Unless demand rises, outlook for stocks of shipbuilders weak

Unless demand rises, outlook for stocks of shipbuilders weak
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First Published: Thu, Jun 10 2010. 12 11 AM IST
Updated: Thu, Jun 10 2010. 12 11 AM IST
Even as revenue growth of shipyard companies—ABG Shipyard Ltd and Bharati Shipyard Ltd—was helped by better pace of execution, higher raw material costs played spoilsport and hit operating profit margins for the March quarter.
ABG’s consolidated margin, excluding subsidy, fell more sharply by 615 basis points (bps) to 13.56% from 19.71% in the year-ago period. One basis point is one-hundredth of a percentage point.
ABG’s raw material costs increased by 64%. Costs increased because it did not consider revenue on some vessels that were under construction, as they had not crossed the threshold limit to recognize revenue.
Margins of ABG are expected to look better once the company is able to recognize revenues from these vessels. Revenue, excluding subsidy, increased at a healthy pace of 40.4% to Rs473.16 crore, thanks to better execution.
Compared with ABG, Bharati’s stand-alone margins dropped by just 38 bps to 16.90% from 17.28% in the March quarter last year due to higher raw material costs, which increased by 24.6%. Bharati’s revenue, excluding subsidy, increased by 14% to Rs324.17 crore, driven by better execution.
Net profit performance of both the firms were flat, as depreciation costs were higher. ABG’s net profit stood at Rs52.85 crore and that of Bharati stood at Rs35.57 crore.
Both the firms are sitting on decent order books, which offer good revenue visibility.
ABG Shipyard’s order book stands at Rs12,050 crore, out of which the unexecuted order book is at around Rs8,500 crore to be executable by fiscal 2014. This is around 5.1 times ABG’s revenue for fiscal 2010.
Bharati’s order book stands at Rs5,076 crore and orders pending execution stand at Rs2,560.29 crore. This works out to around two times its fiscal 2010 revenue.
While that augurs well, order inflows have been a major concern.
Bharati Shipyard has not announced any new orders this year. ABG, though, has secured an order to build three cement carriers in April.
Further, debt levels are also on the higher side for both firms. ABG’s net debt to equity ratio stands at around three times and that of Bharati stands at 2.4 times.
These factors are likely to cloud performance of both stocks, as there seems to be no positive triggers, at least in the near term.
However, improvement in global sea trade bodes well for the stocks as demand for ships increases.
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First Published: Thu, Jun 10 2010. 12 11 AM IST