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ABG Shipyard: Wind in its sails - Views on News from Equitymaster

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ABG Shipyard: Wind in its sails
Jul 26, 2007

Performance summary
  • Bottomline grows by 24% YoY on the back of 23% YoY growth in sales.

  • Operating margins remain flat at 27%.

  • Current order book position at around Rs 56 bn, around 8 times its FY07 sales.

Particulars (Rs m) 1QFY07 1QFY08 Change
Income from operations 1,657 2,033 22.7%
Expenditure 1,210 1,483 22.6%
Operating profit (EBIDTA) 447 550 23.1%
EBITDA margin (%) 27.0% 27.1%  
Other income 15 33 127.5%
Interest 42 61 43.1%
Depreciation 13 17 33.5%
Profit before tax 407 506 24.4%
Tax 137 172 25.2%
Net profit 269 334 24.0%
Net profit margin (%) 16.3% 16.4%  
No. of shares (m)   50.9  
Earnings per share (Rs)*   24.1  
Price to earnings ratio (x)*   21.5  
*On a trailing 12 month basis      

What is the company’s business?
Incorporated in 1985, ABG Shipyard Ltd. (ABG) is India's largest private shipbuilding company with a focus on the offshore segment. Besides offshore vessels, the company has capabilities to build conventional vessels like tankers, bulkers and modern ice-class ships. To expand its shipbuilding capabilities, ABG is setting up a facility at Dahej (Gujarat) with an investment of Rs 4 bn. The expansion will enable the company to build vessels up to 1,20,000 DWT (dead weight tonnes).

What has driven the performance in 1QFY08?
Capacity addition drives topline: For 1QFY08, ABG reported a sales growth of 23% YoY, which was mainly led by the capacity expansion undertaken at the Surat facility. Since revenues for shipbuilding companies are lumpy in nature, quarterly comparisons can be at times misleading.

Margins remain stable: Operating margins for the quarter remained flat at 27.1%. Although, raw material cost (as a percentage of sales) witnessed declined of 2.3%, the benefit of the same was negated by the increase in other expenditure. The company believes that the sustainable long-term margins would be in the range of 25%. Shipbuilding companies normally place orders for their steel requirements as soon as they receive orders from their customers. Hence, companies are exposed to only a few days of volatility in raw material prices.

Cost break-up
Particulars (Rs m) 1QFY07 1QFY08
Raw material cost* 64.8% 62.5%
Employee cost 2.2% 2.0%
Other expenditure 6.1% 8.4%
*adjusted for increase/decrease in stocks

Bottomline mirrors topline growth: The 22% YoY growth in topline coupled with stable operating margins led to 24% YoY growth in the bottomline during 1QFY08. Although, interest and depreciation expenses increased by 43% and 34% respectively, increase in other income more than compensated for the same.

What to expect?
At the current price of Rs 518, the stock is trading at a multiple of 21.5 times its trailing twelve month earnings. The company recently bagged a major order for construction of 12 dry bulk vessels of 32,000 dwt each from Precious Shipping, Thailand for a total value of US$ 360 m. According to the company, the delivery of these vessels would start from 1QFY10 till 4QFY12. The current order book stands at Rs 56 bn, which is nearly 8 times its FY07 sales. The strong orderbook provides good revenue visibility to the company for the next three to four years. We are in the process of initiating our coverage on the company.

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