Varun Shipping: Under pressure…
Varun Shipping Company Ltd (Varun Shipping) has a dominant
presence in the Indian LPG space and operates 10 LPG carriers. The
company also expanded its presence in the offshore segment with the
acquisition of high-end AHTS vessels. However, the economic downturn
and correction in freight rates had a cascading effect on the operational
performance of the company, which has been under pressure for the
last one year. The strain is likely to continue. A high debt level has also
compounded the problems. However, if there is a recovery in high-end
AHTS vessel rates it could enable the company to emerge from the
crisis earlier than expected.
Long road to recovery
Due to oversupply of LPG carriers combined with subdued demand, LPG
freight rates are expected to remain sluggish. As LPG constitutes 50% of
Varun Shipping’s fleet, the performance is expected to be subdued. We
expect crude tanker rates to increase marginally while AHTS rates are
expected to rise at a faster pace over the next two years. The operating
margin of the company is also likely to improve to 44% from the current
36% on account of a rise in high-end AHTS vessel rates.
However, the company is also highly leveraged and significant interest
outgo is likely to strain the performance. Due to high depreciation and
interest costs, Varun Shipping is likely to report a net loss from operations
in FY11.
Valuation
We have valued Varun Shipping at 0.80x FY12E P/BV to arrive at a price
target of | 36. We maintain our SELL recommendation on the stock.
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