ABG Shipyard to see 50% order cancellation, says Merrill report

ABG Shipyard to see 50% order cancellation, says Merrill report
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First Published: Tue, Jan 20 2009. 01 15 AM IST
Updated: Tue, Jan 20 2009. 10 00 AM IST
Mumbai: The country’s largest private shipbuilder, ABG Shipyard Ltd, may see up to a 50% cancellation of orders in 2009-10 as falling ship prices have hurt demand for new vessels, DSP Merrill Lynch Ltd said in a recent report.
The shipbuilder has also had to start construction of two jack-up rigs without receiving payment in advance, an industry norm, and its promoters have had to fund the construction of a vessel for Scan Geophysical ASA, a Norway-based marine seismic data acquisition company, the brokerage said.
Dhananjay Datar, ABG’s chief financial officer, denied the promoters were funding any ship construction and said the terms for building the jack-up rigs did not include advance payments.
He also said the company hasn’t seen any cancellations of orders and is in fact expecting a 25% rise in revenues in fiscal 2009 following its entry into the offshore fabrication business in 2007.
Datar added that the company is set to receive 20% of the total contracted value of jack-rigs—up to $44 million—from Essar Oil Ltd in February.
“Our order book stands at Rs11,400 crore and contracts are fixed at competitive prices. At present, we are not aggressively marketing space for bulk carrier but we are in advanced stages to bag an order for offshore vessel,” Datar said. “We are now more focused into new areas such as dredgers, offshore vessels and specialized ships.”
Sanjaya Satapathy, research analyst with DSP Merrill Lynch, wrote in a report dated 16 January, “We expect the value of ABG’s $2.5 billion (Rs12,150 crore) worth of order backlog to decline by over 50%. Decline in order book is likely to be driven by a combination of 30% order cancellation and 20% decline in contracted price,”
“Value of ships has fallen along with the fall in ship earning driven by economic recession. Shipowners reeling from this asset price decline could either (1) cancel the contract at above market price; (2) reduce the contracted price; (3) delay the vessel delivery,” Satapathy wrote.
ABG Shipyard has not received new orders for bulk carriers since December 2007 and for offshore vessels since June, DSP Merrill Lynch said in the report.
As orders for new ships have fallen globally and competition from bigger shipyards has increased, ABG may not receive any new orders over the next two years, it said.
The company will feel squeezed because prices of ships that are five years of age have fallen by more than 70% in the past nine months to 30% below the contracted price, the brokerage added.
ABG shares ended Monday 8% lower at Rs87.20 on the Bombay Stock Exchange.
Another shipping analyst with a Mumbai-based brokerage said globally shipowners were cancelling orders both because of falling ship prices and to arrest excess supply of ships into the system.
“This will have an impact on Indian ship makers too,” the analyst said, asking not to be named as he’s not the firm’s official spokesman.
On 9 January, the Great Eastern Shipping Co. Ltd cancelled two contracts it had placed with a Chinese shipyard in 2007 for two supramax or medium-sized bulk carriers.
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First Published: Tue, Jan 20 2009. 01 15 AM IST