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SCI: What is the fair value?

Feb 20, 2002

Post the divestment of VSNL and IBP, the next big ticket disinvestments are that of Maruti and Shipping Corporation of India (SCI). While the government has initiated discussions with Suzuki for a stake sale in the former, SCI has generated quite a bit of interest. A number of domestic as well as foreign shipping majors have evinced interest in SCI in light of its strong presence in the tanker segment. We place SCI one-on-one with the private sector shipping major, The Great Eastern Shipping Company (Gesco), to gauge the share value.Comparative valuations…

Sales (Rs m) 29,948 10,070
Operating margin(%)24.9%39.7%
Net profit(Rs m) 3,826 1,774
Net margin(%)12.8%17.6%
No. of ships(nos) 99 60
Capacity(mdwt) 4.5 1.4
Avg fleet age(years) 14.0 13.5
Price(Rs) 58 32
Market Cap(Rs m) 16,599 7,285
Enterprise Value (EV)(Rs m) 23,969 12,741
P/E*(x) 5.7 2.9
Market Cap/Sales(x) 0.6 0.7
EV/EBDITA(x) 3.2 3.2
Price/book value(x) 0.8 0.6
Cash flow per share(Rs) 23.2 17.4
Market Cap/mdwt(Rs m) 3,705 5,318
EV/mdwt(Rs m) 5,350 9,300
*on nine months annualised earnings

Before going to valuations, understanding the business of SCI is important. SCI has been nodal agency for crude transportation for oil companies like ONGC and IOC (expires in March 2002). Last year, the government renewed its nodal agency status and it is widely expected that SCI could retain its nodal agency status in the future also. Apart from tankers, the company has presence in bulk carriers and container transportation. Since it is a government company, it has presence in the passenger segment i.e. goods and passenger transporation between India-Andaman & Nicobar-Lakshwadeep.

If one were to look at the fleet mix of SCI, it has a strong presence in the tanker segment. Compared to three crude tankers of GESHIP, SCI has 29 crude carriers with the aggregate capacity of 2.5 million dead weight tonnage (mdwt). The company also has 10 offshore vessels, which are mostly chartered to ONGC. But at the same time, it has significant presence in the dry bulk and liner cargo segments. While prospects for bulk carrier segment are not promising in light of slowdown in demand and a flurry of fresh tonnage supply, SCI also has a ageing liner fleet. Last year, the company disposed 10 liner vessels and it hopes to bring down its presence in this segment in the future also. This augurs well for the company in the long run.

   Fleet mix…

Bulk carriers2415
Thanks to a record high freight rates in FY01, the company managed to generate Rs 4.8 bn as free cash flow, which was partly utilised to retire debts close to Rs 2 bn. Operating margins increased sharply to 25% in FY01 from 18% in FY00 enabling the company to record a 88% jump in net profits in the same period (excluding extraordinary income from sale of ships). Considering the slowdown in world trade, the performance of the company in the first nine months of the current fiscal is also impressive. While revenues have declined 1%, net profit has fallen by just 8% to Rs 2,141 m. Revenue growth has slowed down significantly in the third quarter (sales fell by 19%) on account of weaker freight rates.

As per the tonnage acquisition plan, SCI has placed orders for 8 vessels, mostly in the tanker segment, involving a total investment of around Rs 8.2 bn. The delivery of these vessels is expected to commence starting March 2003. We expect the total capacity to touch around 5.0 mdwt over the next five years.

Another big positive for the company is that it had entered into a joint venture with Mitsui OSK Lines and NYK lines for transportation of 5 million metric tonnes per annum (MMTPA) of LNG for Petronet LNG's Dahej project. Towards this, it has placed orders for two ships and LNG transportation is set to commence in January 2004. But at the same time, it had also won the LNG transportation contract for the Dabhol Power Company and SCI contributed US$ 7.3 m (Rs 350 m) by way of equity participation. Given the Enron debacle, there is uncertainty on this front. However, over the longer term, the LNG contracts will provide stability to earnings as charters are typically for atleast 20 years. Despite the slowdown in the world economy, we expect the company to generate free cash flow of around Rs 11 bn over the next five years.

The most important question in everyone's mind is what is the fair value of SCI? The stock currently trades at Rs 58 implying a P/E multiple of 5.7x annualised nine months earnings. While both GE Shipping and SCI are trading at a EV/EBDITA of 3.2 times, when one equates it with the existing tonnage capacity, GE Shipping commands a premium to the public sector major. The reason could be the difference in age profile and the fleet mix. But the fleet mix is expected to change over the next five years for SCI. While it may not exit from some unprofitable businesses like passenger liners, as the government would still hold a 29% stake, the LNG venture would insulate earnings from cyclicality. Similarly, market cap per mdwt of SCI is also on the lower side compared to GE Shipping. When one assumes a similar market capitalisation per tonnage for SCI i.e. Rs 5.318 m per mdwt, market capitalisation increases to Rs 23,822. This equates to Rs 84 per share. Besides, the consensus estimate of the net asset value of the company is around Rs 65-Rs 70. So, an offer price in the range of around Rs 70-Rs 85 seems to be on the fairer side.

Consider the disinvestment proposal. The government has invited bids for offloading a 51% stake in the company (current holding is 80%). Post divestment, the acquirer has to make an open offer for another 20% stake. Assuming that divestment goes through, the government would be left with a 29% stake with the remaining 20% in the public's hand. Unless the price is lucrative, the chances of the acquirer raising his stake to 71% seems unlikely.

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