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SCI: Speed breaker ahoy!

Jun 21, 2002

Shipping Corporation of India (SCI), the PSU major and the country's largest shipping company, has posted a notable fall in net profits for the full year ended March 2002. After posting historic profits in FY01 when freight rates, notably tanker rates touched 20-year highs, the fall in profits during FY02 is primarily on account of slowdown in global economy.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net sales 8,520 6,237 -26.8% 30,637 28,182 -8.0%
Other Income 656 698 6.4% 784 871 11.1%
Expenditure 5,625 6,125 8.9% 22,481 22,383 -0.4%
Operating Profit (EBDIT) 2,895 112 -96.1% 8,156 5,800 -28.9%
Operating Profit Margin (%) 34.0% 1.8%   26.6% 20.6%  
Interest (net) 163 (179)   657 226 -65.6%
Depreciation 574 748 30.3% 2,736 2,652 -3.1%
Profit before Tax 2,814 242 -91.4% 5,546 3,793 -31.6%
Tax 1,120 (70)   1,720 1,377 -19.9%
Profit after Tax/(Loss) 1,694 312 -81.6% 3,826 2,416 -36.9%
Net profit margin (%) 19.9% 5.0%   12.5% 8.6%  
No. of Shares (m) 282.3 282.3   282.3 282.3  
Diluted Earnings per share 24.0 4.4   13.6 8.6  
P/E Ratio (x)         10.5  

Since shipping companies generally work on higher fixed costs, any fall in revenue signficantly impacts profitability and this is what has happened to SCI in FY02. When freight rates were on the higher side, the company clearly took advantage of favorable rates to shore up revenues and book charters. The quarterly performance of the company clearly vindicates the reversal in trend of freight rates. Growth in shipping revenues in 1QFY02 was impressive on account of a number of brief charters that were entered into with domestic oil companies in 4QFY01, when freight rates were on the higher side. As a result, margins and net profits were at the peak. However, post that there has been a marked slowdown in global trade on account of sluggish US economy and consecutive reduction in crude throughput by the OPEC. This has had a severe impact on revenue growth of the shipping major. In all the following three quarters, SCI posted a sharp fall in sales. Operating margins also fell in tandem with the decline in revenues.

A quarterly view…
(% growth) 1QFY02 2QFY02 3QFY02 4QFY02 FY02
Sales 29.2% -0.9% -18.1% -26.8% -8.0%
Operating margins 33.0% 25.0% 15.7% 1.8% 20.6%
Net profits 487.9% -23.3% -70.6% -81.6% -36.9%

Though interest costs seem to have declined sharply, the figure available is net interest. Nevertheless, as per our estimates the company has taken advantage of a lower interest rate regime and higher cash flows to retire debts worth Rs 500 m in FY02. Depreciation charges are also lower in FY02 as the company has sold some of its liner tankers, which were affecting overall profitability. For instance, in FY01 SCI sold close to 10 liner tankers and we expect this trend to have continued in FY02. After adjusting for deferred taxation, the company's net profit has fallen by 37% to Rs 2,416 m, which is marginally lower than our estimate of Rs 2,433 m.

The stock currently trades at Rs 90 implying a P/E multiple of 10.5x FY02 earnings. As far as future growth prospects of the company are concerned, it has placed orders for around 8 vessels (predominantly tankers and offshore supply vessels) for a total consideration of Rs 8.5 bn. Operating margins are expected to improve in the current fiscal due to savings from employee costs and retirement of unprofitable vessels. However, this would be negated by fall in revenues, for which the prospects are not promising. Though international agencies expect the global economy to grow at a higher rate in FY03, this seems very optimistic. Besides, sighting weaker crude prices, OPEC's crude output cuts would continue to have a negative impact on freight rates. While freight rates have recently showed some signs of hardening, the sustainability is under cloud. At the same time, SCI's venture into liquified natural gas transportation would provide the much-needed stabilisation in its revenues. But the only factor that has been interesting bourses is the disinvestment of the company, which seems to have gone into some rough offlate. Keeping in mind, the existing fleet profile of the company and the future growth prospects, the stock seems to be valued Read SCI: What is the fair value?. But any news on disinvestment could act as a driving factor in the future.


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