Buy Shipping Corporation; target of Rs 143: KRChoksey

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Buy Shipping Corporation; target of Rs 143: KRChoksey

KRChoksey is bullish on Shipping Corporation of India (SCI) and has recommended buy rating on the stock with a target of Rs 143 in its April 19, 2011 research report.

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KRChoksey is bullish on Shipping Corporation of India (SCI) and has recommended buy rating on the stock with a target of Rs 143 in its April 19, 2011 research report.

"Shipping Corporation of India (SCI), a Navratna PSU is country's largest and most diversified shipping company owning and operating more than 35% of the Indian tonnage. SCI has presence across all shipping segments namely, tanker, dry bulk, product, container, LNG, chemicals and offshore with substantial interests in tanker and bulk segment both nationally and internationally."

"SCI maintains a fine balance between spot, charters, and contract of affreightment (COA's). SCI owns only Indian flagged vessels providing it an edge in capturing domestic contracts including those from the Government due to the Cabotage Laws. SCI currently owns a fleet of 77 commercial vessels with an aggregate capacity of 5.01 million DWT (dead weight tonne). Additionally 21 commercial vessels are to be added prior to October 2012. This fleet diversification allows the company to enter into chartering arrangements of varying duration with varied customers. Container Cargo Traffic has on an average grown 2.9x times of growth in India's GDP however, overall containerization stands at just 52-54% of the production volume leaving huge potential for expansion. On a macro level, there is a direct relationship between a country's GDP and its containerization volumes. India's GDP is expected to grow at 8.5% in current fiscal and in double digits by FY12. SCI's through its ability to grow its fleet size can take advantage of attractive asset prices and anticipated growth in the shipping sector as Indian economy and its ties to international markets grow."

"Bulk carrier-tanker division & Liner division contribute around 62% & 28% to SCI's revenues. Bulk carrier division is on a growth trajectory backed by solid growth in India's domestic power and steel industries which fuels the country's coal imports. India's demand for coal is estimated to grow at 9% whereas the production is expected to grow at 7.9%; this mismatch will create huge opportunities of coal imports for SCI. The tanker division benefits from growth in India's oil refining industry, which requires increased crude oil imports and refined oil exports. SCI is well poised to take advantage of the growth opportunities arising for transportation of coal and oil. SCI is planning a capex of Rs 7,800 crores across segments to acquire 32 commercial vessels (3.4 million DWT) and 9 AHTS, for which it would place orders in the next one year with deliveries in FY14 to FY15 adding 5 million DWT (Gross) and ~ 3.5 million DWT (net) by FY15. Investments in additional vessels will allow SCI to bid on additional charters worldwide thereby increasing market share and further diversifying sources of income."

"SCI has Rs 2,310 crores cash and cash equivalents on its balance sheet with a comfortable debt to equity ratio of 0.55 and a current ratio of 2.97. SCI has retained a liquid asset book to balance sheet size (More than15%). We believe that SCI's strong balance sheet and cash on hand provides it greater working capital flexibility and ability to negotiate favorable financing terms for acquisition of vessels. Post FPO, SCI has seen some correction and is currently quoting at attractively at a P/BV of 0.8x and 24% discount to its NAV of Rs 151.2/Share. At the CMP of Rs 113.8/Share, SCI is quoting at 7.2x its FY11E earnings, we value the company at 9x FY11E earnings and recommend a Buy at the current levels with a 12-month price target of Rs 143/Share, a potential upside of 27% from current levels," says KRChoksey research report.

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