The company’s share price has undergone significant hammering in the past year, led by concerns over high debt and the resultant interest cost leading to an erosion in profits. But, with its board approving the debt restructuring on Monday, the stock gained five per cent on Tuesday. Moreover, there is a huge valuations gap, as its peer group company, ABG Shipyard, is trading at almost 1.5 times its FY11 book value compared to just 0.2 times for Bharati.
Debt concerns remain
After acquiring Great Offshore, Bharati accumulated huge debt on its books. The debt stands at about Rs 3,250 crore, or 3.5 times, its equity in FY11. High debt has become a key worry for investors, as servicing it will require robust cash flows.
Analysts expect the company to have an interest cost of Rs 400-450 crore in this financial year and the next year, which is significant compared to expected operating profit of just Rs 400 crore this year and the following year. The lack of adequate interest coverage will lead to profitability getting eroded.
| PROFITS UNDER PRESSURE | |||
| in Rs crore | FY11 | FY12E | FY13E |
| Sales | 1,609 | 1,296 | 1,329 |
| Growth y-o-y (%) | 19.4 | -19.5 | 2.5 |
| Net profit | 104 | 58 | 15 |
| Ebitda margin* (%) | 19.3 | 18.7 | 18.8 |
| EPS (Rs) | 34.5 | 19.2 | 5.1 |
| RoE (%) | 9.3 | 6.9 | 0.5 |
| PE (x) | 2.1 | 3.7 | 14.0 |
| * excluding subsidy E-Estimates Source: ICICI Securities (Retail equity research) | |||
Though the company is restructuring its debt (details not provided by the management), things could only improve on the repayment side, as analysts believe banks may increase the tenure of the loan payments. However, there is little chance for an interest rate reduction. If the company brings down the interest cost through debt restructuring, that would be a positive. Investors should watch out for details.
Fundamentals still to improve
Servicing debt at this juncture is critical, considering the negative industry outlook and weak internal cash flows. Given the shrinking order book, the revenue visibility for the next two years is also low.
“The majority of our orders come from the European market, which is currently facing challenging times. However, we are in the process of delivering five vessels over the next six months,” says managing director P C Kapoor.
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The management is confident of procuring new orders, especially from the defence sector. The company claims of an order book worth Rs 6,800 crore, with orders worth Rs 3,060 crore (two times its FY11 revenue) yet to be executed. The same will be completed by the end of financial year 2014, it says.
However, as of now, analysts expect revenues to be lower over the next two years and interest cost to eat out most of its profits. According to them, profits are expected to fall significantly from Rs 104 crore in FY11 to just about Rs 15-30 crore (range of estimates) in FY13.
Concerns also emanated from Great Offshore, where Bharati Shipyard holds 49 per cent. Great Offshore has seen a significant cut in earnings after the second quarter results, as analysts worry about a reduction in the fleet size.