Other income keeps SCI afloat… • Shipping Corporation of India’s (SCI) Q2FY15 result update :: ICICI Securities, link

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Other income keeps SCI afloat…
• Shipping Corporation of India’s (SCI) Q2FY15 revenue grew ~4%
YoY to | 1093.5 crore against | 1050.1 crore in Q2FY14. The
performance was led by the offshore segment, which posted robust
revenue growth of ~70% YoY to | 89.5 crore followed by the liner
segment, which posted growth of nearly 8% YoY to | 244 crore.
However, the bulk segment de-grew ~3% YoY to | 756.7 crore in
Q2FY15
• EBITDA for the quarter recorded growth of 36% YoY to | 178.2 crore
whereas on a QoQ basis it remained flattish. The growth in EBITDA
was on account of an expansion in EBITDA margin by 384 bps YoY
to 16.3% due to operational efficiencies.
• PAT for the quarter stood at |18.6 crore in Q2FY15 against loss of
| 123.5 crore in Q2FY14. The company posted a consecutive quarter
of profit due to higher income on account of rescinding of ships from
shipyards to the tune of | 48.8 crore in Q2FY15
Prolonged downturn bleeds shipping; rescinding of vessels bring relief
SCI is the largest shipping company of India and currently operates a fleet
of 72 vessels with a total capacity of 5.8 million dwt. Over the last four
years the company has incurred a capex of ~ | 7000 crore to acquire new
vessels to replace its ageing fleet. The fleet expansion has hurt the
company’s profitability as the new vessels have joined the fleet when the
rates are at low levels due to overcapacity in the industry. Consequently,
the company has seen lower operating margins over the last four years.
In FY11, SCI had an EBITDA margin of ~ 23%, which touched a low of
~1% in FY12. Though FY13 and FY14 have seen a gradual improvement
in EBITDA margin to 9.3% and 14.2%, respectively, higher depreciation
and interest cost have negatively impacted earnings at net profit level.
Depreciation & interest cost has gone up from | 465 crore & | 64.4 crore
in FY11 to | 856 crore & | 208 crore in FY14, respectively. This has led to
a loss for the last three years against a profit of | 567 crore in FY11.
However, with shipyards rescinding ordered vessels, SCI gets breather in
form of higher other income (penalty & refund from shipyards) thereby
leading to improvement in net profit for SCI.
Declining contribution from high margin offshore segment
The lucrative offshore segment is the only segment for SCI that has
remained profitable at the EBIT level over the last five years. However,
SCI has a miniscule presence with the offshore segment contributing only
8% of total revenues. The company had planned to add six vessels in the
offshore segment but had to cancel the orders placed with the shipyard
owing to incessant delay by the yard in delivering the vessels. This has
impacted its expansion plans in the segment and resulted in declining
revenue from the segment.
Other income continues to save the day; losses diminish
Though the liner and offshore segment showed improvement the bulk
segment declined. Going ahead, as the ships rescind and capex guidance
remains weak; revenue growth remains under pressure for SCI. However,
we expect the company to be able to improve its operational
performance due to better control on expenses and a marginal
improvement in freight rates. Consequently, we value SCI at 0.44x FY16E
book value with a target price of | 60.

LINK
http://content.icicidirect.com/mailimages/IDirect_ShippingCorp_Q2FY15.pdf