While the news flow has been good for shipbuilders, investors need to be selective as near-term upsides seem limited.
Stocks of shipbuilding companies have been in the limelight recently for outperforming the broader indices. This could be partly attributed to companies announcing new orders, coupled with news of Shipping Corporation of India seeking to buy a partial stake in any one of these companies. “The SCI-related development has definitely spiked the prices of these companies as whoever gets the deal will get business from SCI, which has a planned capex of about Rs 8,000 crore,” says Bharat Chhoda, who tracks the shipbuilding sector at ICICIdirect.com.
Additionally, the undervaluation of these stocks also made them attractive. “I think many of these stocks were undervalued for quite some time and now some catching up is happening in the sector. However, some of the counters like ABG Shipyard have risen very sharply,” says S P Tulsian of sptulsian.com .
While the news flow on the business front has improved, there is a need to be cautious. “Globally, about half a billion dollars worth of orders have been announced recently in the offshore segment, which has improved the sentiment. But, it is too early and one should wait and see if the real demand is picking up,” says Kejal Mehta, analyst at Prabhudas Lilladher.
Chhoda, too, believes that it is early to take a call, given that there are sufficient capacities that could come on stream if the demand picks up visibly. Besides, as a result of lower crude oil prices, there is over-supply in the offshore segment as well. Read on to know the prospects of the top players in the segment.
ABG Shipyard
ABG Shipyard has a strong order book, good enough to sustain healthy growth for the next three years. The company has ramped up its capacities at Dahej and Surat, which will further help in the faster execution of its existing order book. In terms of new orders also, the company has seen some traction. “Over the last six-eight months, we have been awarded orders worth Rs 800 crore and we are further getting a lot of enquiries, but we are selective about new orders,” says Dhananjay Datar, CFO, ABG Shipyard. Analysts expect the company’s revenue and earnings to grow about 20 per cent over the next two years. While the business fundamentals are improving, ABG’s stock has surged to Rs 401 (from Rs 240 on September 30), translating into a relatively higher PE of nine times its 2010-11 estimated earnings.
| MIXED FORTUNES | |||||
| FY10 | OB / Sales | PE (x) | |||
| in Rs crore | Sales | PAT | FY11E | FY12E | |
| ABG Shipyard | 1,812 | 218 | 4.4 | 8.9 | 8.4 |
| Bharati Shipyard | 1,348 | 138 | 1.4 | 4 | 3.8 |
| Pipavav Shipyard | 428 | -46 | 10.5 | 18.6 | 14.7 |
| OB/Sales: Order book to sales E: Analyst's estimates | |||||
Bharati Shipyard
Bharati Shipyard has relatively lower revenue visibility in terms of its current order book, which stands at just 1.4 times its 2009-10 revenue. However, it is looking for new orders worth about Rs 1,000 crore from the defence and offshore sectors over the next one year. The company’s acquisition of 49.7 per cent stake in Great Offshore gives it presence in the offshore business. However, this has also led to higher debt of Rs 2,300 crore or 2.6 times its equity, because of which in 2010-11 its interest costs are estimated to more than double to Rs 235 crore. The flow of new orders and high debt are also among the crucial things to monitor. However, analysts like the stock because of low valuations and its stake in Great Offshore. ABG’s stock is trading at about four times its standalone one-year forward earnings. Additionally, its stake in Great Offshore is valued at about Rs 100 per share.
Pipavav Shipyard
Pipavav, which was recently been listed, has good visibility in terms of the order book, which is over 10 times its 2009-10 revenue. At present, the company is building about three ships on which the work is in the advanced stages. One of these ships is expected to be delivered by the end of the current year — this will be its first delivery. With the company’s capacities now being operational, it is expected to report a profit of Rs 325 crore in the current financial year as against a loss of Rs 46 crore in 2009-10. Further, the company is eyeing opportunities in the defence, offshore, repair and fabrication segments. The stock is relatively expensive, trading at 15 times its 2011-12 estimated earnings, which factors in the medium-term growth in earnings. Investors could buy on dips.
