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Dredging Corp.: An overview - Views on News from Equitymaster
 
 
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  • Feb 25, 2004

    Dredging Corp.: An overview

    The Dredging Corporation Of India (DCI) was established in 1976 to provide dredging services to the major ports of the country in India. It is not only involved in capital dredging (it is the process of removing the 'virgin' soil to create the designed depth in the water bodies/adjacent to water bodies), but also works towards deepening of existing harbors and maintenance dredging (it is the process of removing the accumulated material in the existing ports and harbors) at various ports along the 5,700 km coastline of India with the objective of creation of deeper water to improve navigation. The company's fleet consists of a total of 12 dredgers (two cutter section dredgers and ten trailer section dredgers).

    Let us have an overview of the industry as well as the performance of the company in recent times.

    Indian dredging industry: The Indian industry is largely maintenance dredging driven, owing to the location of ports and heavy monsoon rains along both the east as well as the west coast. The industry is still in its nascent stage and has no ancillary support in the form of training centers for dredging operations and dredger building yards. Moreover, dredger (equipment used for dredging) repair facilities are limited in number (and quality) and there are no indigenous facilities for spares, which results into longer lead times, as the spares have to be imported. On account of these uncertainties, the clients always desire that the dredging companies take complete responsibility on a turnkey basis (start to finish).

    However, the industry dynamics are undergoing change because of increasing private sector participation in port development. Also, there is a change in payment pattern whereby quantity measures rather than daily rate measures are being adopted by some clients. This would result in more efficient operations by the dredging companies.

    DCI: The company is predominantly into maintenance dredging and has a huge 87% share in the maintenance dredging market. The company derives 40% of the volume from a single customer, Kolkata/Haldia Port.

    Although the margins in capital dredging are better, the company has refrained from venturing into the same on account of a host of reasons. While the market size of capital dredging in India is limited, the resources and ancillary equipment required for capital dredging is high and since soil strata varies from port to port, the equipment purchased for capital dredging, might not have continuous work and may not find use in multiple locations. Therefore, in the absence of continuous capital dredging work, it does not make financial sense for the company to invest in equipment.

    The following table gives the financial snapshot* of the company:

      Units DCI
    Revenues Rs m 4,928
    Revenues CAGR (FY01-FY03) (%) 13.6%
    Profitability margins
    EBITDA (%) 43.3%
    Net profit margin (%) 32.8%
    Return ratios    
    RONW (%) 30.0%
    ROA (%) 19.8%
    ROIC (%) 24.0%
    Valuations    
    Price (Rs) 459.0
    P/E** (x) 8.4
    Mkt cap/sales (x) 2.6

    *FY03 figures
    **annualised 9mFY04

    As far as the pricing policy is concerned, before entering into any contract, the total cost of the project is arrived by considering the fixed, variable and the project specific costs. Moreover, on account of present guidelines for execution of maintenance and capital dredging of major ports valid up to 31st March 2004, DCI will get the first right to refusal before the contract is given to any foreign dredging company and a 10% purchase preference against lowest private Indian bidder. In other words, if the lowest foreign bidder quotes Rs 100 and DCI quotes Rs 120 then the client will provide an opportunity to DCI to match the lowest foreign bidder's bid, and if DCI matches, the work will be awarded to DCI. Therefore, whenever the ports have gone for open tender, DCI has always secured the contracts except for an assignment at Mumbai where DCI availed the 'Right of First Refusal' available to it.

    Going forward, we feel that the regulatory changes might erode the dominant market share of the company as low quotes by foreign companies with depreciated equipment might turn the tide in their favour. Aware of this, the company has started taking steps to ensure that the growth in profitability is sustained. While it would try to capitalize on its know how of Indian ports to maintain its domestic market share, it is also in the process of appointing marketing agents abroad in order to divert part of its capacity to international markets such as Malaysia, Indonesia, Sri Lanka etc. DCI would have mobilization advantage in these markets since these markets are close to India. Besides the company is also trying to venture into the lucrative capital dredging business by forming JVs with foreign dredging companies and acquiring and enhancing skills in project management and project planning. Moreover, the cash (and equivalent) reserves to the tune of Rs 2.3 bn puts it in a good position to make adequate investments in procuring capital dredging equipment.

    The stock is currently trading at Rs 459, implying a P/E of 8.4x of its annualised 9mFY04 earnings. Despite the dominant position of the company in the maintenance dredging market, the growth seems to have been factored into the valuations. However, the company's plan of venturing into high margins yielding capital dredging business and foray into international markets are likely to give further boost to the company's growth prospects. But investors need to be wary of any regulatory changes, which might hurt the dominant market share of the company. Moreover, the company has come into the limelight largely owing to the IPO, and its track record has not been under the public scanner for too long.

     

     

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