SCI has launched its FPO which includes an offer for sale and a fresh issue as well. The issue is for a total of 846.9 lakh shares which comprises half by way of fresh issue and half by way of offer for sale. The price band is Rs 135-140 and retail investors and eligible employees are eligible for a discount of 5% post the allotment of shares. The issue has opened on Tuesday the 30th of November and would close on Thursday for QIB’s and for all other bidders on Friday the 3rd of December.

Business

The Shipping Corporation of India Limited or SCI is celebrating its golden jubilee. SCI as the name suggests is in the business of shipping. The fleet of SCI consists of dry bulk carriers, very large crude carrier tankers (VLCC), crude oil tankers, product tankers, container vessels, passenger-cum-cargo vessels, phosphoric acid and chemical carriers, LPG and ammonia carriers and offshore supply vessels. As of 31st October 2010, the fleet consisted of 18 dry bulk carriers of 781,777 DWT, four VLCC’s of 1,274,175 DWT, 18 crude oil tankers of 2,081,003 DWT, 15 product tankers of 877,726 DWT, ten offshore supply vessels of 17,904 DWT, five container vessels of 202,413 DWT, three phosphoric acid and chemical carriers of 99,174 DWT, two gas carriers of 35,202 DWT and two passenger-cum-cargo vessels of 5,303 DWT.

The company also manages 62 vessels of 0.22 million DWT on behalf of government agencies, public sector undertakings and our joint ventures. The ships on order include 26 vessels as of 31st October 2010 which is expected to be delivered through the year end of 2010 to 2013. The company intends to order an additional 20 vessels in fiscal 2011. The ships already ordered include 14 bulk carriers, 4 tankers, and 8 offshore vessels with a total DWT of 1,463,080.

The 20 ships to be ordered in 2011 include 2 VLCC’s, 4 bulk carriers, 3 product tankers, 3 container ships and 8 offshore support vessels. The tonnage of these 20 ships would be 1,191,000 DWT.

The company has three business divisions which are as follows: – Bulk carrier and tankers, Liner and passenger and Technical and offshore. It deploys its bulk carriers worldwide through a combination of COA (contracts of affreightment), spot chartering and period chartering.

SCI has joint ventures with other companies as well to further its business interests. It has formed a JV with SAIL for importing coking coal and offering various services relating to shipping to SAIL. Its next JV is with Japanese shipping companies for transportation of LNG from Qatar to Dahej in Gujarat. These 3 ships are under 25 year’s charter. SCI is India’s only shipping company LNG carrier expertise. Its next JV is with Forbes Gokak Company and this company operates 4 chemical tankers with total dwt of 52,092. Its fourth and last JV is with the Iranian Shipping company and it operates a fleet of 7 vessels aggregating a total DWT of 0.64 million.

Objects of the Issue

The objects of the issue are to use the net proceeds for acquisition of certain vessels by the company. The estimated total cost is Rs 2,663.96 crs of which Rs 2,026.12 crs would be funded by way of debt and the balance of Rs 637.84 crs would be funded by way of net proceeds and internal accruals. In case there is money left after utilising the proceeds for the purpose of ship acquisition, then the same would be used for general corporate purposes.

Financials

SCI had a total income of Rs 4561.02 crs for the year ended March 2009, Rs 3899.97 crs for the year ended March 2010 and Rs 2049.76 crs for the half year ended September 2010. Its profit after tax was Rs 962.64 crs for the year ended March 2009; Rs 386.69 crs for the year ended March 2010 and Rs 432.58 crs for the half year ended September 2010.

SCI pays a tonnage tax on its shipping assets which is a small percentage of its revenue and also pays normal tax of 33% on its corporate income. The rate of tax as a percentage of tax paid on Profit before tax has changed simply because the company had a large interest income in 2009 and 2010 which has reduced considerably in 2010-2011.

The EPS of the company based on the existing equity of Rs 423.45 crs is Rs 22.73 for the year ended March 2009, Rs 9.13 for March 2010 and Rs 20.43 for the half year on an annualised basis for 2010-2011.

Comparison

SCI is India’s largest shipping company by tonnage and owns roughly 35% of the Indian fleet. SCI has compared itself with G.E.Shipping, Mercator Lines and Varun Shipping. It compares favourably with Mercator and Varun Shipping but not so with GE Shipping which has a better price earnings multiple as well as return on net worth.

The year 2010 has been bad for the company and profits have come down substantially. The liner division has had huge losses and this affected the profits significantly. In the current year first half ended September 2010, the liner division has fared very well and has turned around completely. It has made a segmental profit of Rs 69.68 crs against a loss of Rs 224.17 crs in the full year of 2010.

Key Growth Drivers

The key growth area is the increasing crude oil import for our own consumption and also our growing stature as an important refiner in the world. The number of coal based power plants in the country need huge amount of coal which has to be imported. Added to the coal demand for power is also the demand of the same from the steel industry and also there need for coking coal. These would be the key growth drivers for SCI.

The shift in shipping to liner cargo will be a big driver for SCI and this is a highly profitable segment and SCI plans to increase the market share of this segment. It has a young fleet with an average age of 15.47 years. With new vessels on order this age would come down as and when these ships are added to the fleet.

Valuations

SCI shares are being offered in a price band of Rs 135-140. Based on the EPS for March 2010 of Rs 9.13 the price earnings multiple on historical equity is between 14.78-15.33 times. If one were to look at the valuations based on the current half year on an annualised basis the PE would be between 6.61 times to 6.85 times. If one were to consider the dilution of equity and look at the new equity of Rs 465.79 crs the EPS would reduce to Rs 18.56 on an annualised basis for year ended March 2011 and the PE would be between 7.27 and 7.54 times. The valuations are reasonable and offer scope for growth in the medium term.

The unfortunate part is the sharp fall in prices of SCI in the last three weeks. On Diwali Muhurat day the stock of SCI had closed at Rs 184.95 and on Tuesday the 30th of November the same was at Rs 143.40, a fall of Rs 41.55 or 22.46%. The BSESENSEX in the same period has fallen from 21004.96 to 19521.25, a fall of 1483.71 points or 7.06%. Very clearly the stock has been a complete under performer in this period. On top of such an underperformance, the price band gave no opportunity or incentive to invest and may receive poor response from the HNI’s who have virtually no margin to hedge the stock by selling in futures and locking in their profits. The retail discount of 5% would in all likelihood be Rs 7 assuming the discovered price being Rs 140, offers some comfort to the investor.

I believe this stock offers appreciation in the medium term only and serious investors with a time horizon of a minimum of three to six month only should apply. Asset prices of shipping companies are improving, freight rates are inching upwards and the growing GDP is an indicator of better times for shipping companies catering to Indian trade.

Conclusion

A decent opportunity to invest in a growing company and a core sector if one is to look at India as a developing economy with 8.75% GDP growth. The low differential between the current market price and the top end of the price band will ensure muted response from some segments but still offer returns in the medium term. Retail investors should apply with a three to six month time horizon and expect their stock to appreciate about 12-15% from current levels.

SEBI Disclaimer: – I intend to subscribe to the above issue