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SCI: Long way to go

Mar 31, 2003

Shipping stocks have been in the limelight on the bourses over the last one month or so amidst war concerns. The reason for the optimism seem to stem from the fact that freight rates have increased in conjunction with the rise in crude prices in the international markets. Shipping Corporation of India (SCI) has also moved up. However, things are not as rosy as they seem.

(Rs m)3QFY023QFY03Change9mFY029mFY03Change
Net sales 7,086 5,947 -16.1% 22,452 17,145 -23.6%
Other Income 183 195 6.6% 248 324 30.8%
Expenditure 5,975 4,783 -19.9% 16,839 14,614 -13.2%
Operating Profit (EBDIT) 1,111 1,164 4.8% 5,613 2,531 -54.9%
Operating Profit Margin (%)15.7%19.6% 25.0%14.8% 
Interest (net) 137 72 -47.0% 405 207 -49.0%
Depreciation 637 615 -3.4% 1,905 1,867 -2.0%
Profit before Tax 520 671 29.1% 3,551 782 -78.0%
Extraordinary items - 144 - - 824 -
Tax 140 53 -62.1% 1,410 133 -90.6%
Profit after Tax/(Loss) 380 762 100.7% 2,141 1,473 -31.2%
Net profit margin (%)5.4%12.8% 9.5%8.6% 
No. of Shares (m) 282.3 282.3   282.3 282.3  
Diluted earnings per share* 5.4 10.8   10.1 7.0  
P/E ratio (x)     7.5  

A brief review of the first nine months performance is of importance. The fall in revenues in 3QFY03 has been on the lower side as compared to the first two quarters in FY03. SCI posted a sharp 34% fall in revenues in 1QFY03 which was followed by a 21% decline in topline in 2QFY03. While the rise in freight rates in the international markets has had a positive impact on the company's performance in 3QFY03, it has to be mentioned SCI has a weaker presence in the global shipping arena. It has been the nodal crude transportation agency for ONGC and largely caters to the tonnage demand for PSUs in India. As a result, the impact of any spurt in freight rates globally, tends to be muted.

On the shipping sector front, the rise in freight rates is a usual phenomenon. In the third quarter i.e. September-December, demand for crude oil tends to head north in light of inventory build up in the US (for the winter season). As a result, tanker freight rates increase during this period. But in the current fiscal year, tanker tonnage demand has remained relatively good despite strong inflows of capacity. The fall in crude output in Venezuela and interruption in Nigerian output has disrupted supply and consequently, tonne-mile demand has gone up.

Despite the sharp fall in revenues in 3QFY03, SCI's operating margins have increased noticeably. As can be seen from the table below, with the company's other operations (technical and offshore services) back to profitability, margins have increased. SCI has been in the process of reducing the fleet size on the Liner front, which has augured well in the current fiscal. The liner segment has posted a lower PBIT loss of Rs 66 m in 9mFY03 as compared to Rs 146 m in the same period last year. But for the first nine months, overall margins are on the lower side. Just to put things in perspective, GE Shipping, with a similar decline in topline in 9mFY03, operates with a 38% operating margin as compared to 15% for SCI. This goes to show the advantage GE Shipping has over SCI, especially on the employee productivity front.

Segment3QFY02% of sales3QFY03% of sales% change*
Liner 2,041 28.1% 1,751 28.5%-14.2%
PBIT margins1.3% 3.1%  
Bulk 4,895 67.3% 4,116 67.0%-15.9%
PBIT margins20.0% 16.8%  
Others 332 4.6% 276 4.5%-17.1%
PBIT margins-69.4% 71.2%  
Total income 7,268 100.0% 6,142 100.0%-15.5%
*3QFY03 over 3QFY02

But for the extraordinary item, SCI's net profit would have been lower by 69%. How does FY04 look for the company? The average age of SCIs fleet is estimated at around 16 years, which though in line with the global average, is lower compared to other Indian players. Besides, environmental regulations have been tightened significantly by the governing authorities. An amendment has been passed regarding scrapping of single hull tankers above 26 years of age by FY05. Single hull tankers will not be allowed to ply in the international waters after FY15. Since the existing fleet of SCI is predominantly single hull tankers, it may have to scrap around 7 tankers by FY05. The company was also ambitious on the LNG project, which has also gone into some rough weather.

Though disinvestment hopes continues to support the stock price, weaker operating environment, an aged fleet mix and disappointment on the LNG venture is likely to affect the disinvestment process. The stock currently trades at Rs 52 implying a P/E multiple of 7.5x annualised nine months earnings. Fundamentally speaking, this when compared with GE Shipping's P/E multiple of 2.7x annualised nine months earnings is on the higher side.

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