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ABG Shipyard's payment-on-delivery strategy may prove risky

Improving economic conditions in Europe and increased exploration activity in West Asia region has pushed up demand from offshore segment in last few months

Aditi Divekar Mumbai

ABG Shipyard, the largest private sector ship builder in India, is ready to accept payments towards its orders only upon delivery, but analysts have cautioned the debt-laden company that such a move could prove to be risky given the huge working capital loan the company carries post the debt recast approval last week.

"Liquidity is a problem for the shipping industry overall due to the slowdown and so earlier where we used to get advances at various milestones, when building the ships, now we will be accepting payments upon delivery of the vessels," chief executive officer Dhananjay Datar of ABG Shipyard said.

 

"Also, oil and gas exploration activity is strong globally and so demand for vessels and rigs catering to that segment is also robust. Due to this, we do not see any cancellations in this segment," Datar said.

Improving economic conditions in Europe and increased exploration activity in West Asia region has pushed up demand from offshore segment in the last few months.

"Most of our offshore contracts are overseas orders," Datar added.

Though bullish demand from the offshore segment hints at an assured business for shipbuilding companies in the near term, analysts were of the view that companies like ABG Shipyard are not in a position to execute a strategy of 'no advances' when its inventory is high, cash flows are negative and loans are more towards the working capital.

As on FY13, ABG Shipyard has an inventory as high as Rs 4,360 crore, while its cash flows have been in negative since the last two years until FY13.

"Most of the loan that has been recasted recently is for working capital. As such our long-term loan is only Rs 2,000 crore," said Datar.

"It is important for the comany to work towards reducing its inventory at present," said an analyst with a local brokerage. "The company cannot run its business on working capital loans for long. It has to generate positive cash flows,"he added.

As on Mar 31, 2014, ABG has a total order book worth Rs 16,000 crore which provides very strong revenue visibility.

Of this, Rs 11,000-crore-worth orders, an amount almost equal to the debt recasted recently, are mainly towards the offshore and rigs segment and are currently under execution. The balance orders for bulk carriers are yet to be commenced, said Datar.

Atleast about 30 percent of the total offshore order book of ABG Shipyard is currently exposed to Essar Group, one of the primary clients of the company, who's promoter has relationship with the latter.

"Considering that 70 percent of the offshore orders have been taken without any advances being received, it seems like a very risky strategy on the part of ABG Shipyard," said Sudarshan Shreenivas, associate director-corporates India Ratings.

It was the delayed payment from Essar that had put ABG Shipyard into financial stress earlier. The shipbuilding company then had to go for debt restructuring which was cleared only last week.

In the quarter ended December, due to shrinking revenue and increased expenditure, the 27-year old company reported a net loss of Rs 15.6 crore. At the operating level too ABG was in losses.

With shipyards in Surat and in Dahej in Gujarat, ABG Shipyard mostly builds offshore vessels including rigs along with cement and bulk carriers.

Analysts were also of the view that it was crucial to understand the composition of the offshore order book of the company.

"The overall shipping market is weak and so it is important to know the inclination of the buyer to take delivery," said Amit Agarwal, analyst with Kotak Securities.

The company's Rs 11,000 crore debt recast explains that it has given significant bank gurantees so that incase it is unable to fulfill its order on time, as penalty, the buyer can invoke these bank guarantees, said Agarwal.

This explains why ABG Shipyard was looking for a debt recast close to Rs 11,000 crore when its consolidated debt at the end of FY13 stands at around Rs 4,300 crore.

Apart this, the company is yet to receive its subsidy payment of Rs 1,000 crore from the government which is long pending since 2007. This is another stream of cash flow which is yet to come onto the company's books.

"We are helping the government with the necessary documents inorder to speed up the subsidy payment but we really do not know by when we will get this amount," said Datar.

Noting the bullish trend in shipping sector in pre-crisis period, the government had introduced a subsidy policy for shipbuilders for a period of five years ending August 2007. Though the policy has ended long ago, shipbuilders continue to make trips to the government offices to book their subsidy.

All-in-all, in order to bring back its 'hay' days, ABG Shipyard will have to lay its strategies with more caution and keep close tab of its buyers' delivery inclination inorder to complete its Rs 11,000-crore offshore order book.

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First Published: Apr 09 2014 | 5:38 PM IST

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