Shipping Corporation of India (SCI)

The Shipping Corporation of India (SCI) is planning to raise `1,100 crore through a follow-on public offer (FPO) to part fund its fleet-modernisation programme, which entails replacing its ageing 77vessel fleet.

Under the Eleventh Five-Year Plan, SCI has a capex of `13,100crore. However, post the issue, the government's holding in the company will decrease from 80 per cent to just under 64 per cent.

Expansion

As of October 31, SCI had placed orders for 26 vessels that are expected to be delivered over the next three years. Before the end of the current financial year, the company plans to order an additional 20 vessels. This expansion will result in an increase of 1.5 million DWT (deadweight tonnage) of capacity by 2012, which is about 28 per cent of its current fleet. With the current and new additions, over the next two years, the average age of vessels is expected to come down to 11 years from 16 years. This will help SCI save on operational costs.

Focus on energy

While SCI has a diversified fleet catering to dry bulk commodities (coal, iron ore, etc), crude oil and chemical derivatives, and container trade; about twothirds of its current assets service the crude oil segment. However, the company will continue focusing on the energy transportation sector.

While its tanker division is expected to capitalise on crude oil demand and export of refined products, the bulk vessels could see higher demand from the domestic power and steel sectors, which rely on coal imports.

The Planning Commission estimates that the demand for coal is projected to grow at a robust 9 per cent annually between 2007 and 2012. However, the dry bulk freight rates — which have seen a significant downward pressure in the first half of the year —are likely to be under pressure in the short term, given the monetary tightening in China. Analysts believe tanker freight rates have started bottomingout and given the strong growth numbers from high consumption countries such as India, the rates are likely to stabilise.

Valuations

A dip in freight rates and higher operating costs meant that SCI's revenues for 2009-10 fell by 17 per cent, while its operating profit margins tanked 1,230 bps to 13.7 per cent. Angel Broking believes that while return ratios are likely to improve on a low base (return on capital employed pegged at 5 per cent in 2010-11 vis-àvis 1.1 per cent in 2009-10), a higher capex will mean they will be below the numbers prior to 2009-10.

However, a strong balance sheet (Rs 2,000 crore in cash) and a debt to equity ratio of 0.55 are a source of comfort in a capital-intensive business.

The positives for SCI include astrong client base of government and private companies, in addition to a diversified and younger fleet. However, its return ratios are lower when compared to peers such as Great Eastern Shipping (Gesco). At the lower end of the price band, the stock is valued at 0.8 times and 7.2 times its estimated 201112 book value and price to earnings, respectively.

Given that these are in line with Gesco, which offers better opportunities (unlocking of offshore subsidiary), only investors with a long-term perspective could consider the issue at the lower end of the price band.