Anchor stock

PENNY WISE

ABG Shipyard will benefit from growing export demand for specialised and mid-size vessels.

Companies with future visibility of earnings are always a preferred investment options.

When markets are at a peak and volatile, these companies are considered safer investments as their future revenues and profits can be ascertained. ABG Shipyard is one such company having a strong position in the Indian ship-building industry.

Its order-book stands at almost 6.5 times its FY06 revenues and the company has aggressive plans to expand its capacity. Moreover, a strong demand outlook driven by increasing expenditure on oil exploration and production, upgradation of technology and an ageing fleet for many shipping companies mean that ABG's growth prospects are bright.

Over the past 15 years, ABG has emerged as an important player, having executed more than 94 ships since 1990. The company has a diversified portfolio of building and repairing different variety of ships including offshore, Coast Guard and fleet vessels.

The growth is led by exports, which account for almost 70 per cent of its total order book. The company's total income has grown at 46 per cent annually during FY 2001-06, whereas the net profit grew at 87.60 per cent a year.

While commenting on the company's growth, Dhananjay Datar, chief financial officer, ABG Shipyard, says, "The export market still holds good prospects, where India still has a minuscule market share of less than 1 per cent of the global ship-building industry. We perceive this as an opportunity and expect India's share to grow to 5-6 per cent in the next five years."

Sea change
The global ship-building industry is still dominated by South Korea, China and Japan. India, although, a late entrant is gaining ground due to low cost advantage, supportive government policies and increasing technical expertise.

This is evident from Indian ship-builders' order books, which has gone up by nine-fold in the last four years. The Indian companies have been able to get a footing in building small and specialised vessels.

Besides, there is a huge potential from the domestic oil and gas exploration and manufacturing sector. The demand for small and specialised vessels such as coast guard, pollution control and short sea trade vessels is increasing.

To keep pace with the growing shipbuilding industry, ABG has embarked on an expansion plan where it will invest about Rs 450 crore. It has plans to expand its existing Surat capacity from 23 vessels to 32 vessels by FY08. This is expected to result in faster execution of its pending orders and booking revenues earlier.

In addition to this, it is investing in a greenfield project and entering into building large size vessels with vessel size of up to 120,000 dead weight tonne.

The new facility of building eight vessels at a time will come up at Dahej, and will be operational by April 2008. As most of its orders will be delivered by FY09 and FY010, the impact on revenues will be reflected only in the long run. 
 

SHIPPING GAINS
Rs crore	FY07E	FY08E	FY09E
Income	720.00	950.00	1800.00
Net Profit	118.80	156.75	297.00
Equity	5.09	5.09	5.09
EPS (Rs)	23.33	30.78	58.33
PE (X)	14.70	11.14	5.88

Valuations
ABG's current order book of 60 vessels valued at Rs 3,530 crore is good enough for sustainable growth over the next three years. At its current market price of Rs 344, the stock is trades at a P/E of 14.7 times estimated FY07 earnings and 11 times FY08 earnings.

Considering its execution of bigger orders in FY09 and FY10, coupled with better prospects of the industry, ABG Shipyard's long-term prospects appear attractive.