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SCI: Expanding horizons

Oct 4, 2001

Shipping Corporation of India (SCI), the state owned shipping major, clocked an impressive performance in FY01 as well as in 1QFY02 thanks to the buoyant freight rates and new charters. But given the slow down in the global economy, similar performance maybe jeopardized.The company owns a diversified fleet of 98 ships (4.5 m DWT) with an average life of 14 years (World fleet avg. 19 years). It also manages several vessels on behalf of various state and governmental organisations. It accounts for over 50% of Indian shipping companies earnings and 52% of national tonnage.

The Government of India has extended the nodal agency status of the company upto March 2002 and SCI will continue to operate with Indian Oil Corporation for import of crude. SCI also deployed one of its vessels in the international markets last year to familiarise with international standards. An increasing proportion of fleet catering to international markets would boost earnings growth of SCI in the long run.

A PSU jewel…
(Rs) FY98 FY99 FY00 FY01
Book value (Rs) 57.7 62.5 66.8 77.5
Fully Diluted EPS (Rs) 8.72 7.13 5.7 13.6
Cash EPS (Rs) 17.57 16.30 15.5 23.2
Free cash flow/share (Rs) (41.45) 10.56 21.4 17.3
RONW (%) 15%11.4%8.6%17.5%

In an effort to increase tonnage, SCI has placed orders for 5 crude carriers and 3 tugs aggregating to about 0.5 m DWT. The delivery of the vessels is expected to be start from first quarter of 2003. The company initially had plans to add 44 vessels aggregating to an estimated 1.95 m DWT with a total outlay of US$ 1.3 bn. Given the current low fuel consumption levels in India, crude demand is expected to register a consistent growth in coming years. The company would benefit from any upturn in crude demand given its expertise and leadership position.

Apart from crude and product transportation, SCI had ventured into Liquefied Natural Gas (LNG) transportation last year. The joint venture company between SCI, Mitsui OSK Lines and Enron would own and operate the first liquefied natural gas (LNG) ship for transportation of LNG for the Dabhol Power Company (DPC). The ship is under construction and dry runs are expected to commence by October 2001. Given the rising need for clean fuel due to environmental issues, prospects for LNG transportation are promising. Another interesting aspect of LNG transportation contract is that they are typically for 20 years. This could provide a steady stream of cash flow for the company, which is otherwise vulnerable to international freight movements. The draft LNG policy also states that the foreign partner should transfer LNG vessel management expertise to the Indian partner after five years. However, due to political reasons, Enron, GE and Bechtel (investors in the DPC project) have decided to sell their stake in the company. This might have a negative impact on SCI.

Besides freight rates have already come off significantly on account of slow down in the global economy. The repercussions of the terrorist attack in the US are already being felt in terms of slower world trade. Crude demand has also slowed down. As per the IMF report, the world trade is expected to register a 1.5% growth as compared to 3.2% growth last year. This could subdue freight rates even further.

Given the government’s stance on dismantling the Administered Price Mechanism (APM) from March 2002, individual refineries may source crude independently. This might affect the growth prospects of the company. Also demand for dry bulk carriers has also slowed down due to sluggish industrial production.

Last week, the finance ministry announced that it proposes to disinvest atleast 13 public sector undertakings (PSUs) in the current financial year. SCI has been in the priority list of companies to be disinvested for atleast two years. A number of shipping companies, including multinationals, had evinced interest in the company in light of its fleet size and large free cash flow.

If disinvestment goes through, it could fasten its decision-making process and improve efficiency standards of SCI. A new partner will also bring in technical expertise that would benefit SCI in the long run. But, in the interest of the investors and the nation, the government should not hurry the disinvestment process and sell profit-making PSUs like SCI in haste.

The scrip is currently trading at Rs 23 at a P/E multiple of 1.5x 1QFY02 earnings. The price to book value works out to 0.3 times.

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