Stock Review: VARUN Shipping

 

A demand pick-up in LPG business is likely to help Varun Shipping stay afloat in the coming quarters

 

VARUN Shipping, which is a part of the Yudhishthir D Khatau Group, is a leading player in the transportation of liquefied petroleum gas (LPG) to the country. As per estimates, Varun's fleet transported nearly 63% of all LPG cargos imported into the country by PSU oil marketing companies for the year ended March 2010. The country imported nearly 2.71 million tonne of LPG for year ended March '10 , a rise of 15.8% compared to a year earlier.

   The operating environment for the shipping industry has been difficult over the past 4-6 quarters with sluggish freight rates, but demand in the company's key LPG segment is showing signs of improving. This is due to the revival in the global economy especially, emerging markets, and the resulting strong demand for crude oil and allied products. For instance, the global body, International Energy Association (IEA) recently announced that China has overtaken the US to become the world's largest consumer of energy.

   In addition, in the domestic market, the Rajiv Gandhi Gramin LPG Vitrak Scheme should lead to a pick up in demand. A rise in demand for imported LPG should help players such as Varun Shipping to ensure better utilisation of their fleet and also improve freight earnings. Varun Shipping is also present in the offshore segment and the current pick in the upstream oil sector should help the company get better rates for its assets.

FLEET SIZE:

Varun Shipping is a mid-size player in this sector while the biggest domestic player is the government-controlled Shipping Corporation of India. Varun Shipping owns/operates a fleet of 10 vessels for LPG transportation and is the largest player in the country in this segment.

   Its owned capacity for the LPG segment was 187,978 DWT (dead weight tonnes), as of May 2010. The company utilises a combination of spot and time charters with PSU and private sector oil companies to maximise its freight earnings. In addition, the company owns three Aframax vessels to transport crude oil. These vessels are placed in the Sigma Tanker Pool, which enables them to operate mainly in overseas markets. Apart from its presence in shipping business, Varun also has been ramping up its presence in the offshore segment. It owns/operates a fleet of seven anchor handling towing and supply vessels (AHTS) and these vessels are deployed in India and overseas.

   Varun has substantially expanded its presence in the offshore segment since March 2007, when it had just three assets in that segment. As part of that strategy, the company had invested 1997.5 crore during the period March 2007-March 2010, while its cash flow during this period was just 1,201 crore. As a result, its debt-to-equity ratio was 3.4 at the end of March 2010, which was one of the highest in the domestic shipping and allied sectors.

FINANCIALS:

Varun Shipping's performance in the June 2010 quarter was adversely affected by sluggish freight rates on a year-on-year basis in the key LPG segment. The difficult environment for the company in the quarter under review was highlighted with average spot freight rates in tanker segments related to LPG that declined nearly 9% y-o-y, as per industry estimates.

   As a result, the company's operating profit margin plummeted 2,820 basis points year-on-year to 12.9% in the quarter under review, at a time when its core income also declined 24.8% to 132.2 crore. The impact of the slowdown in the global shipping sector between March 2008 and March 2010 was visible as the company's net sales that declined nearly 29.5% to 666.2 crore during this period. Also, its adjusted net loss (excluding exceptional items) was 183.5 crore at the end of March 2010 compared to a net profit of 223.9 crore, two years earlier.

VALUATIONS:

Varun Shipping at 41.5 per share trades at a P/E of 18.2 times on a trailing four-quarter basis. Larger rivals, Shipping Corporation trades at a P/E of 17 times and GE Shipping trades at 9.1 times on a consolidated basis.