Weigh the anchor

IPO REVIEW

Shipbuilding company ABG Shipyard has a substantial order book and looks attractively priced too.

Shipping logistics companies are surely set to boom. Growing imports into the country to feed economic growth has opened up a lot of opportunities for the shipping logistics companies.

To make the best of both the growing business opportunity and of course a zooming stock market ABG shipyard is the next in line with a public issue. Engaged in the manufacture and repair of marine ships for commercial and government customers, ABG plans to expand its operations. The company is making a public offer of 85 lakh shares in the price band of Rs 155-185.

According to Huzaifa Suratwala of Angel Broking, the company's valuation is less than half of what its listed competitor Bharti Shipyard currently trades at. Based on H1FY06 annualised earnings, the stock is being offered at price-earnings multiple of 10-12 times while Bharati traded at 26 times on the same count. 
 

COMPARATIVE PERFORMANCE
In Rs crores	H1FY06
	ABG Shipyard	Bharati Shipyard
Sales	215.40	127.68
EBIDTA	56.40	25.54
EBIDTA margin (%)	26.20	20.00
Net profit	32.60	14.59
NPM (%)	15.10	11.43
P/E ratio for FY06E*	10x - 12x	26.00
* Half yearly EPS annualised

The giant leap
The industry in which ABG is operating is set to take a giant leap in coming years. Focus of international ship building is expected to shift to the Asian countries like India and China mainly due to low labour costs as ship building is labour intensive.

Domestic market is also booming equally. This is evident from the increasing share of domestic sales in the company's total revenue from 2.4 per cent in FY03 to 43.5 per cent in FY05.

This is partly due to the new project "Sagar Mala" initiated by the Indian government for the development of the country's maritime sector which is likely to result in an estimated additional demand for 2500 new ships.

Further, private shipping companies operating in both domestic and international markets are also entitled to a subsidy at the rate of 30 per cent of the sale price of ships which is likely to last till August 2007. Tanker vessels aged over 25 years and ships more than 15 years old have been banned which will further increase demand.

Growth aspirations
Operating in an industry that is set to boom, ABG has ambitious growth plans too. The company plans to utilise the proceeds of the issue, which should be about Rs 130 crore, mainly for setting up its shipyard at Dahej in Gujarat.

The company expects to put up capacities to build vessels upto 120000 DWT (dead weight tonnes) and commission the same in 2008. Already, it has entered into an agreement with Irving Shipbuilding, Canada to acquire shipbuilding machinery having an estimated life of at least 20 years.

It already has one shipyard at Magdala near Surat close to the banks of the river Tapi spread across 35 acres. Currently, it can manufacture ships of a maximum length of 155 metres and a maximum weight of 20000 DWT.

The company's total income and operating profit have increased at a compounded annual growth rate of 13.2 per cent and 56.7 per cent during the past three years. The company has achieved 71 per cent of its FY05 revenues, 62 per cent of its FY05 gross profit and 64.8 of its FY05 net profits in half year ended September 05. 
 

FINANCIALS
In Rs crores	H1FY06	FY05	FY04	%change
Sales	215.40	304.10	204.90	48.40
EBIDTA	56.40	98.50	24.00	310.40
EBIDTA margin (%)	26.20	32.40	11.70	-
Net profit	32.60	50.30	7.20	598.60
NPM (%)	15.10	16.50	3.50	-
P/E ratio for FY06*                                                         10 -12x

However it has witnessed a negative cash flow from operations of Rs 43 crore due to increase in working capital requirement.

Currently, ABG is sitting on an order book position of 27 ships amounting to Rs 1300 crore including export orders for Rs 670 crore. These orders are to be executed over the next three years.

The caveats
However according to analysts there are certain caveats. Firstly in FY05, the company earned 56.5 per cent from exports and about 64 per cent from oil and gas industry.

Secondly, its raw materials - mainly items made of steel and aluminium which form about 50 per cent of net sales are largely imported. Thus it is exposed to the volatility in metal prices. Besides, as imports are high for a typical ship manufacturer, it is exposed to currency risk.

There is another risk too. The company could face higher interest burden in a rising interest rate scenario as 52 per cent of the cost of the project is being raised through debt at a floating interest rate of around 8 per cent. Interest costs formed about 6.6 per cent of net sales in FY05.

Also it is expected to face competition from the international markets as global producers are much larger and highly automated. Also China poses as the biggest threat to India in terms of lower labour costs and construction of new facilities and up-gradation of existing shipyards.

Overall analysts are very bullish about the company's potential and think that the issue is attractively priced.

Issue closes: November 24, 2005