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FPO: Shipping Corporation of India - Neutral
Shipping Corporation of India (SCI) is coming out with an FPO in a price band of `135–
140/share to raise `1,143cr–1,186cr through an offer for sale of 42,345,365 shares and
a fresh issue of 42,345,365 shares. SCI intends to use the FPO proceeds for acquisition of
new vessels.
New vessels to drive growth: SCI has an existing fleet size of 77 vessels (5.4mn dwt) with
an average age of 15.5 years. It has identified the need to modernise its ageing fleet and
lined up an aggressive capex of `131bn under the Eleventh Five-Year Plan (2007–12). As
of October 31, 2010, SCI had ordered construction of 26 vessels, expected to be delivered
between CY2010–13, and plans to order additional 20 vessels in FY2011. This would lead
to an increase of 1.5mn dwt (27.8% of its current fleet) by CY2012. Further addition of
new vessels will bring down its average age of fleet from 16 years to 11 years by CY2012.
Freight rates bottoming out: The shipping industry witnessed sharp plunge in freight rates
in CY2008. Despite revival after a severe collapse in CY2008, freight rates for most asset
classes continued to remain weak due to a vessel over-supply situation. Ship owners have
responded to the situation by resorting to slow steaming of vessels, thereby reducing the
active fleet availability and the operating costs due to savings of fuel. Further, the industry
has witnessed high rate of slippages/cancellations, which could help ease the over-supply
situation. As per Clarksons, slippages in the tanker and dry bulk segments stood at 30%
and 45%, respectively, for 1HCY2010. We expect charters to bottom out at current levels,
with upward recovery especially in tanker freight rates from FY2012.
Fairly valued: At the lower price band of `135/share, the stock is trading at 0.8x P/BV and
7.2x P/E on FY2012 basis, which is in line with GE Shipping. We believe GE Shipping is a
much better bet than SCI at current levels, given the former’s higher return ratios, earnings
growth, relatively younger fleet and decent exposure towards the high-growing offshore
segment. Our fair value for SCI works out to be `143/share (0.8x one-year forward P/BV).
Hence, we recommend a Neutral rating on the issue.
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