SHIPPING Corporation of India (SCI)

Beta: 0.38
Institutional Holding: 15.08%
Dividend Yield: 10.01%
P/E: 3.67
M-Cap: Rs 3,597 cr

SHIPPING Corporation of India (SCI) is the country’s largest shipping company and is 80.1% government-owned. It had a fleet size of 79 vessels at the start of August ’08 and a capacity of 4.76 million dead weight tonnes (dwt). Around 56.3% of its capacity is utilised for transporting crude products, while 30.8% is used for the dry bulk segment. But a concern related to SCI’s fleet is the rapid ageing of its vessels, which limits its ability to quickly deploy its vessels, especially in the dry bulk segment. For instance, in the dry bulk segment, SCI’s 20 bulk carriers are 19 years old on an average. In fact, SCI has admitted in its annual report for FY08 that 12 out of its 15 Handymax vessels in the dry bulk segment are 20 years old.

As a result, the deployment of such vessels has come down considerably, with customers preferring vessels that are less than 15 years old. In the tanker segment too, SCI has several vessels that are over 15 years old, but the demand for transporting imported crude to the country by oil marketing companies has spurred the utilisation of these vessels. The aging fleet of SCI has resulted in the company reporting mediocre growth in topline, even during the boom phase of the shipping industry between FY06 and FY08. Another symptom of this aging fleet is that operational costs tend to be higher, which puts pressure on operating profit margins (OPM). Meanwhile, SCI’s capacity on a spot basis is pegged at 33% of its total fleet as of end FY08.

FINANCIALS:

SCI reported a lacklustre growth in net sales during the three years ended FY08, with its core operational income rising just 5.5% during the period to reach Rs 3,726.8 crore in FY08. In addition, its OPM declined by over 550 bps during the period to 25.5% in FY08. Pressure on OPM has been due to a rising cost structure — for instance, repairs & maintenance cost as a percentage of net sales stood at 9.6% in FY08, compared to 8.35% in FY06. SCI’s bunker cost as a percentage of net sales was 18% in FY08, compared to 13.3% in FY06. To the company’s credit, it maintained a conservative debt-equity ratio of 0.3 in FY08, which is identical to the level reported in FY06. Meanwhile, during the September ’08 quarter, SCI’s OPM fell 160 bps y-o-y to 24.8%, which was once again due to rising operational costs.

GROWTH PLANS:

SCI plans to add 28 vessels over the next 2-3 years at a cost of $2 billion (Rs 10,000 crore). Despite the current weakness in spot freight rates, this strategy is optimal in a bid to reverse the ageing nature of its fleet. The company’s cash and bank balance as of end FY08 was Rs 2,019.2 crore. Analysts expect a rise in its debt-equity ratio in the medium term due to its expansion plans.

VALUATIONS:

At Friday’s closing price of Rs 85, the stock trades at 2.7 times its estimated FY09 earnings and we are neutral on the stock. Investors keen on taking exposure in the shipping sector can consider investing in private sector players.