ICICIdirect.com's report on Shipping Corporation of India (SCI)
Shipping Corporation of India’s (SCI) Q2FY15 revenue grew ~4% YoY to Rs 1093.5 crore against Rs 1050.1 crore in Q2FY14. The performance was led by the offshore segment, which posted robust revenue growth of ~70% YoY to Rs 89.5 crore followed by the liner segment, which posted growth of nearly 8% YoY to Rs 244 crore. However, the bulk segment de-grew ~3% YoY to Rs 756.7 crore in Q2FY15
EBITDA for the quarter recorded growth of 36% YoY to Rs 178.2 crore whereas on a QoQ basis it remained flattish. The growth in EBITDA was on account of an expansion in EBITDA margin by 384 bps YoY to 16.3% due to operational efficiencies.
PAT for the quarter stood at Rs 18.6 crore in Q2FY15 against loss of Rs 123.5 crore in Q2FY14. The company posted a consecutive quarter of profit due to higher income on account of rescinding of ships from shipyards to the tune of Rs 48.8 crore in Q2FY15
SCI is the largest shipping company of India and currently operates a fleet of 72 vessels with a total capacity of 5.8 million dwt. Over the last four years, the company has incurred a capex of ~ Rs 7000 crore to acquire new vessels to replace its ageing fleet. The fleet expansion has hurt the company’s profitability as new vessels have joined the fleet when rates are at historically low levels due to overcapacity in the industry.
We believe this capex was wrongly timed and is hurting the company’s current and future profitability. The ships were ordered in 2007, 2008 when freight rates and asset prices were at their peak. These ships have joined SCI’s fleet when freight rates are near their lows resulting in very low margins leading to insufficient EBITDA generation to cover for the higher depreciation and interest expense owing to the huge capex. SCI’s debt equity has increased from 0.3x in FY08 to 1.3x in FY13. We expect it to decline to 1.1x in FY16E.
"On the valuation perspective, SCI’s five year average price/book value multiple has been 0.7x. The stock had traded at an average PBV multiple of ~0.9x during April 2008-March 2011. During this period, the company was making profits at the net level and had a dividend payout of ~ 40%, which enabled it to trade at reasonable valuations in line with peers. However, with losses in FY12, FY13 and FY14, and absence of dividend payment, its average PBV valuation in the last two years has come down to ~0.3x. We expect the company to be able to improve its operational performance due to better control on operating expenses further aided by lower depreciation due to rescinding of vessels by shipyards and consequent increase in other income (penalty paid by shipyards and refund of payments) together with marginal improvement in freight rates. As a result we expect losses to taper down in FY15 and turn profitable by FY16. We continue to value SCI at 0.44x FY16E book value with a target price of Rs 60 and assign HOLD rating on the stock", says ICICIdirect.com research report.
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