Stock Review: Bharati Shipyard

Bharati Shipyard has acquired a 51 per cent stake in the South India-based Tebma Shipyard (Tebma) for a price of Rs 75.75 crore through a fresh issue of capital at a price of Rs 19.20 a share (face value of Rs 10).

The company already has two major shipyards at Malpe in Karnataka and Cochin in Kerala, and will further get access to three modern and readymade shipyards of Tebma in Kerala, Karnataka and Tamil Nadu, which are capable of manufacturing tugs, dredgers and offshore E&P vessels.

While the acquisition adds to Bharati's capacities, it will also put pressure on its already-stretched balance sheet. The gross debt stands at Rs 420 crore and the net debt at Rs 335 crore pre-acquisition, according to Prabhudas Liladher reports. The September quarter earnings too had suffered as interest costs at Rs 63.4 crore matched the operating profits of Rs 63.1 crore. The net profit was salvaged by a subsidy booking of Rs 48 crore, which pushed the bottom line to Rs 29.2 crore (down 10.5 per cent y-o-y). Accumulated losses on the books now stand at Rs 188 crore. Bharati had undergone debt restructuring recently, which helped it receive a moratorium on the interest and principal on a large part of its loans till the end of FY12.

The order flow too has been sluggish till now, but is expected to improve. Given the current order book of Rs 750 crore, analysts estimate the FY11E revenue growth to remain slightly subdued. Estimated revenues at Rs 1,502 crore are expected to grow 18.8 per cent compared to 35.2 per cent in FY10, while the net profit is pegged at Rs 102.6 crore.

However, the acquisition seems attractive on valuation parameters. Prabhdas Lilladher Research values the acquisition at EV/Ebidta of 4xFY12E and PER of 2 to 3 times the FY12E earnings. While the debt-equity ratio may now swell to 3.2:1, with improvement in order flows, the acquisition will be quite fruitful for the company.

Though the acquisition of Temba seems logical, improvement in order flows will be keenly watched