Expect Varun Shipping to outperform: Karvy

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Expect Varun Shipping to outperform: Karvy

Karvy Stock Broking expects Varun Shipping to outperform considering no exposure to dry bulk segment and recent expansion into offshore support services. Varun is also expected to benefit from being largest player in (80% share) domestic LPG market where freight rates are less volatile and market is supply driven.

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Karvy Stock Broking expects Varun Shipping to outperform considering no exposure to dry bulk segment and recent expansion into offshore support services.

Karvy Stock Broking's report:-

Water transport remains the backbone of the global economy and moves 90% of international trade cargo. The recent decline in freight rates (Baltic Dry Bulk Index dropped by 94% since May 2008) and asset prices is expected to significantly impact the earnings and valuation of shipping companies. The downward shift in freight curve due to all time high order book and declining trade is expected to impact profitability going ahead. We believe the next two years will be challenging for ship owners particularly for the leveraged players. We expect supply to adjust with the demand with increased scrapping and order cancellation. The fall in asset prices is also expected to erode net asset value of these companies leaving no value for older ships.

The sharp fall in freight has already impacted the Indian shipping stocks. The stock prices of leading players in dry bulk segment like GE Shipping and Mercator Lines have fallen by 60% and 80% respectively from their 52 week high. The Indian companies keep significant portion of fleet (50% to 80%) on long term contracts varying from six months to five year which is expected to provid e stability from short term. However recent sharp decline in BDI increases the risk of downward revision or default on existing long term contracts.

We have revised our freight estimated downwards considering the demand supply scenario over next two years. We have assumed the freight rates to remain weak over next two years at average levels of 2001 to 2003. We believe the Net Asset Based (NAV) valuation will act as better support in uncertain and volatile freight market scenario.

We expect Varun shipping to outperform considering no exposure to dry bulk segment and recent expansion into offshore support services. Varun is also expected to benefit from being largest player in (80% share) domestic LPG market where freight rates are less volatile and market is supply driven. The diversified revenue streams and expansion in offshore is expected to help The Great Eastern Shipping from further downside. The Mercator line with high leverage and significant exposure to dry bulk sector (Singapore subsidiary is pure play on dry bulk) along with recent vessel acquisition at peak asset price may find next two years challenging.

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