SHIPPING CORPORATION OF INDIA (SCI)
PRICE: RS.73 RECOMMENDATION: REDUCE
TARGET PRICE: RS.86 FY12E P/E: 15.6X
We interacted with the management of SCI to get an insight on the latest
developments in the shipping market and the company. We also factor in
FY11 annual report in our analysis.
The tanker market in which SCI primarily operates has fallen by ~25% YoY
in the last six months, more than what we had anticipated. The outlook also
continues to remain weak for medium term with both OPEC and IEA
bringing down the oil demand forecast for CY11 and CY12. Amidst weak
shipping market, SCI has either deferred or cancelled a part of its capex
programme. Consequently we have brought down our earnings estimate for
FY12E and FY13E and reduce our target price to Rs 86 per share (from Rs 110
per share).
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 slow with their capex program in the
shipping segment.
Capex would have highly leveraged the balance sheet for SCI
Though SCI did an FPO in FY11 of Rs 6.5 bn to buy assets, it would have primarily
resorted to high cost debt to pursue its huge capex programme which would have
leveraged the balance sheet and evaporated the cash reserve. With debt becoming
expensive and shipping market going through a bad phase, it would have been difficult
for the company to service its debt, do further capex and generate free cash
flow. With the above prudent step SCI has kept its financial position much
favourable.
Company currently has cash balance of Rs 17 bn - Secured loans
of the company has almost doubled in pursuing its capex program.
SCI did a capex of ~Rs 30 bn in FY11 through a mix of debt and equity. As a result
the gross debt of the company has gone up from ~Rs 26 bn in FY10 to ~ Rs 47 bn
in FY11. Gross debt of the company currently stands at ~Rs 52 bn with cash balance
of Rs 17 bn (which is ~12% of the capital deployed). Healthy cash balance is of
utmost importance for the company to make timely asset purchase and face the
cyclicality of shipping business. Healthy cash balance could positively impact the
other income component of the company with interest rates peaking and expected
to move up further.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI still struggles to surpass the 1,500 points level mark with
weak expectations for the forthcoming days. Even the tanker market is very soft
with oversupply of ships and minimum tonnage available. We believe the current
spot market rates across most of the shipping segments are below the operational
cost of the ship. We are not bullish on the shipping business going forward primarily
due to oversupply of ships in the bulk segment (net supply of 7.0% per annum) and
even in the tanker segment (net supply of 3.2% per annum) over CY11E to CY14E
We estimate the net NAV at Rs 123 per share
The management indicated that the NAV for the company has fallen to Rs 133 per
share in the June quarter (it was Rs 145 per share as on March 2011). The three key
segments - dry, tanker and container market has fallen about 5% to 50 % YoY in
the quarter, the NAV for SCI has also fallen QoQ. We now estimate the net NAV of
the company at Rs 123 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 two subsequent quarters including Q4FY11 and Q1FY12. All
the three key segments of shipping including container, bulk and the tanker segment
have performed badly and performance is 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 86/share (earlier Rs 110) to reflect
weakness in the shipping business (especially tanker segment) and the subsequent
fall in asset prices across segments by 5 to 50% over the last six months.
Historically most Indian Shipping companies including SCI have traded in a range of
0.6 x to 0.9 x of its NAV. We value SCI at 0.7 x NAV, in line with our view that the
shipping sector would remain under pressure at least till CY12. We reiterate Reduce
rating on SCI with a changed price target of Rs 86.
We also factor in the following while arriving at the fair value and Reduce 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
PRICE: RS.73 RECOMMENDATION: REDUCE
TARGET PRICE: RS.86 FY12E P/E: 15.6X
We interacted with the management of SCI to get an insight on the latest
developments in the shipping market and the company. We also factor in
FY11 annual report in our analysis.
The tanker market in which SCI primarily operates has fallen by ~25% YoY
in the last six months, more than what we had anticipated. The outlook also
continues to remain weak for medium term with both OPEC and IEA
bringing down the oil demand forecast for CY11 and CY12. Amidst weak
shipping market, SCI has either deferred or cancelled a part of its capex
programme. Consequently we have brought down our earnings estimate for
FY12E and FY13E and reduce our target price to Rs 86 per share (from Rs 110
per share).
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 slow with their capex program in the
shipping segment.
Capex would have highly leveraged the balance sheet for SCI
Though SCI did an FPO in FY11 of Rs 6.5 bn to buy assets, it would have primarily
resorted to high cost debt to pursue its huge capex programme which would have
leveraged the balance sheet and evaporated the cash reserve. With debt becoming
expensive and shipping market going through a bad phase, it would have been difficult
for the company to service its debt, do further capex and generate free cash
flow. With the above prudent step SCI has kept its financial position much
favourable.
Company currently has cash balance of Rs 17 bn - Secured loans
of the company has almost doubled in pursuing its capex program.
SCI did a capex of ~Rs 30 bn in FY11 through a mix of debt and equity. As a result
the gross debt of the company has gone up from ~Rs 26 bn in FY10 to ~ Rs 47 bn
in FY11. Gross debt of the company currently stands at ~Rs 52 bn with cash balance
of Rs 17 bn (which is ~12% of the capital deployed). Healthy cash balance is of
utmost importance for the company to make timely asset purchase and face the
cyclicality of shipping business. Healthy cash balance could positively impact the
other income component of the company with interest rates peaking and expected
to move up further.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI still struggles to surpass the 1,500 points level mark with
weak expectations for the forthcoming days. Even the tanker market is very soft
with oversupply of ships and minimum tonnage available. We believe the current
spot market rates across most of the shipping segments are below the operational
cost of the ship. We are not bullish on the shipping business going forward primarily
due to oversupply of ships in the bulk segment (net supply of 7.0% per annum) and
even in the tanker segment (net supply of 3.2% per annum) over CY11E to CY14E
We estimate the net NAV at Rs 123 per share
The management indicated that the NAV for the company has fallen to Rs 133 per
share in the June quarter (it was Rs 145 per share as on March 2011). The three key
segments - dry, tanker and container market has fallen about 5% to 50 % YoY in
the quarter, the NAV for SCI has also fallen QoQ. We now estimate the net NAV of
the company at Rs 123 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 two subsequent quarters including Q4FY11 and Q1FY12. All
the three key segments of shipping including container, bulk and the tanker segment
have performed badly and performance is 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 86/share (earlier Rs 110) to reflect
weakness in the shipping business (especially tanker segment) and the subsequent
fall in asset prices across segments by 5 to 50% over the last six months.
Historically most Indian Shipping companies including SCI have traded in a range of
0.6 x to 0.9 x of its NAV. We value SCI at 0.7 x NAV, in line with our view that the
shipping sector would remain under pressure at least till CY12. We reiterate Reduce
rating on SCI with a changed price target of Rs 86.
We also factor in the following while arriving at the fair value and Reduce 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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