Disinvestment play…
SCI is trading at a significant premium to its domestic peers. The
premium valuation is justified on account of it being the largest
shipping company in India and a Navratna PSU. In addition, the
company has insignificant debt, which will enable it to leverage its
balance sheet and borrow in the international market at competitive
interest rates. In addition, the follow on public offer (FPO) of SCI has
revived investor interest in the stock.
The average age of SCI’s fleet is 18.1 years, which is twice the age of
Indian shipping companies. In order to replace its ageing fleet, SCI has
committed to incur capex of ~| 8000 crore over the next two years.
Despite the improvement in topline and operating margin, higher
depreciation and interest costs is likely to exert pressure on the
bottomline. A rise in the equity base on fresh issue of shares is further
expected to dilute the earnings.
Capex to fuel topline growth
SCI has reported an improvement in performance over the last two
quarters with the rise in freight rates across vessel categories. The liner
business of the company, which has been posting losses for the last
many quarters also turned around and posted profits in Q1FY11. We
expect the topline to increase at a steady pace over the next two years
combined with expansion of operating margins to 22.1% in FY12. The
main factors leading to the expansion in operating margin would be a rise
in freight rates and drop in repair and maintenance expenses on account
of new fleet addition. However, capex spend would also lead to a rise in
depreciation and interest costs resulting in pressure on net profits.
Valuation
We have valued SCI at 1.0x book value to arrive at a price target of | 162.
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