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Strong fleet expansion: Shipping Corporation of India (SCI) has lined up an
aggressive fleet expansion plan which would take the total fleet to 7.78m DWT in
the next four years from the current 5.48m DWT, a growth of 42%. In terms of the
number of vessels, the fleet is likely to expand from the current 78 vessels to 108
vessels (gross additions). Average age of the fleet, which currently stands at ~15
years, is likely to reduce to ~13 years post the expansion.
DER to be maintained at 1:1: SCI, which has been a net debt positive company up to
FY10, is likely to witness its debt going up on account of its strong capex. Its debt as
on September 30, 2010 stands at Rs37.6bn, translating to a current DER of 0.56 and
a post issue DER of 0.51. Despite the company’s strong expansion plans, its strategy
is to maintain its DER at 1:1, going forward.
Financials improving: On account of subdued freight rates in Tanker and Bulker
segment, along with the bleeding liner segment, SCI’s revenues have been under
pressure. Margins, too, witnessed a steep decline from 26.5% to 16.7% in FY10.
However, the bulker/tanker segment has witnessed a 360bps improvement in EBIT
margins for H1FY11. Overall, EBITDA margins have improved from 14.8% in H1FY10
to 30.6% in H1FY11 on account of an improvement in the liner business, coupled
with increasing margins in the bulker/tanker segment. Profit growth in H1FY11 also
stood at 182%, with absolute profits of Rs4.32bn, which on annualized basis would
translate to Rs8.64bn, a growth of 172%.
Valuations: At the upper and lower band of the FPO, the stock is available at a 2.9%
and 6.3% discount to its CMP, respectively. At the upper band, the offer is priced at
a P/B of 0.9, whereas, we estimate the NAV of its current fleet to be close to its BV.
On a PER basis, the stock trades at 7.5x annualized earnings. With valuations being
reasonable as well as the stock trading close to it 52w low, coupled with a discount
being available to the CMP, we recommend ‘SUBSCRIBE’.
Strong fleet expansion
SCI has lined up an aggressive fleet expansion plan which would take the total fleet
to 7.78m DWT in the next four years from the current 5.48m DWT, a growth of 42%.
In terms of the number of vessels, the fleet is likely to expand from the current 78
vessels to 108 vessels (gross additions).
Average age of the fleet, which currently stands at ~15 years, is likely to reduce to
~13 years post the expansion.
In addition to replacing its ageing fleet, SCI intends to take advantage of the subdued
asset prices on the offer currently.
On the back of a strong balance sheet, SCI has ordered 30 vessels for a total outlay
of Rs70bn and has plans to order another 15 vessels in this financial year. While part
of the funding will come from the issue proceeds, the rest will be funded through a
combination of internal accruals and debt.
Doubling its bulker capacity
From the current capacity of 781,777 DWT within the bulker segment which includes
15 Handymax‐sized vessels and three Panamax‐sized vessels, SCI plans to more than
double its capacity by 2013 based on the current vessels which are on order.
Between 2011‐13, SCI plans to take delivery of six Handymax bulk carriers, four
Panamax bulk carriers and four Kamsamax bulk carriers. Total tonnage of the vessels
on order within this segment stands at 995K DWT. In September 2010, SCI further
placed an order for four Kamsamax vessels, the equity portion of which shall be
funded from the proceeds of the issue. These are slated for delivery in 2013.
Coupled with a strong expansion in the fleet size, new vessels will substantially
reduce the average age of SCI’s bulk fleet which currently is on the higher side at 21
years.
Strong focus on tanker business
SCI’s main focus is on the tanker business, where its fleet currently stands at 39
vessels, totalling to 4268K DWT. Its tanker fleet consists of four VLCCs, 18 crude
carriers, 15 product carriers and two gas carriers. Further, it has placed orders for
two VLCCs, 3 Aframax’s and plans to place orders for three product tankers in 2011.
The average age of the tanker fleet is quite healthy at 10 years and will further
decline with fleet addition.
With tanker rates under pressure, revenues from this segment have been subdued.
However, with a small recovery in rates, coupled with an increase in tonnage, the
operating leverage that could accrue is quite significant.
Bulker & Tanker segment major contributor to revenues
Bulker and tanker segment put together has been the major contributor to SCI’s
revenues, contributing over 70% over the last five years. With a strong capex linedup
in these two segments, this trend is likely to continue. Other segments, i.e liners
and others (OSV’s etc), contribute between 18‐23% and 3‐5%, respectively.
Liner segment
SCI has a liner division that has containerships which carry cargo in 20 foot standard
containers. SCI deploys a fleet of 26 such vessels, of which five are owned.
Revenues in this segment are dependent on global container trade volumes. This
segment has been making losses for the last two years mainly on account of inchartering
of vessels at high freight rates for 3‐5 years. Owing to the recession,
freight rates dropped substantially, resulting in this segment reporting EBIT losses of
Rs1,872m and Rs2,251m in FY09 and FY10, respectively.
However, on account of a revival in global trade, this segment has posted a
turnaround in FY11, reporting revenues of Rs5.6bn in H1FY11 v/s Rs3.9bn in H1FY10,
a growth of 44%. The segment reported EBIT of Rs633m in H1FY11 v/s a loss of
Rs1,701m last year.
Financials
Revenues & margins under pressure on account of subdued freight
rates, however improving
On account of subdued freight rates in the tanker and bulker segment, along with a
bleeding in the liner segment, SCI’s revenues have been under pressure. Margins,
too, witnessed a steep decline from 26.5% to 16.7% in FY10. However, the
bulker/tanker segment has witnessed a 360bps improvement in EBIT margins for
H1FY11.
Overall, EBITDA margins have improved from 14.8% in H1FY10 to 30.6% in H1FY11
on account of an improvement in the liner business, coupled with increasing margins
in the bulker/tanker segment.
Profits likely to more than double in FY11
On account of weak freight rates, coupled with the losses in the liner segment, FY10
profits declined by 67% on YoY basis to Rs3.17bn. However, the recovery in the liner
segment has resulted in strong profit growth in H1FY11 to the tune of 182%. Profits
for the period stood at Rs4.32bn, which on annualized basis, would translate to
Rs8.64bn, a growth of 172%.
Improvement in freight rates to result in strong operating leverage
With a strong capex on the cards, any increase in freight rates would result in strong
operating leverage for the SCI. Margins which stood at 16% in FY10 could strengthen
to >25% on the back of firmer freight rates. This, coupled, with an increase in
tonnage, would have a multiplier effect on the company’s profits.
DER to be maintained at 1:1
SCI, which has been a net cash company upto FY10, is likely to witness its debt going
up on account of its strong capex. Its debt as on September 30, 2010 stands at
Rs37.6bn, translating to a current DER of 0.56 and a post issue DER of 0.51. Despite
the company’s strong expansion plans, its strategy is to maintain it DER at 1:1, going
forward.
Valuations
At the upper and lower band of the FPO, the stock is available at a 2.9% and 6.3%
discount to its CMP, respectively. At the upper band, the offer is priced at a P/B of
0.9, whereas, we estimate the NAV of its current fleet to be close to its BV. On a PER
basis, the stock trades at 7.5x annualized earnings. With valuations being reasonable
as well as the stock trading close to it 52w low, coupled with a discount being
available to the CMP, we recommend ‘SUBSCRIBE’ to the issue.
Concerns
Subdued return ratios
Due to a downturn in the shipping cycle, return ratios for SCI have been subdued
between 13‐15%, with FY10 witnessing a major knock to 5‐6%. In case, this cycle
remains weak for a prolonged period, the risk of low returns would continue
Non‐revival in freight rates could be detrimental
On one hand, a revival in the shipping cycle could prove to be extremely positive for
SCI, given their strong expansion plans. However, on the other hand, if rates remain
weak, the capex could have a negative impact on the company.
Erosion in value of orders placed at the peak
Certain orders for new vessels have been placed by the company in 2008‐09, where
asset prices were close to the peak. Value of these orders would have witnessed
substantial erosion. However, given the fact that certain orders would have also
been placed at lower asset prices, average cost of the assets put together would be
near the current market value.
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