SCI, Shipping Corp of India Hold Target Price: Rs60:: Centrum,

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Shipping Corp of India

Hold

Target Price: Rs60

CMP: Rs62             

Downside: 3%

Slower capex on dismal macro outlook

Shipping Corporation of India (SCI) is slowing down its expansion and diversification plans on the back of expectations of continued dismal macro outlook. The company expects supply pressures in the global markets to continue to keep freight rates under pressure. It wants to slow down on its expansion plans as well as its diversification into allied activities like shipbuilding due to the challenging business environment. SCI has 26 vessels on order, while it plans to scrap at least 15 ageing ships during FY12. The adverse market scenario has impacted SCI with net losses of Rs1,465mn during H1FY12 vs. a net profit of Rs4,421mn in H1FY11. We believe SCI would remain impacted by lower freight rates and higher operating costs. We continue to have a cautious outlook on SCI with a Hold rating and a target price of Rs60.

m  Macro headwinds impact profitability: SCI has reported net loss for the last three consecutive quarters impacted by the slowdown in the sector and lower freight rates. Its net loss increased to Rs1406mn in Q2FY12 from Rs59mn in Q1 and Rs62mn in Q4FY11. It reported losses of Rs235mn at the EBIT level in Q3FY12 vs. a profit of Rs2.4bn last year.

m  Slower capex to conserve cash: SCI had set up an aggressive capex plan of Rs131bn to add 60 vessels under the 11th Five-Year Plan (2007-12). The company was able to place orders for 32 new ships, though at the peak of the shipping cycle of FY08-09 worth Rs81bn. However, it has put on hold its earlier plan to place the second round of orders for the remaining capacity during FY11-12 as it believes that the macro environment is not conducive to increase capacity as the global shipping industry is already reeling due to over capacity. SCI added 6 vessels during H1FY12 and has another 26 under construction from orders already placed.

m  Sale of older vessels to help improve profitability: SCI plans to scrap at least 15 older and ageing vessels during FY12 to help improve profits. It earned Rs324mn from the sale of two ships during H1FY12. SCI has already scrapped seven of them till date during this fiscal and of this 5 in the last two months i.e. during Q3FY12. These vessels are reaching their asset life of 25 years and are not viable to operate. While operating costs are high including higher repairs & maintenance, they have lower demand leading to lower freight rates.

m  Outlook cautious, maintain Hold: We believe SCI would remain impacted by lower freight rates and higher operating costs, which would result in operational losses. We expect SCI to report a net loss of Rs1.5bn in FY12 (aided by profit from sale of ships) and a marginal profit of Rs562mn in FY13. We continue to have a cautious outlook on SCI with a Hold rating. We have valued the stock at 0.4x FY13 P/B and set our target price of Rs60. However, we believe that there is limited downside as the stock is trading at its historical low valuations.