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Varun Ship.: 'Extraordinary' growth - Views on News from Equitymaster

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Varun Ship.: 'Extraordinary' growth

Jul 25, 2007

Performance summary
  • Topline grows 31% YoY during 1QFY08 on the back of vessel additions in the LPG and tanker segments.

  • Operating margins contract by 5% due to increase in staff and repairs & maintenance expenses (both as percentage of sales).

  • Adjusted PAT growth at 18% YoY due to decline in operating margins and increase in depreciation and interest expense.

  • Records extraordinary income of Rs 990 m on account of gains on forex loans and sale of ships.

Performance Snapshot
Particulars (Rs m) 1QFY07 1QFY08 Change
Income from operations 1,473 1,935 31.4%
Expenditure 566 841 48.4%
Operating Profit (EBIDTA) 906 1,094 20.8%
EBITDA margin (%) 61.5% 56.6%  
Other income 6 6 1.9%
Interest 268 322 20.0%
Depreciation 404 496 22.7%
Profit before tax 240 283 17.8%
Extraordinary items - 990  
Tax 5 5 7.5%
Net profit (reported) 236 1,268 437.9%
Net profit margin (%) 16.0% 65.5%  
No. of shares (m)   149.6  
Book value per share* (Rs)   50.3  
Price to book value* (x)   1.3  
*FY07 book value

What is the company's business?
Formed in 1983, Varun Shipping Company Limited (VSCL) is a niche player with focus on the mid-size LPG carrier segment. It boasts of a well-diversified fleet that comprises 13 LPG carriers, 1 product tanker, 3 crude oil tankers and 4 AHTS (anchor handling tug supply vessels). VSCL currently owns 80% of the total LPG tonnage (on dwt basis) under the Indian flag.

What has driven performance in 1QFY08?
Ships added as part of the capex plan
Vessel name Vessel type Delivery
Maharshi Vamadeva LPG Dec-06
Amba Bhargavi Aframax Jan-07
Subhiksha AHTS Feb-07
Sudaksha AHTS May-07
Maharshi Bharadwaj LPG Jun-07
Vessel additions drive topline growth: VSCL reported a 31% YoY growth in topline for 1QFY08, primarily due to addition of 'Maharishi Vamadeva', a second-hand large gas carrier (52,000 cbm) and 'Amba Bhargavi' - an Aframax tanker to its fleet. The average time charter yield per day for a 52,000 cbm capacity LPG ship was US$ 29, 931 in 2006 (Source: Varun Shipping). As part of its US$ 400 m expansion plan, the company has already invested US$ 320 m towards acquisition of 2 AHTS vessels, 2 LPG carriers and 1 Aframax carrier in the past 8 months. It is also in lookout for suitable ships to complete the balance plan for investment of US$ 80 m.

Margins remain under pressure: Operating margins contracted by 5% YoY in 1QFY08, mainly due to increase in staff and repairs & maintenance expenses. As a percentage of sales, staff cost increased to 12.2% during the quarter, as compared to 10.4% in 1QFY07. Similarly, repairs and maintenance expenses witnessed an increase of 3.2% during the quarter. However, considering the fact the operating margins in the past two financial years have been in the range of 56% to 58%, the operating margins for the quarter appear normalised in nature.

Cost break-up
Particulars (Rs m) 1QFY07 1QFY08
Staff cost (floating and shore) 10.4% 12.2%
Fuel consumption 1.8% 3.9%
Port expenses and agency fees 1.6% 1.2%
Stores and lubes & victualling 5.3% 3.7%
Repairs and maintenance 11.8% 15.1%
Other expenditure 7.6% 7.4%

Adjusted (for forex gains and sale of ships) PAT for the quarter witnessed a growth of 18% YoY as compared to a 31% YoY growth in topline. This was mainly due to decline in operating margins and increase in interest and depreciation expenditure. Adjusted PAT margins for the quarter stood at 14.4%, as compared to 16.0% in 1QFY07.

Over the last few quarters
After a lacklustre growth in topline for the past two quarters, VSCL has reported a strong 31% YoY growth during 1QFY08. Although operating margins have recovered in the past two quarters, net profit margins have deteriorated to a mere 14.4% in 1QFY08 on account of the capex plan undertaken by the company, and the consequent rise in depreciation and interest expenses.

Quarterly trend
Particulars 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
Sales growth (YoY) 72.9% 25.5% 16.7% -13.5% 0.5% 31.4%
Operating profit margin 65.5% 61.5% 47.9% 54.5% 58.4% 56.6%
Net profit margin 30.5% 16.0% 26.7% 24.2% 17.0% 14.4%

What to expect?
At the current price of Rs 67, the stock is trading at 1.3 times its FY07 book value. Though the company has invested around US$ 400 m towards vessel additions, the same is unlikely to result in a proportionate increase in topline as the company will have to phase out its three old ships which are more than 30 years old. Moreover, the gas carriers acquired by the company are all second-hand ships (in fact they are more than 15 years old). This has exposed the company to the risk of over-paying, considering the strong prices prevailing in the new-build and second-hand market. Also the LPG vessels acquired by the company are either large carriers (52,000 cbm) or very large gas carriers (VLGCs), which have been the most volatile segment in terms of freight rates. For instance, the time-charter rates for the VLGC segment ranged between US$ 400,000 per month to US$ 1,600,000 in 2006.

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