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Return ratios of SCI may be low due to high capital expenditure

Return ratios of SCI may be low due to high capital expenditure
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First Published: Wed, Dec 01 2010. 08 36 PM IST

Graphic: Ahmed Raza Khan / Mint
Graphic: Ahmed Raza Khan / Mint
Updated: Wed, Dec 01 2010. 08 36 PM IST
Shipping Corp. of India Ltd (SCI) is the largest shipping company in India. SCI has an existing fleet size of 77 vessels having an average age of 15.5 years. It has lined up an aggressive capital expenditure plan over the next five years since most of its fleet, especially in the bulk segment, is relatively old. This would improve the company’s freight realization going forward. However, return ratios will remain subdued on account of high capital expenditure planned.
SCI has identified the need to modernize its ageing fleet and has lined up an aggressive capital expenditure of Rs131 billion under the 11th Plan (2007–12). As of 31 October, SCI had ordered construction of 26 vessels, expected to be delivered between 2010 and 2013, and plans to order 20 more vessels in FY11. Addition of new vessels will bring down the average age of its fleet from 16 years to 11 years by 2012.
The shipping industry witnessed a sharp plunge in freight rates in 2008. Despite revival after a severe collapse in 2008, freight rates for most asset classes continued to remain weak due to a vessel oversupply situation. Shipowners have responded to the situation by resorting to slow steaming of vessels, thereby reducing the active fleet availability and operating costs due to savings of fuel. Further, the industry has witnessed a high rate of slippages/cancellations, which could help ease the oversupply situation. As per Clarksons (leading provider of integrated shipping services), slippages in the tanker and dry bulk segments stood at 30% and 45%, respectively, in the first half of 2010.
Graphic: Ahmed Raza Khan / Mint
At the lower price band of Rs135 per share, the stock is trading at 0.8 times its price-to-book value (PBV) and 7.2 times price-earnings multiple as per FY12 estimates, which is in line with Great Eastern Shipping Co. Ltd (Gesco).
We believe Gesco is a better bet than SCI at current levels, given the former’s higher return ratios, earnings growth, relatively younger fleet and exposure to high-growth offshore segment. Our fair value for SCI works out to be Rs143 per share (0.8 times one-year forward PBV). Hence, we recommend Neutral on the issue.
Company background
SCI is India’s largest shipping company. Incorporated as Eastern Shipping Corp. Ltd on 24 March 1950, it was later amalgamated with Western Shipping Corp. Ltd in October 1961 and obtained its current name.
Jayanti Shipping Co. and Mogul Lines Ltd were merged with SCI in 1973 and 1986, respectively. The company was accorded the Navratna status by the government of India in August 2008, leading to enhanced autonomy with respect to capital investment, formation of joint ventures and opening of new offices.
The company, which began with 19 vessels, currently owns a fleet of 77 vessels and manages 62 vessels on behalf of government agencies, public sector units and joint ventures.
The company has a diverse fleet of dry bulk carriers, very large crude carrier (VLCC) tankers, crude oil tankers, product tankers, container vessels, passenger-cum-cargo vessels, chemical carriers, LPG and ammonia carriers, and offshore supply vessels.
SCI has been listed on the Bombay Stock Exchange and the National Stock Exchange since 1992 and has been extremely rewarding on its dividend payout over the last 10 years.
Edited excerpts from a report by Angel Broking. Your comments are welcome at mintmoney@livemint.com
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First Published: Wed, Dec 01 2010. 08 36 PM IST