SCI is grappling with an ageing fleet, but is focused on reversing that trend

THE global financial slowdown weighed on international trade and it hit the shipping industry hard in the last quarter of fiscal 2009. As a result, stocks like Shipping Corporation of India (SCI) trades at an earnings multiple of just 5.3.
    The government has a 80.12% stake in this PSU. Also, SCI has an interest coverage ratio above 17 for FY 09, and it is higher than that of GE Shipping, the largest private sector player. Also, current dividend yield of SCI at 5.4%, is higher than that of GE Shipping, as SCI pays a much higher proportion of its net profit as dividends.
Fleet capacity : SCI's current owned fleet consists of 78 vessels with a total capacity of 5.03 million dead weight tones (dwt). Also, the company has deployed nearly 70% of its fleet capacity towards the tanker segment (which are used mainly to transport crude oil). However, an operational difficulty is the ageing profile of SCI's fleet, which makes it difficult to quickly deploy vessels.
    In its bid to remain competitive, SCI is aggressively expanding fleet capacity — it has 31 vessels on order — at a total cost of nearly Rs 7,500 crore, and these additional vessels are expected to be delivered in phases over the next three years. This expansion will add nearly 2.19 million dwt of fleet capacity to SCI. Senior company management highlighted that they will use a combination of internal accruals and debt, to finance this fleet expansion. The company's debt equity ratio at the end of FY 08 was 0.25, and this is expected to rise in the medium term, but SCI's leverage ratio is much lower than its peers. In addition, the company's cash flow (net profit plus depreciation) for FY 09 amounted to Rs 1268.7 crore.
Global shipping environment: With freights rates declining as crude sales shrunk, the operating environment was difficult for the shipping industry in the March 2009 quarter. In tanker segments like VLCC, there was a decline of 42% yo-y in the spot average freight rates in March 09 quarter. VLCC are very large carriers, which are used to transport crude oil. In the dry bulk segment, the average of the Baltic Dry Index declined 78.8% y- o-y in the last quarter.
Financial performance : SCI has nearly 60% of its capacity on long-term contracts. Nevertheless, its net sales declined 23.6% yo-y to Rs 807 crore in the fourth quarter of FY 09, and its operating profit margins also fell.
    As nearly 40% of SCI's capacity is exposed to volatile spot freight rates, it led to a decline in the company's topline in the last quarter. Valuations: At Rs 119.85, SCI trades with a P/E of 5.3 and could be considered as a value buy for the long term. GE Shipping trades with a P /E of 3.3, while that of Mercator Lines is at 7.7. However, the dividend yield of SCI is higher than that of GE Shipping.
    amrit.mathur@timesgroup.com 

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