An upsurge for Bharati

SMARTSHARE

On Thursday, the Bharati Shipyards issue was listed and closed at Rs 127.95 after trading over 1.65 crore shares. This was nearly 100 per cent premium on the issue price of Rs 66 and the trading volumes were astonishing given that the company had issued 1.25 crore shares!

Obviously an enormous trading interest has been generated and based on the market's enthusiasm, one can suggest in hindsight that the issue was underpriced.

Bharati Shipyards did have a problem about pricing "" there were few benchmarks, since this was the first shipbuilder to make an IPO.

The company is run by two technocrats, naval architects from IIT, who retain ownership of around 45 per cent of the equity. The company was raising money for expansion of existing facilities at its two working yards and also expanding further by taking over a defunct Goan yard.

Shipbuilding is as cyclical a business as shipping itself "" but the industry is on an upcycle. Bharati has a full order book for the next 24-30 months. There have been some encouraging policy developments in the Indian context "" substantial subsidy around 30 per cent for domestic shipbuilders has been offered to private players for ships delivered between now and 2007.

The new tonnage tax will encourage fleet expansions over the next five fiscals and so, inevitably, will the National Maritime Development Project alias Sagarmala "" optimists project upto 2,400 new coastal vessels being built if Sagarmala takes off. And there is also an increasing trend of LNG imports.

Bharati is comfortable handling an expansion in the short shipping segment since it does tugs and it also does a range of small vessels from tankers to bulk carriers to exploration/offshore support vessels.

It hopes to expand capacity by moving up into the 25,000 DWT capacity (Handysize). The major client is Great Eastern Shipping with Reliance also providing repeat business.

The good times and the cyclical industry upsurge have both been reflected in the balance sheet. Bharati saw a sales growth rate of 14 per cent CARG over the last four years and net profit has grown at 42 per cent. The topline doubled from Rs 61 crore in 2002-03 to Rs 121 crore in 2003-04.

In the first half of 2004-05, it's done Rs 99 crore in business "" if the trend is maintained, it will see a 75 per cent growth in topline this fiscal.

Net profits grew from Rs 6 crore in 2003-04 to over Rs 14.5 crore in the first half of 2004-05. The annualised FH 04-05 earnings would be above Rs 13 per share "" that's a current discount of just below 10 if we assume price discovery has been reasonable. In terms of book-values, that's about 4.

Is this expensive? There is no exact domestic benchmark and comparisons with listed Far Eastern Shipyards are irrelevant because of the different types of production capacity.

There have been apparent problems in the past with high receivables and cursory cash-flow analysis suggests that the company could be stretched maintaining an expensive but unavoidable inventory. But it does have guaranteed orders coming in over two fiscals from clients with decent cash-flows.