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SHIPPING CORPORATION OF INDIA
PRICE: RS.67 RECOMMENDATION: SELL
TARGET PRICE: RS.60 FY13E P/E: 27.5X
Subdued operational performance - company reports net loss in
the quarter
Subdued shipping market, higher bunker cost, higher interest payment and
higher depreciation has resulted in SCI reporting net loss in the quarter of
Rs 1408 mn (versus expectation of profit of Rs 120 mn). This is third
consecutive quarter for SCI reporting net loss. Poor performance was
reported by the bulk segment and liner segment which has reported loss of
Rs 437 mn and Rs 16 mn respectively at EBIT level in the quarter. Even the
tanker segment continues to be weak. Over supply of ships continues to put
pressure on the freight rates affecting the performance of most of the shipowners
including SCI. Company now has curtailed its capex programme
over the next two years due to poor shipping market outlook and also to
conserve cash. We are very cautious on the business of the company and
estimate that the NAV of the company has eroded significantly over the last
4 months. We change our rating on the company to SELL from current rating
of REDUCE with a new PT of Rs 60 for the stock. The company intends
diversifying into shipbuilding and deep water offshore business which we
believe would take atleast 3 to 4 years from today and would help SCI to
beat the cyclicality of shipping business.
Financial Highlights:
n Consolidated revenues of the company went up ~4% YoY (-4% QoQ) in Q2FY12
to ~ Rs 9.01 bn. The company has been discarding old low earning vessels on
regular basis. With net fleet addition, the revenues of the company has gone up
YoY.
n The company has reported operating loss in the quarter. This is primarily due to
high bunker cost, higher port charges, high insurance cost and higher cost of in
chartered vessels.
n With Baltic at 1500 levels and VLCC available at $10,000/ day, we believe the
company is currently operating some of the ships in its fleet at below operating
cost. .
n Interest component has gone up significantly from Rs 132 million in the previous
year to Rs 1463 million in Q2FY12 (Q1FY12 = Rs 242 mn). It was primarily due to
rupee depreciation in the quarter. The company also has taken significant debt
to pursue its capex programme currently estimated at ~ Rs 47 bn over FY12 -
FY14E. The debt has gone up from Rs 27 bn in FY10 to ~ Rs 54 bn by end of
Q2FY12 (Q1FY12 = Rs 47 bn).
n With addition of new fleet and discard of fully depreciated old assets, the depreciation
of the company has gone up significantly to Rs 1451 mn (vs. Rs 1033 mn
in Q2FY11) affecting profits significantly.
n Consequently company has reported a huge net loss for the quarter of Rs 1408
mn. Very important to note here that the company has reported net loss for third
consecutive quarter.
n Till date, SCI has a healthy track record of payment of dividend. But with reporting
of loss in H1FY12, it may not be able to pay any dividend in FY12 which
would be a downside risk for the stock. We have reduced the dividend payment
to 20% each (from 50%) for both FY12 and FY13.
Company has brought down its capex programme - a prudent
measure
In the beginning of FY12, SCI was having a capex programme of Rs 78 bn over FY12
to FY14E, with deliveries of ships happening in FY14 and FY15. But with the continued
weakness in the shipping market, the company has either curtailed or deferred
a part of its capex in the commercial segment in the last 3 months. We now estimate
the company to spend about Rs 47 bn (approx. ~ 40% less of earlier plan)
over FY12E to FY14E as capex on 30 ships (earlier 40 ships).
With shipping markets continuing to go through a bad phase and expected to remain
subdued atleast for the next two years, we believe SCI has taken a prudent
measure in curtailing its capex. Similarly other Indian companies like GE Shipping
and Mercator Lines Ltd (MLL) are also going slowly with their capex program in the
shipping segment.
We estimate the net NAV at Rs 110 per share
The management indicated that the NAV for the company has fallen to Rs 115 per
share in the June quarter (it was Rs 123 per share as on March 2011). The three key
segments - dry, tanker and container market has fallen about 5% to 25 % YoY in
the quarter, the NAV for SCI has also fallen QoQ. We now estimate the net NAV of
the company at Rs 110 per share. Usually the shipping asset prices moves after a lag
of 2 to 3 months to shipping freight rates. We feel NAV of the company to remain
under pressure in subsequent quarters.
SCI has also shelved plans to buy a minority stake in a shipbuilding
company. It also postpones it plans to enter the high end offshore
market
SCI was doing due diligence of some of the shipyards including ABG, Bharati and
Pipavav for buying a small stake of ~10%. Company cited this step as an intitiative
towards backward integration. We estimate this purchase by SCI not to materialise
in near term (only after FY13E) and hence we don't factor this in our numbers.
Company also intends to get into high end off shore market like jack up, drill ships
and submersible. With oil above $ 100 per barrel, we believe the market for deep
water drilling is very lucrative. GE Shipping through its 100% subsidiary - Great India
Ltd - is already having significant presence in this area. As the segment is very capital
intensive, SCI has deferred its plans to enter this segment for now. Company also
intends to hive off the offshore segment into a separate 100% subsidiary which is
expected by end of FY13E.
Top line and earnings to remain under pressure
Subdued shipping market, higher bunker cost and higher depreciation has resulted
in SCI reporting loss for three consecutive quarters including Q4FY11, Q1FY12 and
Q2FY12. All the three key segments of shipping including container, bulk and the
tanker segment has performed badly and estimated to be weak in medium term.
Over supply of ships continues to put pressure on the freight rates affecting the performance
of most of the ship-owners including SCI. We estimate the revenues and
earnings of the company to remain under pressure in near term.
Valuation and Recommendation
We have reduced the target price of SCI to Rs 60/share (earlier Rs 86) to reflect
weakness in the shipping business (especially tanker segment) and the subsequent
fall in asset prices across segments by 5 to 25% over the last six months.
Historically most Indian Shipping companies including SCI have traded in a range of
0.5 x to 0.9 x of its NAV. We value SCI at 0.55 x NAV, in line with our view that the
shipping sector would remain under pressure at least till CY12. We are assigning
higher discount to SCI due to weak earnings estimate in near term. We change our
rating on the company to SELL from current rating of REDUCE with a new PT of Rs
60 for the stock.
We also factor in the following while arriving at the fair value and SELL rating:
1. Asset prices would continue to remain under pressure
2. Poor return ratios - ROE and ROCE are <10%, both in FY12E and FY13E.
3. Negative free cash flow for the company over FY11 - FY13E
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SHIPPING CORPORATION OF INDIA
PRICE: RS.67 RECOMMENDATION: SELL
TARGET PRICE: RS.60 FY13E P/E: 27.5X
Subdued operational performance - company reports net loss in
the quarter
Subdued shipping market, higher bunker cost, higher interest payment and
higher depreciation has resulted in SCI reporting net loss in the quarter of
Rs 1408 mn (versus expectation of profit of Rs 120 mn). This is third
consecutive quarter for SCI reporting net loss. Poor performance was
reported by the bulk segment and liner segment which has reported loss of
Rs 437 mn and Rs 16 mn respectively at EBIT level in the quarter. Even the
tanker segment continues to be weak. Over supply of ships continues to put
pressure on the freight rates affecting the performance of most of the shipowners
including SCI. Company now has curtailed its capex programme
over the next two years due to poor shipping market outlook and also to
conserve cash. We are very cautious on the business of the company and
estimate that the NAV of the company has eroded significantly over the last
4 months. We change our rating on the company to SELL from current rating
of REDUCE with a new PT of Rs 60 for the stock. The company intends
diversifying into shipbuilding and deep water offshore business which we
believe would take atleast 3 to 4 years from today and would help SCI to
beat the cyclicality of shipping business.
Financial Highlights:
n Consolidated revenues of the company went up ~4% YoY (-4% QoQ) in Q2FY12
to ~ Rs 9.01 bn. The company has been discarding old low earning vessels on
regular basis. With net fleet addition, the revenues of the company has gone up
YoY.
n The company has reported operating loss in the quarter. This is primarily due to
high bunker cost, higher port charges, high insurance cost and higher cost of in
chartered vessels.
n With Baltic at 1500 levels and VLCC available at $10,000/ day, we believe the
company is currently operating some of the ships in its fleet at below operating
cost. .
n Interest component has gone up significantly from Rs 132 million in the previous
year to Rs 1463 million in Q2FY12 (Q1FY12 = Rs 242 mn). It was primarily due to
rupee depreciation in the quarter. The company also has taken significant debt
to pursue its capex programme currently estimated at ~ Rs 47 bn over FY12 -
FY14E. The debt has gone up from Rs 27 bn in FY10 to ~ Rs 54 bn by end of
Q2FY12 (Q1FY12 = Rs 47 bn).
n With addition of new fleet and discard of fully depreciated old assets, the depreciation
of the company has gone up significantly to Rs 1451 mn (vs. Rs 1033 mn
in Q2FY11) affecting profits significantly.
n Consequently company has reported a huge net loss for the quarter of Rs 1408
mn. Very important to note here that the company has reported net loss for third
consecutive quarter.
n Till date, SCI has a healthy track record of payment of dividend. But with reporting
of loss in H1FY12, it may not be able to pay any dividend in FY12 which
would be a downside risk for the stock. We have reduced the dividend payment
to 20% each (from 50%) for both FY12 and FY13.
Company has brought down its capex programme - a prudent
measure
In the beginning of FY12, SCI was having a capex programme of Rs 78 bn over FY12
to FY14E, with deliveries of ships happening in FY14 and FY15. But with the continued
weakness in the shipping market, the company has either curtailed or deferred
a part of its capex in the commercial segment in the last 3 months. We now estimate
the company to spend about Rs 47 bn (approx. ~ 40% less of earlier plan)
over FY12E to FY14E as capex on 30 ships (earlier 40 ships).
With shipping markets continuing to go through a bad phase and expected to remain
subdued atleast for the next two years, we believe SCI has taken a prudent
measure in curtailing its capex. Similarly other Indian companies like GE Shipping
and Mercator Lines Ltd (MLL) are also going slowly with their capex program in the
shipping segment.
We estimate the net NAV at Rs 110 per share
The management indicated that the NAV for the company has fallen to Rs 115 per
share in the June quarter (it was Rs 123 per share as on March 2011). The three key
segments - dry, tanker and container market has fallen about 5% to 25 % YoY in
the quarter, the NAV for SCI has also fallen QoQ. We now estimate the net NAV of
the company at Rs 110 per share. Usually the shipping asset prices moves after a lag
of 2 to 3 months to shipping freight rates. We feel NAV of the company to remain
under pressure in subsequent quarters.
SCI has also shelved plans to buy a minority stake in a shipbuilding
company. It also postpones it plans to enter the high end offshore
market
SCI was doing due diligence of some of the shipyards including ABG, Bharati and
Pipavav for buying a small stake of ~10%. Company cited this step as an intitiative
towards backward integration. We estimate this purchase by SCI not to materialise
in near term (only after FY13E) and hence we don't factor this in our numbers.
Company also intends to get into high end off shore market like jack up, drill ships
and submersible. With oil above $ 100 per barrel, we believe the market for deep
water drilling is very lucrative. GE Shipping through its 100% subsidiary - Great India
Ltd - is already having significant presence in this area. As the segment is very capital
intensive, SCI has deferred its plans to enter this segment for now. Company also
intends to hive off the offshore segment into a separate 100% subsidiary which is
expected by end of FY13E.
Top line and earnings to remain under pressure
Subdued shipping market, higher bunker cost and higher depreciation has resulted
in SCI reporting loss for three consecutive quarters including Q4FY11, Q1FY12 and
Q2FY12. All the three key segments of shipping including container, bulk and the
tanker segment has performed badly and estimated to be weak in medium term.
Over supply of ships continues to put pressure on the freight rates affecting the performance
of most of the ship-owners including SCI. We estimate the revenues and
earnings of the company to remain under pressure in near term.
Valuation and Recommendation
We have reduced the target price of SCI to Rs 60/share (earlier Rs 86) to reflect
weakness in the shipping business (especially tanker segment) and the subsequent
fall in asset prices across segments by 5 to 25% over the last six months.
Historically most Indian Shipping companies including SCI have traded in a range of
0.5 x to 0.9 x of its NAV. We value SCI at 0.55 x NAV, in line with our view that the
shipping sector would remain under pressure at least till CY12. We are assigning
higher discount to SCI due to weak earnings estimate in near term. We change our
rating on the company to SELL from current rating of REDUCE with a new PT of Rs
60 for the stock.
We also factor in the following while arriving at the fair value and SELL rating:
1. Asset prices would continue to remain under pressure
2. Poor return ratios - ROE and ROCE are <10%, both in FY12E and FY13E.
3. Negative free cash flow for the company over FY11 - FY13E
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