Varun Shipping: Sailing ahead

Formed in 1983, Varun Shipping Company Limited (VSCL) is a niche player in the shipping industry. The company focuses on the mid-size LPG carrier segment. It boasts of a well-diversified fleet that comprises 12 LPG carriers, 1 product tanker, 3 crude oil tankers and 3 AHTS (anchor handling tug supply vessels). As of 31st March 2006, VSCL owned 76% of the total LPG tonnage (on dwt basis) under the Indian flag.

VSCL: Fleet profile Vessel Type FY03 FY07 LPG carriers 4 12 Crude oil tankers - 3 Product tankers 5 1 Bulk carriers 2 0 AHTS 2 3 Total 13 19

Fleet expansion: VSCL owns and operates vessels across the hydrocarbon value chain – oil & gas, petroleum products & chemicals, and offshore services. However, LPG segment continues to remain the company's mainstay. The focus on this segment is evident from the change in fleet profile over the past three years. As can be seen from the table below, the company has increased the number of LPG vessels in its fleet from 4 in FY03 to 12 in FY07, whereas the number of product tankers has been pared from 5 in FY03 to 1 in FY07.

Major Customers: VSCL has contracted with domestic oil and gas companies like IOC, Reliance-IPCL and HPCL. In FY06, IOC was the largest revenue contributor for VSCL, accounting for almost half of the company's topline. The company has also placed its vessels with various pools including Sigma Pool Tanker, Dorado Tankers Pool and Exmaar Pool that acts as a marketing channel for charterers. The combined revenue contribution from these pools stood at 33% in FY06.

Financial Performance: On the back of a rapid fleet expansion in the past few years, VSCL has been able to grow its topline at a CAGR of 26% (between FY02 and FY06). During the same period, operating margins have expanded from 40% to 59%. Due to expansion in margins, the net profit growth has outpaced the topline growth (CAGR of 71%).

Financial Performance - Consolidated numbers

Particulars	FY02	FY03	FY04	FY05	FY06	4 Yr CAGR
Sales	2,128	2,303	2,929	3,890	6,619	25.5%
Operating expenses	1,277	1,502	1,779	2,140	2,721
EBIDTA	850	801	1,150	1,750	3,898	35.6%
EBDITA margins	40.0%	34.8%	39.3%	45.0%	58.9%	43.6%
Other income	11	14	8	14	15
Depreciation	478	559	579	707	1,268
Interest	241	195	178	177	742
Profit before tax	142	61	401	880	1,903
Extraordinary items	-	61	5	-21	1
Tax	14	10	23	18	29
PAT	128	112	383	841	1,875	71.1%
Net Profit margin*	6.0%	2.2%	12.9%	22.2%	28.3%	14.3%

*Extraordinary items have been excluded from calculation

Attractive dividend yield: VSCL has one of the most attractive dividend yields (dividend per share as a percentage of market price) in the market. As can be seen from the adjacent chart, the dividend yield over the past few years has ranged between 8% and 12%.

Note: Dividend yield has been calculated using the average of the closing price of shares traded during trading days on BSE of each financial year.

What to expect?
At the current price of Rs 58, the stock is trading at a multiple of 1.7 times its FY06 book value. Over the past few years, Asia has emerged as a largest LPG consuming region in the world (accounts for more than half of the total world LPG consumption). With India meeting a significant portion of its demand through exports, business prospects for VSCL appear bright. Also, freight rates in the LPG segment have been relatively stable as compared to bulk and tanker segments. Since the company derives substantial portion of its revenues from transportation of LPG segment, it is well cushioned against any volatility in the freight rates. Also, the expansion in the domestic refining and petrochemical sector is likely to result in sustained volumes in the tanker segment.