Corporate
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Still in rough seas
Eastern 3,050.20 1,310.60 841.10 7.40 4.30 Mercator 4,044.80 2,028.10 486.20 8.10 5.10 Varun Shipping 1,899.00 1,279.00 121.10 6.90 9.30 ABG Ship 1,950.90 386.10 126.20 8.52 6.03 Bharati Ship 1,420.00 350.00 145.00 4.22 3.27 FY10 financial nos for shipping cos are annualised based on half yearly nos, except for GE Ship. Rest are analysts estimates Varun Shipping Varun Shipping which gets over 60 per cent of its revenues from the LPG tanker business has also been hit hard by the dip in demand for oil products. Currently, the company has 20 vessels including three tankers, 10 gas carriers and seven offshore vessels. In the last quarter, Varun Shipping’s net profit plummeted 70 per cent to Rs 13 crore as compared to a year earlier, while its revenues fell 40 per cent to Rs 157 crore. With business prospects not majorly improving, Varun Shipping had gone slow in its fleet acquisition plans. It had earlier earmarked around Rs 450 crore capex for vessel acquisition, especially in the offshore segment. Going ahead, the weak oil demand in some countries are likely to keep product tanker as well other related tanker business under pressure as the company gets four-fifths of its revenues from this segment (LPG, crude, product). The company’s managing director Yudhishthir Khatau, believes that while the demand for oil has picked up from India and China, the real demand from the developed countries is yet to pick up. Excluding extraordinary items, the stock is trading at 7 times its trailing 12 months EPS of Rs 8. While the short term looks hazy, a consistent trend of increasing consumption of oil products could be a starting point for exposure to this stock. ABG Shipyard ABG Shipyard has a strong order book of over Rs 12,000 crore, which is almost six times its 2009-10 estimated revenue and provides higher visibility to revenue and earnings. However, almost 50 per cent of the order book is for building dry bulk ships and another 40 per cent for offshore vessels. The company is now further diversifying into the ship repairing business, given the higher potential in the segment. The company is in the process of acquiring a small listed company, Western Shipyard, which should add to its ship repairing capabilities and scale. With this the company will be able to repair large ships of about 100,000 dead weight tonne. Besides, the company is also expanding and building new capacities at Surat and at Dahej, which are expected to be complete by the end of 2009-10. These capacities will allow the company to construct large ships. Further, in a recent development, ABG Shipyard is estimated to gain Rs 54 crore on account of its withdrawal from the Great Offshore acquisition deal. This should help ABG to partly reduce its debt-equity ratio, which stood at 1.9 times as on March 2009. At the current market price, the stock is trading at 5.4 times estimated earnings of 2010-11. As valuations are higher than Bharati Shipyard, investments can be considered on declines. Bharati Shipyard The benefits of any recovery in crude oil prices and capex on the exploration or offshore activities will be large in the case of Bharati Shipyard. The company has a strong order book of Rs 5,100 crore, which is almost 5.5 times its 2008-09 revenue. Out of the order book, about 68 per cent is accounted by the offshore segment. This is also a reason that analysts believe that Bharati’s move to own a controlling stake in Great Offshore would be of great value providing captive demand for new vessels. Bharati is already building two new vessels for Great Offshore for a total value of Rs 1,200 crore. The move to acquire Great Offshore has not only added synergies but has also created value for the share holders of Bharati. Besides, the company also undertakes shipbuilding orders for the dry bulk segment and defence sector, which accounts for 26 per cent and 6 per cent of the order book, respectively. On the valuations front, analysts value Bharati"s stake in Great Offshore at Rs 118 per share based on its 2010-11 estimated EPS of Rs 68.5 and PE multiple of seven times. At Rs 223, the stock is trading at a reasonable PE multiple of 3.4 times its estimated 2010-11 EPS of about Rs 66. Pipavav Shipyard Pipavav Shipyard, which recently got listed, did not perform well in the market given its expensive pricing. Despite its strong order book of Rs 5,200 crore, the lack of operational track record remains a key concern. The company reported revenues of just Rs 6.17 crore and net profit of Rs 4.72 crore in 2008-09, as its shipyard facility is not yet fully operational. The company will be delivering its first ship in April 2010. Meanwhile, the company aims to undertake activities including commercial shipbuilding, ship repairs, offshore fabrication and naval shipbuilding, with an ultimate aim to emerge as India’s largest shipbuilder. The company"s new facility with a capacity to build 2-3 ships of about 400,000 dead weight tonne is partly operational and is expected to be fully operational soon. Besides, the company is also building fabrication capacities equivalent to 1,44,000 tonne of steel, which could undertake work relating to the offshore activities and power projects. This business will prove to an additional source of revenue for the company. The company is looking for big opportunities from the domestic defence sector, where the management says that the enquiries have already started coming in for new orders. Overall, at Rs 59, the stock trades at about 10 times the estimated 2010-11 earnings, and is expensive. Additionally, analysts say, given that eight of the 22 orders are subject to renegotiation and another four are subject to arbitration, which indicates higher execution challenges. With inputs from Jitendra Kumar Gupta and Sarath ChelluriPages: 1 [2]