Shipping Corporation of India - IPO - Buy

Shipping Corporation of India

The government of India is planning to meet the target of raising Rs 40000 crore from divestment and has already come out with the issues like Coal India, Power Grid Corporation of India and MOIL India. Next in the line is Shipping Corporation of India (SCI) which is expected to come out with the follow on public offer. The total issue of 8.469 crore comprises of offer for sale of 4.235 crore equity shares and another fresh issue of 4.235 crore.  Post the stake sale, the Government’s holding in the company will come down to 63.75 per cent from the current levels of 80.12 per cent. The price band is set at Rs 135-140 per share. SCI plans to raise round Rs 1186 crore from the issue at the higher price band level and Rs 1143 crore at lower price band. While the proceeds from the offer for sale (approximately Rs 593 crore) will go to government's kitty, proceeds from the fresh issue (Rs 593 crore) will be utilized to part fund the acquisition of certain vessels and general corporate purposes.

The moot question is whether to go for the issue or avoid it. Going ahead in the issue we have tried to find an answer to the same, but let’s understand the business of the company.

Business of the Company

As regards the business operations, the company currently operates 78 vessels with a total capacity of 5.37 million dead weight tonnage (DWT). Currently its bulk carrier and tanker division is the primary source of income with contribution of around 70 per cent to the topline. The demand for bulk carriers and tankers, to a large extent, depends on the demand for energy products, including crude oil, gas and coal. Further the company also has liner division which contributes around 20 per cent of its revenues.

The management expects the ratio of revenue from bulk carriers & tanker division to decline going forward. Just to quantify in H1FY11 the bulk carrier and tanker division contributed 63 per cent to the topline and the liner division contributed 27 per cent of the revenues. But the management stated that still the source of revenue will be tilted towards the energy products, as we look forward to grow in energy-related business.

Expansion Plans

SCI is planning for ambitious expansion plans. Here Chairman and Managing Director, S Hajara stated that, “We have drawn up a capex plan of USD one billion per annum for the next three year period." He further stated that, “The capex will be financed through internal accruals and debt”. As a part of its ambitious expansion plan, SCI plans to add 62 vessels in the 11th Five Year Plan. "We have already ordered 30 vessels and will place orders for 15 more vessels by end-March 2012," Hajara said. While the addition of 30 ships will take the total capacity to 6.83 million DWT, the addition of 15 vessels will take the total capacity to 8.03 million DWT.

As regards the utilization of net proceeds from the issue, SCI will utilize the same to fund the acquisition of 2 VLCC crude oil tankers and 3 container vessels. The delivery of the same is expected in 2014.

Further, going ahead, SCI plans to take its capacity to 10 million DWT by acquiring more vessels in the next six years. Here Hajara stated that, “We believe that our strong balance-sheet and cash on hand provides us with greater working capital and the flexibility to sustain our business during difficult economic times. In addition, our strong balance-sheet has allowed us to service interest and principal payments on our debt in a timely manner. We believe this will permit us to enter into favorable financing terms for the acquisition of vessels,"

Financial Performance

The financial performance of the company has been good in the past. But in revenue and net profit for Fiscal Year 2010 dropped by 14.3 per cent and 59 per cent, respectively, compared to Fiscal Year 2009. The basic reason was, demand for shipping services as well as the prices charged by international shipping companies dropped significantly, as the world economy came under pressure and shipping markets underwent a correction, including the Indian shipping market. Actually the liner division suffered losses bringing the overall profitability downwards. But the scenario is improving and in the first half the performance has improved significantly. In H1FY11 the topline stood at Rs 1789.36 crore and bottomline of Rs 450.46 crore as compared to Rs 1727.73 crore and Rs 153.62 crore respectively for H1FY10. The performance of the liner division has also been good and turned profitable in the H1FY11.

As regards the overall scenario in the shipping industry Hajara explained that, “Shipping rates are likely to remain under pressure till the end of calendar year 2011, and rates in the container segment will remain firm”. Considering the above factors, the management expects the performance of the first half to be repeated in second half also.

Whether to invest or not?

If we consider the price band of Rs 135-140, the government has priced the issue attractively. The book value after considering the new issue of shares stands at Rs 146. Considering the 5 per cent discount offered to the retail investors, we feel there is lot being left on the table for the investors. Further considering the strong and consistent dividend track record, better financial performance and the attractive price offering we recommend the investors to go for the issue.