Top 5 Ship Recycling Stocks to Add to Your Watch List

Would you drive a 40-year-old vehicle?

No, right?

Like cars, all ships reach a point when operating them is no longer sustainable or economical. Most vessels are demolished or recycled at the end of their life cycle, typically 20-30 years.

As the shipping industry works towards decarbonisation and older ships become obsolete, ship recycling is becoming part of the sector's regulatory framework.

In the world of ship recycling, India and Bangladesh are major players, accounting for about 80% of the global market. India emerges as a dominant player in the worldwide ship recycling market, commanding over 40% of the industry share.

Turning the Tides

The Indian ship recycling industry is expected to record revenue growth of approximately 15% this financial year after 2 years of decline of 22% in FY24 and 8.5% in FY23.

Two factors back this growth. First, the increased availability of aging vessels for recycling due to the addition of new vessel capacity globally.

Second, the higher competitiveness of Indian ship recyclers compared with the key rival nations, Bangladesh and Pakistan.

The increased availability of aging vessels will reduce ship recyclers' input costs. This, along with higher capacity utilization leading to better efficiency, will improve operating profitability to 6.5% this financial year.

Indian ship recyclers are expected to grab a lion's share of the increased volume of condemned vessels, given their higher competitiveness leading to likely volume growth of around 20-23%.

In this article, let me give you a brief of the top 5 companies in this niche and untouched segment.

#1 Mazagon Dock Shipbuilders Limited (MDL)

Mazagon Dock Shipbuilders holds a unique position as the sole company in India specializing in building conventional submarines and destroyers for the Indian Navy.

The company's offerings span a diverse range, from naval ships and submarines to ferries and cargo vessels. The government remains the largest shareholder in Mazagon Dock, with an 84.8% stake as of 31 March 2024.

Consecutive Contracts

1) In December 2023 MDL signed a contract with a European client for the construction of 3 units of 7,500 DWT multi-purpose hybrid power vessels. The contract is for Rs 3,514 million (m). These vessels need to be delivered in the next 3 years.

2) ONGC has signed a contract with MDL for part replacement of a pipeline project with an order value of Rs 11.45 billion (bn).

3)MDL in December 2023 signed a contract with the acquisition wing of the Ministry of Defence for the construction of six next-generation offshore patrol vessels for the Indian Coast for Rs 16 bn.

4) The company signed a contract worth Rs 10.7 bn with the Ministry of Defence. The deal is for the delivery of 14 Fast Patrol Vessels (FPVs) for the Indian Coast Guard (ICG) on 24 January 2024.

The company is in advanced talks on acquiring additional Kalvari-class submarines for the Navy, potentially sealing a Rs 350 bn deal that promises to bolster India's submarine fleet.

Order Book

As of March 2024, the company has an order book of around Rs 390 bn that includes backlogs for the P-15 Bravo destroyers, P-17 Alpha frigates, and P-75 submarines.

Coming to the financials of the company,

MDL reported earnings before interest tax depreciation and amortisation (EBITDA) of Rs 5.2 bn (up 1.5 times YOY-Year on Year). The company's EBITDA margin stood at 16.9% (10.1% in the fourth quarter of FY23) and was aided by a refund of LD charges (Rs 1.4 bn), operating leverage advantage, lower subcontracting, and other expenses.

The company has a planned capex of Rs 25-30 bn over the next 3-4 years to develop an infrastructure facility In FY25, the company plans to deliver the fourth destroyer by the third quarter of FY25, the first frigate (P17A program) by the end of 2024.

On 29 May 2024, Mazagon Dock declared a final dividend of Rs 12.1 per share, which is in addition to the interim dividend of Rs 15.3 per share it announced earlier in the financial year 2024.

Mazagon Dock Shipbuilders has excelled, with a stellar return of over 277% in the past year.

# 2 Hariyana Ship Breakers Ltd. (HSBL)

Hariyana Ship Breakers Ltd., a part of Haryana Group undertakes shipbreaking activity through 3 companies Inducto Steel Limited, Hariyana Ship Breakers Limited, and Hariyana Ship Demolition Private Limited.

HSBL is engaged in ship breaking/recycling business in the Alang-Sosiya belt of the Bhavnagar region of Gujarat with a plot size of 4,185 square meters having a frontage of 45 meters.

This microcap company has been in the spotlight as its stock price reached an all-time high on 18 July 2024.

The company has RINA certification and guidelines for safe and environmentally sound ship recycling. Green recycling companies are preferred over non-RINA-certified companies.

Despite posting a 3x growth in its revenue in FY24, the company's margins remained under pressure, and it even posted a flat growth in net profit.

In recent years, the company has forayed into the real estate business activities by partnering with reputed players and has completed various real estate projects in Bengaluru city.

Coming to the financials of the company

The company's net sales have shown a significant growth of 97.4% YoY, reaching Rs 921.7 m. This positive sales trend is a promising sign for the company's future performance.The company's profit after tax (PAT) has also seen a growth of 55.4% YoY, reaching Rs 67 m. This is higher than the previous 12-month period, indicating a strong financial performance in the nine months.

However, the profit before tax (PBT) has fallen by 530% compared to the average of the previous four quarters.One of the factors contributing to the decline in PBT is the company's operating profit margin, which is at its lowest in the last five quarters. This indicates a decrease in efficiency and could potentially impact the company's profitability in the near term.Another concerning aspect is the company's non-operating income, which is 1,818.1% of the PBT. This suggests that the company's income from non-business activities is high, which may not be a sustainable business model.

# 3 Knowledge Marine & Engineering Works Ltd. (KMEW)

Knowledge Marine & Engineering Works Ltd is primarily engaged in the business of owning, chartering/ hiring along with manning, operation, and technical maintenance of marine crafts and repairs/ maintenance of marine crafts and marine infrastructure and allied works in India.

The company has delivered a stellar return of over 3,500% in 3 years.

Consecutive Contracts

The company made a deal in March for fairway maintenance of the Farakka to Kahalgaon stretch of National Waterway -1 from the Inland Waterways Authority of India (IWAI) for a total of Rs 980.6 m over three years.

KMEW has bagged a contract from V.O. Chidambaranar Port for the work of supply, manning, operation, and maintenance of one number high-speed patrol boat (HSPB) of 20 knots speed or more on a hire basis. The contract is valued at Rs 58.6 m for five years.

Order Book

The company's current order book, as of May 2024, stands at Rs 7.3 bn, with order wins totalling Rs 6.9 bn in FY24, and an average tenure of more than 3 to 4 years.

Coming to the financials of the company,

In FY24, the company achieved a revenue of approximately Rs 1.6 bn and recorded an EBITDA of around Rs 500 m, maintaining strong EBITDA margins at 30%. The decline in revenue was primarily due to external site conditions.

The company's profit after tax reached Rs 330 m, with the PAT margin rising to 20%. The company's net debt increased due to the acquisition of new vessels in FY24.

#4 VMS Industries Ltd.

Incorporated in 1991, VMS Industries Ltd is in the business of shipbreaking and trading of ferrous and non-ferrous metals.

VMS Industries dismantles ships and offers offshore support services. The company breaks ships down into their parts recycles them, and operates a tugboat with which it offers offshore support services.

As of last year, the company has recycled 37 ships which are Annoula, Colombo Star 2, Jamaima, Kapadokia, Loretta D, at Alang Ship Breaking yard.

Coming to the financials of the company

In FY24, VMS Industries achieved its highest-ever annual revenue of Rs 2.6 bn, marking a significant growth of 89.7% compared to the previous year.

The company's net profit increased to Rs. 63.1 m, growing by an impressive 152.8%. This remarkable financial performance is a testament to the company's strategic initiatives and robust operational management.

The company's revenue surged to Rs 2663.7 m, marking an 89.7% increase from the previous year. The EBITDA for the full year reached Rs 105.4 m, reflecting a growth of 110.1%.

PBT stood at Rs 84.4 m, a growth of 183.1%, while PAT surged to Rs 63.1 m, representing a growth of 152.8%.

# 5 Inducto Steel Ltd.

Inducto Steel Ltd is in the business of shipbreaking, trading, and investment activities. The company is a part of the Haryana group which is engaged in ship breaking business and steel trading business. The company also does shipbreaking in the Alang-Sosiya belt of Bhavnagar region of Gujarat.

Apart from the shipbreaking business, the company is also engaged in trading of metal scrap, coals, aluminium foil & other inputs. Also, the company lends out excess capital to other parties and invests in shares and securities.

Moving forward, Inducto Steel plans to invest in expanding its production capacity and enhancing its technological infrastructure.

Coming to the financials of the company,

The company's net sales stood at Rs 207.3 m in March 2024 up 40.88% from Rs. 147.2 m in March 2023. Its quarterly net loss was at Rs. 0.1.7 m in March 2024 down 155.1% from Rs.3.1 m in March 2023.

EBITDA stands at Rs. 2.4 m in March 2024 down 79.1% from Rs. 11.5 m in March 2023.

The promoter holding was 69.3% as of 30 Jun 2024.

Conclusion

India has risen to become the world's pre-eminent green ship recycling nation. India stands head and shoulders above the rest in transforming traditional scrapping into eco-conscious recycling.

To boost its shipbreaking industry and make the industry more appealing to ship owners in terms of occupational and environmental standards, India enacted the Recycling of Ships Act in 2019.

India manages to recycle or repurpose a staggering 97% of a ship's materials.India's ship recycling paradigm is a brilliant blend of economic, environmental, and ethical considerations.

One must not forget that the ship-recycling industry is cyclical as the supply of old ships for recycling is inversely proportional to freight rates in the global economy

That's why there are plenty of checks that need to be undertaken before considering an investment in ship recycling stocks.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...