SHIPPING Corporation of India (SCI)

SHIPPING Corporation of India (SCI) is planning to aggressively expand its fleet capacity by nearly 54% over the next 3-4 years in a bid to meet the anticipated demand over the medium term and also to reduce the average age of the fleet. The company has drawn up plans to order an additional 24 vessels during the current financial year with a capacity of 1.5 million dead weight tonnes (DWT), in both the shipping and offshore segments. These vessels would be delivered in phases over the next few years. The company's fleet capacity at the end of October was 5.37 million DWT, the largest among Indian shipping companies. To part fund this expansion plan, SCI intends to raise nearly . 1,185 crore from its follow-on public offer (FPO), and it includes nearly . 592 crore that the central government would receive for reducing its stake. Post this FPO, the government's stake would come down to about 63.7% from 80.1%.

   However, SCI expansion plan comes at a time when the global shipping industry is witnessing an extremely difficult operating environment. In the key tanker segment, which is used for transporting crude oil and al-lied products, shipping companies have been grappling with sluggish global demand in the past 15 to 18 months. This is largely due to cur-tailed oil demand in USA and key European markets. In segments like VLCC, spot freight rates are currently at $ 18, 000 per day level, nearly half the average in the March 2009 quarter. The shipping sector is also grappling with the problem of additional tanker vessels being delivered in phases from global shipyards over the next 6-12 months, and it remains to be seen if there is sufficient demand for these vessels.

   Indian shipping companies utilise a combination of long- and short-term contracts to maximise their freight earnings. However, a difficult operating environment had resulted in SCI's net sales declining 3.6% on a CAGR basis to . 3,463 crore, during the year ended March 08 and March 10, while its adjusted net profit had also declined 41.3% on a CAGR basis during this period. This was broadly in tune with its nearest rival, GE Shipping, which also experienced similar falls in net sales and net profit on a CAGR basis during the period.

   Retail investors would be getting the stock (adjusted for the 5% discount) in this FPO offer at . 133, which is below the 52-week low of . 139 reached in late Nov 2009, and it considerably reduces the risk. Also, the FPO is at a P/E of nearly 11 times, annualising the first half FY 11 earnings, and adjusted for the expanded capital base. The SCI stock ended Monday's trade at . 144.75. Its peer GE Shipping trades at nearly 9.7 times on a consolidated basis on a trailing four-quarter basis.