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Shipping/Offshore/Shipbuilding
ƒ Demand supply equation unfavourable in Q3FY11
Demand for dry bulk carriers eased in the later part of Q3FY11, mainly
on account of decline in Chinese iron ore imports. Demand for
crude/product carriers remained quite subdued during the first half of
the quarter but picked up post mid November on account of heating
oil demand from Europe and US. There has also been significant
supply addition in Q3FY11 which means that the demand-supply
equation has remained unfavourable during the quarter.
ƒ Dry bulk rates remained flat while tanker rates declined in Q3FY11
Baltic Dry Index gained by 0.5% as Q3FY11 average for BDI was 2364
as against Q2FY11 average of 2353. Baltic Dirty Index gained by
11.3% as Q3FY11 average for the index was 848 as against Q2FY11
average of 762. Clean tanker Index declined by 6.7% as Q3FY11
average for the index was 684 in Q3FY11 as against Q2FY11 average
of 733. Utilisations levels for semisubs and jack up rigs remained
almost flat while it declined sharply for drill ships. Shipbuilding
companies are expected to report modest topline growth as order
execution picked up pace post monsoon.
ƒ Q3FY11E performance (QoQ basis)
Performance of shipping and offshore companies is expected to be
subdued due to weak freight rates and decline in utlisation levels.
Topline of companies in our universe is expected to increase by 2.3%
on QoQ basis while EBITDA is expected to be increase by 2.0% on
QoQ basis. However we expect a sharp cut in the bottomline which is
expected to drop by 43.1% on Q0Q basis. Amongst the companies
significant under performance is likely from GE shipping, Mercator,
SCI and Great Offshore, all of which are likely to report in excess of
50% correction in their bottomline. Aban Offshore, Garware Offshore
and ABG Shipyard are likely to report improvement in bottomline on
QoQ basis in Q3FY11.
ƒ Stock recommendations
Our preferred pick is Mercator on account of diversified revenue
streams from shipping, offshore, dredging, coal mining and trading. In
addition long term contracts with its clients also provide a hedge from
the volatility in freight rates to a large extent. The stock is currently
trading at an attractive valuation i.e. 0.50xFY12 book value of | 107.
Aban
Offshore
We expect revenues to increase on account of a rise in utilisation levels but operating
margin is expected to drop to ~62.5% in Q3FY11. The recent price rally in the stock can
be used as an opportunity to exit and re-enter at lower levels as FY12E earnings are
likely to be downgraded
ABG
Shipyard
Topline is expected to rise by 6.8% on the back of higher order execution post
monsoon. The company is expected to report a larger order book as it has bagged
orders worth | 2000 crore for two jack-up rigs in Q3FY11. The stock is trading at rich
valuation and we recommend investors exit
Bharati
Shipyard
We expect a 3.2% rise in topline while the operating margin is expected to decline from
28.4% in Q2FY11 to 26.0% in Q3FY11. Net profit in Q3FY11 is likely to decline by 25.9%
to | 21.7 crore. The stock is trading at an attractive valuation and can be considered for
investment
Essar
Shipping
Revenues from the surface transport and oilfield services business is likely to decline
while revenues from the port and ocean transport business are set to increase resulting
in 0.8% decline in topline in Q3FY11. Operating margin is expected to improve to 38% in
Q3FY11
Garware
Offshore
Revenues are expected to rise QoQ by 10.9% to | 54.7 crore along with improvement in
operating margin to 46.8% in Q3FY11. PAT is likely to be higher at | 7.2 crore in the
current quarter as against | 4.3 crore in Q2FY11. The stock is fairly valued at the
current market price
GE Shipping Revenue is expected to rise by 6.1% QoQ on account of a recovery in tanker/product
carrier rates, which contributes a significant portion to the topline. We expect a
contraction in operating margin to 36% along with a drop in PAT by 50.3% to | 83.8
crore in Q3FY11 on a QoQ basis
Great
Offshore
Revenue is expected to increase marginally on a QoQ basis in Q3FY11 to | 206.6 crore
while PAT is expected to drop by 57.5% to | 11.9 crore in Q3FY11. Earnings in FY11 are
likely to be negatively impacted due to a delay in deployment of one of its rigs but
valuations are still attractive
Mercator
Lines
Revenues are expected to decline marginally by 2.1% to ~ | 657.3 crore in Q3FY11 as
the drop in revenue from charter earnings is likely to be compensated by the rise in
revenue from coal trading. The bottomline is expected to decline by 64.6% to | 18.3
crore in Q3FY11
SCI Topline is expected to contract by 1.6% in Q3FY11 to | 862.7 crore. We expect 58.2%
QoQ decline in bottomline to | 104.8 crore in Q3FY11 in the absence of significant
extraordinary income from sale of assets. However, after the recent price correction,
valuations appear attractive for re-entering the stock
Varun
Shipping
Revenues are expected to rise to | 178.5 crore in Q3FY11 on account of a rise in
operating days and improvement in day rates for offshore vessels. EBITDA is expected
at | 76.1 crore with net loss of | 26.7 crore in the absence of extraordinary income
from sale of assets
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