Stock Review: VARUN Shipping

 

At Current Valuation, Stock Looks Attractive And Investors Could Play Long

 

VARUN Shipping, a leading player in the transportation of liquefied petroleum gas (LPG) to the country, took a hit in its June '10 quarter performance due to sluggish freight rates on a year-on-year basis. Varun also operates in the offshore segment via its fleet of anchor-handling towing supply vessels (AHTS). Analysts tracking this segment point at broadly weaker day rates earned by players in this segment compared with a year earlier.

   As a result, the company's operating margin plummeted to 12.9%, one-thirds of the year-ago margin. Its core freight & charter income also declined 24.8% to Rs 132.2 crore. However, the company had sold one LPG carrier in the first quarter, which resulted in a profit of Rs 108.36 crore. As a result, net profit jumped more than 10 times to Rs 23.5 crore in the quarter. Excluding this non-operating income, the company's net loss was nearly Rs 84.8 crore in the quarter.

   Investors, however, pushed up the stock 16.4% to Rs 47.6 on Thursday. According to analysts, the stock is available at attractive valuations, given its sharp fall in recent months. The stock had fallen to its 52-week low of Rs 39.8 at the end of July.

   The company has highlighted the possibility of higher domestic demand for LPG during the current financial year, helped by government schemes such as the Rajiv Gandhi Gramin LPG Vitrak scheme. This should give a boost to its freight earnings, going forward. In addition, day rates on a global basis have shown signs of moving up for the offshore segment over the past few weeks.

   Stocks of big players in the sector, including GE Shipping, have not seen much action in recent months, given the tough operating environment. The difficulty for Varun Shipping, in the quarter under review, is reflected in a 9% year-onyear fall in the average spot freight rates in the tanker segment related to LPG as per industry estimates. However, it needs to be noted that players like Varun Shipping have long-term contracts with key clients to minimise this impact.

   Clearly, investors looking to buy shipping stocks would need to have a long-term horizon, considering the extremely difficult operating environment over the past 15-months, and recovery signs that still appear tentative.