Stock Review: SHIPPING Corporation of India

SHIPPING Corporation of India, the leading player in the sector, managed to tide over a difficult operating environment in the global shipping industry with long-term contracts with key customers and a tight check on costs. Its operating profit margin improved by 720 basis points year-on-year to 18.4 % in the December 2010 quarter, while its net sales grew 5.1% to . 888.9 crore.

   The growth in the company's top line in the third quarter appears mediocre, but it was faster than in the first two quarters of the current financial year. Almost two-thirds of the company's fleet capacity is dedicated to the tanker segment, where the average spot freight rates in the third quarter were broadly weaker than a year earlier.

   For instance, in the very large crude carrier segment (VLCC, typically used to transport crude oil from the Middle East), the average spot freight was $7,365 per day in the third quarter, a decline of nearly 58% year on-year.

   Analysts say this was largely due to a sluggish demand in the western markets for oil products in the quarter under review. The company's fleet capacity at the end of October was nearly 5.37 million DWT (dead weight tonnes), the largest amongst Indian shipping companies.

   Also, in the smaller dry bulk segment, the average of the Baltic Dry Index was nearly 31% lower in the third quarter for the company. However, its long-term contracts with key customers helped it to minimise the impact of weak freight rates in the December 2010 quarter. Besides, a tight check on costs helped Shipping Corp's post a net profit rise of 40.8% year-on-year to . 123.1 crore in the quarter under review.

   The underlying concerns for the shipping industry show no signs of easing in the short term. And that's because spot freight rates in both the tanker and dry bulk segment have weakened further, from the levels at the end of the third quarter.

   Shipping Corp had also recently raised nearly . 582.5 crore from its follow-on public offer to part- finance its expansion plans over the medium term. This will help it meet the projected growth in cargo traffic over the next few years.

   The quarterly results were declared after the close of Monday's trading, but the stock ended the day's trade 0.4% lower at . 114.3. Investors remain skeptical about the growth prospects of the shipping sector in the short term, and this stock trades barely above its 52-week low. Shipping Corp trades at a P/E of 6.8 times on a trailing four-quarter basis and we are neutral on this stock. Its nearest rival GE Shipping trades at a consolidated P/E of 7.4 times on a trailing basis.