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SCI: The time is ripe - Views on News from Equitymaster
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  • Nov 19, 2001

    SCI: The time is ripe

    The buoyancy in freight rates and a better than expected world trade growth resulted in a sharp rise in profitability of shipping companies in FY01. But since then, tables have turned.

    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Sales 7,479 7,413 -0.9% 13,613 15,335 12.6%
    Other Income 484 64 -86.8% 611 97 -84.2%
    Expenditure 6,058 5,559 -8.2% 11,246 10,864 -3.4%
    Operating Profit (EBDIT) 1,421 1,854 30.5% 2,367 4,471 88.9%
    Operating Profit Margin (%) 19.0% 25.0%   17.4% 29.2%  
    Interest 226 135 -40.3% 432 268 -37.9%
    Depreciation 659 619 -6.1% 1,296 1,268 -2.2%
    Profit before Tax 1,020 1,164 14.2% 1,250 3,031 142.6%
    Tax 180 520 188.9% 220 1,270 477.3%
    Profit after Tax/(Loss) 840 644 -23.3% 1,030 1,761 71.0%
    Net profit margin (%) 11.2% 8.7%   7.6% 11.5%  
    No. of Shares (eoy) (m) 282.3 282.3   282.3 282.3  
    Earnings per share (Rs)* 11.9 9.1   7.3 12.5  

    Shipping Corporation of India (SCI), the state owned shipping major, for the first time in the last five quarters, reported a de-growth in shipping income for the second quarter ended September 30, 2001. But a sharp fall in expenses led by lower charter hire payments and staff costs resulted in a 30.5% growth in profits at the operating level. Though net profit on first glance may seem to have fallen by 23.3%, this was primarily on account of higher other income in 2QFY02 (income from sale of ships). Excluding the other income component in the correponding quarters, net profit has actually risen by 63% in 2QFY02. Profit growth would have been even higher but for higher tax provisioning towards deferred taxation.

    Prospects for the second half do not seem all that encouraging. The International Monetary Fund (IMF) has projected a 2.3% growth in world trade as compared to more than 3.4% in FY01 due to the slowdown in the global economy. There are also views that even this growth might not materialise in light of sluggishness in other key economies like European Union (EU) and Japan.

    Reflecting this, freight rates also have come off their highs significantly. To put things in perspective, the spot Panamax rate is trading at 818, which is 18% lower compared with rates in August 2001. The same is the case with product tanker, crude tanker and gas tanker segments as well. Tanker rates have fallen sharply over the last six months and have more than halved in the last nine months. With OPEC all set for a production cut in the coming months coupled with slowdown in crude demand, freights rates are expected to weaken further in the current year. While SCI is expected to report a de-growth in shipping income in 2HFY02, margins would continuously expand thus resulting in higher profits.

    But on the positive side, SCI, in consortium with the three Japanese lines viz. Mitsui OSK Lines (MOL), NYK and K Line had won the bid for the transportation of 5 mmtpa (million metric tonnes per annum) of LNG for Petronet LNG's (PLL) Dahej project starting January 2004. SCI and MOL have a 34% stake each in the consortium with the remaining 32% being shared by NYK and K Line. Two special purpose joint venture companies would be shortly set up at Malta to construct, own and operate the LNG ships. A time charter agreement for two LNG ships for a period of about 24 years each has been formally executed between PLL and the consortium. The SCI is also in the running to bid for more LNG shipping contracts in the future. This is expected to partially insulate the company from fluctuations in freight rates and volatility on the trade front.

    This seems to be the right time for the government to consider disinvestment of the company. The buoyancy in freight rates last year has significantly improved reserves and profitability of SCI. With the LNG contract under its belt, valuations have also improved notably for SCI. Nonetheless, compared to the book value of Rs 78 per share, it is one the lower side.

    SCI is currently trading at Rs 26 on a P/E multiple of 2.1x annualised 1HFY02 earnings.



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