Varun Shipping ::ICICI Securities (PDF link)

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E x t r a o r d i n a r y   i n c o  m e   e n  a b l e s   p r o f i t a b i l i t y   y e t
a g a i n …
Varun Shipping (VSL) continues to  report low EBITDA, which makes it
difficult to cover its interest and depreciation cost. For Q3FY12, VSL
reported revenues of | 79 crore, QoQ growth of 9% and YoY decline of
35%. Though EBITDA improved QoQ  from an operating loss of | 9.5
crore in Q2FY12 to an operating profit of | 6.2 crore, the quantum is
inadequate to cover its interest and depreciation cost. At the earning
before tax and extraordinary income level, VSL reported a loss of | 41.4
crore. The company has accounted an extraordinary foreign exchange
gain of | 123.93 crore in Q3FY12, which has enabled it to report a net
profit of | 82.5 crore. For 9MFY12, VSL reported revenue of | 234.6 crore
and net profit of | 147.6 crore (including extraordinary income of | 333.5
crore comprising exchange gain of | 284 crore and profit on sale of assets
of | 49.5 crore). VSL’s earning quality has deteriorated over the last eight
quarters and earnings have been  primarily driven by extraordinary
income.
ƒ Fleet status – reduction in owned vessels to lower EBITDA margin
Varun Shipping currently operates a  fleet of 21 vessels comprising 11
LPG carriers, seven AHTS and three crude carriers. Of the 21 vessels,
VSL owns only four vessels while the remaining has been sold on a salecum-leaseback arrangement with associate companies. The drastic
reduction in owned fleet would result in lower EBITDA margins, thereby
curtailing the profitability of the company.
V a l u a t i o n
At the CMP of | 19, the stock is trading at 0.37x FY13E book value of | 51.
Considering the reduction in owned fleet and sluggish demand scenario,
we expect VSL’s profitability to remain under stress. VSL’s deteriorating
financial health has led to the company selling its vessels to associate
companies on a sale and lease back arrangement. Sluggish industry
demand and VSL’s stressed financials would pose a serious challenge in
terms of achieving revenue and profitability growth, going ahead. Hence,
we are dropping coverage on the stock. Existing investors can exit the
stock.


http://content.icicidirect.com/mailimages/ICICIdirect_VarunShipping_Q3FY12.pdf

Sell Varun Shipping; Target : Rs 17 :ICICI Securities,

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P e r f o r m a n c e   d e t e r i o r a t e s   f u r t h e r …
Varun Shipping Co (Varun Shipping) continued its dismal performance in
Q1FY12 with topline remaining flat at | 83.2 crore. At the EBITDA level,
Varun Shipping reported a loss of | 15.1 crore compared to a loss of | 3.1
crore in Q4FY11. The interest (| 55.9 crore) and depreciation (| 32.7 crore)
resulted in an operating net loss from operations of | 84.8 crore in
Q1FY12. The company has booked an extraordinary profit on sale of
crude tanker and AHTS to the tune of | 49.5 crore in Q1FY12, which has
resulted in reducing net loss to | 35.3 crore. The operational performance
of Varun Shipping is likely to be under pressure for another couple of
years as freight rates continue to  remain subdued. Varun Shipping’s
owned fleet has been reduced to just six vessels and the remaining eight
assets are on a sale and lease  back arrangement with associate
companies. The sale and lease back arrangement would continue to put a
strain on the EBITDA margin due to a rise in charter hire expenses.
ƒ Operating performance worsens in Q1FY12
Varun Shipping reported a flattish QoQ performance with 0.3% increase
in revenues to | 83.2 crore in Q1FY12 as against | 82.9 crore in Q4FY11.
The continued weakness in crude tanker freight rates and AHTS charter
rates as well as reduction in the fleet size has kept the revenue growth
muted. The company reported a loss of | 15.0 crore at the EBITDA level
in Q1FY12. The dismal EBITDA can be attributed to depressed freight
rates along with a rise in charter hire expenses on account of a sale and
lease back arrangement executed in the previous few quarters. The
company reported a net loss of | 35.3 crore in Q1FY12, which included a
gain of | 49.5 crore on sale of assets. Excluding this, the operating net
loss would have been | 84.8 crore. Going ahead, we expect Varun
Shipping’s revenue to decline in  FY12E by 5% to | 466.4 crore and
increase by 13% in FY13E to | 528 crore.
V a l u a t i o n
At the CMP of | 20, the stock is trading at 1.2x FY13E book value of | 17.
We  have  valued  the  stock  at  1x  FY13  P/BV  to  arrive  at  a  price  target  of  |
17. We maintain our SELL recommendation on the stock.

Sell Varun Shipping; Target :Rs 24 :ICICI Securities,

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Varun Shipping: Under stress…
Varun Shipping Co (Varun Shipping) reported yet another quarter of
dismal performance in Q3FY11 with the topline contracting to the
lowest level in almost three years. EBITDA margin has contracted to
under 3% with EBITDA of | 2.9 crore. The interest (| 52.4 crore) and
depreciation (| 43.5 crore) resulted in a net loss from operations of |
86.1 crore in Q3FY11. The operational performance of Varun Shipping is
likely to be under pressure for another couple of years as freight rates
continue to remain subdued. The sale and lease back arrangement
would continue to put a strain on the EBITDA margin and the
performance could deteriorate further in the absence of extraordinary
gains from sale of assets. The company has sold two AHTS vessels in
Q3FY11, to enable repayment of debt. In the absence of a turnaround in
operations, debt servicing could become a concern. Further pledge of
shares by the promoters is an added concern for the company.

Varun Shipping- Operational matrix deteriorates… ICICI Securities,

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Operational matrix deteriorates…
Varun Shipping Co (Varun Shipping) reported disappointing results in
Q2FY11 despite a QoQ rise in topline. The main disappointing factor and
matter of concern was the sharp decline in EBITDA margin to just 3.1%
and EBITDA of Rs 4.8 crore. Interest (Rs 51.6 crore) and depreciation (Rs
46.4 crore) resulted in a net loss from operations of Rs 88.5 crore in
Q2FY11. The operational performance of Varun Shipping is likely to be
under pressure for another couple of years as freight rates continue to
remain subdued. The sale and lease back arrangement would continue
to put a strain on the EBITDA margin and the performance could
deteriorate further in absence of extraordinary gains from sale of assets.

ICICI Securities: Varun Shipping: Under pressure…Target Rs 36

Varun Shipping: Under pressure…
Varun Shipping Company Ltd (Varun Shipping) has a dominant
presence in the Indian LPG space and operates 10 LPG carriers. The
company also expanded its presence in the offshore segment with the
acquisition of high-end AHTS vessels. However, the economic downturn
and correction in freight rates had a cascading effect on the operational
performance of the company, which has been under pressure for the
last one year. The strain is likely to continue. A high debt level has also
compounded the problems. However, if there is a recovery in high-end
AHTS vessel rates it could enable the company to emerge from the
crisis earlier than expected.
Long road to recovery
Due to oversupply of LPG carriers combined with subdued demand, LPG
freight rates are expected to remain sluggish. As LPG constitutes 50% of
Varun Shipping’s fleet, the performance is expected to be subdued. We
expect crude tanker rates to increase marginally while AHTS rates are
expected to rise at a faster pace over the next two years. The operating
margin of the company is also likely to improve to 44% from the current
36% on account of a rise in high-end AHTS vessel rates.
However, the company is also highly leveraged and significant interest
outgo is likely to strain the performance. Due to high depreciation and
interest costs, Varun Shipping is likely to report a net loss from operations
in FY11.
Valuation
We have valued Varun Shipping at 0.80x FY12E P/BV to arrive at a price
target of | 36. We maintain our SELL recommendation on the stock.