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SCI – Hidden value? - Views on News from Equitymaster
 
 
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  • Nov 16, 2000

    SCI – Hidden value?

    Shipping Corporation of India’s (SCI) share price has moved up sharply on the bourses. This could be attributed towards the proposed disinvestment of the company. The hardening freight rates and improving fundamentals of the global shipping industry seem to have also contributed to this surge.

    The company has a strong fleet mix compared to its Indian peers. The company has 30 crude carriers, most of them being chartered to the domestic oil companies that include Oil and Natural Gas Corporation (ONGC) and Indian Oil Corporation (IOC). Besides, SCI in a joint venture with Mitsui O.S.K. Lines and Enron has ventured into the transportation of 2 MMTPA (metric million tonnes per annum) liquefied natural gas to Dabhol Power Company, on a 20-year time charter basis. This is expected to stabilise cash flows for the company because LNG transportation is a lucrative segment and contracts are usually for 20 years. This would insulate the company from fluctuations in freight rates.

    Fleet profile
    Type Number of ships DWT
    Crude tankers 30 2,816,516
    Product tankers 15 515,529
    Chemical carriers 3 93,030
    Gas carriers 2 35,202
    Bulk carriers 23 960,230
    Liner ships 27 500,405
    Offshore vessels 10 17,912
    Passenger-cum-cargo vessels 2 5,434
    Total 112 4,944,258

    But there are some apprehensions. As of 31st March 2000, payments under various heads from the oil industry (especially Oil and Natural Gas Corporation) to SCI amounted to Rs 4,615 m. These payments are being delayed due to disputes between oil companies on who should be paying how much.

    The company posted a turnover and net profit of Rs 25 bn and Rs 2 bn respectively for FY00. If the company were to receive these dues, SCI would be able to expand its fleet as per the 9th fleet expansion plan as well command better valuations. As per the tonnage acquisition programme during 9th plan period, the company was supposed to expand its fleet capacity by 1.95 m dwt (dead weight tonnage). However, SCI has revised its acquisition target to just 21 vessels aggregating 1.68 m dwt at a cost of US$ 710 m. Even historically, the tonnage targeted by the planning commission has never been achieved (for the last six years).

    Why is this happening? Lack of fiscal incentives and slow reform processes continue to slaughter Indian shipping companies. Despite being one of the highest foreign exchange earners for the country, shipping industry does not have adequate tax incentives.

    Another big disadvantage being a state owned shipping company is that SCI has to operate passenger liner vessels, which are not profitable and at times loss making.

    However, short-term prospects of the shipping industry are promising. The world trade is expected to grow at 4% in the current year, which has buoyed sentiment and freight rates across various segments. Very Large Crude Carriers (VLCC) and Aframax rates have gone up sharply in the last six months. SCI reported more than 100% rise in net profits for the second quarter ended 30th September 2000, which puts forth the current state of the shipping industry.

    So, what does all these mean to the company? SCI is amongst of the state owned companies in the disinvestment list. This is the right time for the government to privatize, if at all it is planning to, given the fact that shipping market is on the uptrend. The bourses seem to be acknowledging it. In the past month and a half, the share has gained more than 46% (from 3rd Oct 2000 to 15th Nov 2000). Among various public sector undertaking listed on the bourses, SCI is one of the top gainers.

    The stock is currently trading at Rs 23 at a P/E multiple of 4x the FY00 earnings as against the book value of Rs 71.

     

     

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