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SCI: The smooth sailing PSU - Views on News from Equitymaster
 
 
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  • Mar 10, 2001

    SCI: The smooth sailing PSU

    This company is one of those Public Sector Undertakings (PSUs), which has been valued at half of its actual book value by the markets. This company has a total asset base valued at Rs 29 billion with free reserves of Rs 16 billion. It is amongst the 27 PSUs, which is in the disinvestment list. This ‘Mini-Navratna’ is The Shipping Corporation of India (SCI).

    SCI is the nodal transportation agency for some of the major oil and exploration companies like Indian Oil Corporation (IOC) and Oil and Natural gas Corporation (ONGC). The company ranks as one of the premier shipping company having more than 112 vessels with an aggregate tonnage of 4.9 million debt weight tonnage (dwt). The company has a strong fleet mix ranging from oil tankers, bulk carriers, container ships, offshore support vessels and passenger carriers.

    Type Number of
    ships
    DWT
    Crude tankers 30 2,816,516
    Product tankers 15 515,529
    Chemical carriers 3 93,030
    Gas carriers 2 35,202
    Bulk carriers 23 960,230
    Liner ships 27 500,405
    Offshore vessels 10 17,912
    Passenger-cum-cargo
    vessels
    2 5,434
    Total 112 4,944,258
    To put things in perspective, more than 61 percent of crude transportation into India is accounted by SCI in 2000 (68 percent in 1999). It also accounts for over 50 percent of earnings and 52 percent of tonnage in the Indian shipping sector. Currently, the tanker division contributes nearly 70 percent of the company’s turnover.

    The sharp rise in freight rates, notably tanker rates have augured well for the company, which is apparent from the first nine months performance of the company. For the first nine months of the current year i.e. April-December 2000, the company has reported a 57 percent rise in net profits to Rs 2,359 million (US$ 50 million). What is impressive about this performance is the significant growth in operating margins. Operating margin, for the first nine months of the current year has gone up by more than 330 basis points to 21 percent.

    (Rs m) 9 mFY00 9 mFY01 Change
    Sales 20,396 22,035 8.0%
    Other Income 835 878 5.1%
    Expenditure 16,738 17,359 3.7%
    Operating Profit 3,658 4,676 27.8%
    Operating Profit Margin 17.9% 21.2%  
    Interest 680 618 -9.1%
    Depreciation 1,876 1,963 4.6%
    Profit before Tax 1,937 2,973 53.5%
    Tax 430 614 42.8%
    Profit after Tax/(Loss) 1,507 2,359 56.5%
    Net profit margin (%) 7.4% 10.7%  

    Despite this, valuations of SCI have been found wanting because the rise in domestic refining capacity has raised apprehension about demand for product tankers. The government has proposed to dismantle the administered price mechanism in April 2002, after which oil companies have the autonomy to source crude on their own (presently crude oil is imported only by ONGC, which it distributes to the refining companies). The company transported an aggregate tonnage of 2.9 Million Tonne (MT), out of which 2.5 MT were accounted by imports. So, if imports were to reduce, then it will have severe impact on SCI’s bottomline.

    Being a PSU has its own inherent disadvantages. The company operates passenger vessels between Chennai and Calcutta to Colombo. This has been a drag on the company’s bottomline because passenger vessels are non-profitable at times.

    Further, as on 31st March 2000, payments under various heads outstanding from oil companies in connection with the transportation of crude and demurrage amounted to Rs 4,615 million (US$ 98 million). The outstanding debtors of the company as on 31st March 2000 were Rs 7,671 million (US$ 163 million), which is 30 percent of operating income. Reportedly, the company has received close to Rs 3 billion from the oil companies after lot of deliberations between oil companies and the Ministry of surface transport.

    The Budget-2002 has brought some respite for the Indian shipping companies, which has been constrained by lack of fiscal incentives. The reduction in dividend tax rate from 20 percent last year to 10 percent in the current year will result in savings to the extent of more than Rs 53 million and would increase net profits by 3 percent. Though depreciation rate has been increased from 20 percent to 25 percent, this is much below 40 percent, which the industry was actually anticipating.

    SCI, in consultation with Pricewaterhouse Coopers (SCI's consultant for restructuring), has drawn up an Rs 19 billion investment plan to be executed over the next five years. The total investment is divided into three segments - tankers 75 per cent, LNG 15 per cent and bulk 10 per cent. Added to this, the company has also plans to venture into liquefied natural gas transportation, for which traffic projections are estimated at 53 million tonnes by 2020 as per the Vision-2020 report on the Indian port sector.

    In the latest round of positives the government has also approved the voluntary retirement scheme proposed by the company. So, SCI has much to look forward to but its PSU status will continue to dog its performance.

     

     

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