Shipping Corporation of India Review – Positives Balanced by Negatives,FPO Price Key to Buy

Shipping Corporation of India (SCI),the government owned carrier is coming out with a Follow on Public Offering (FPO) of  84,690,730 Equity Shares to divest 18% of its equity which will be equally shared by the company and the government.At the current price the company will raise around Rs 600 crores for the company with another Rs 600 crore going to the government. SCI is India’s largest shipping line by tonnage deriving most of its revenues from oil/gas transport.SCI like other shipping companies has faced a very bad 2009 due to the sharp contraction in world trade and dropping in shipping rates.However results have started to improve with the improvement in the world economy and it is returning to its normalized sales and profits.The valuation of the company is not expensive according to normalized profits however note that shipping sector in general does not enjoy high p/e due to the cyclical and capex intensive nature of the business.The pricing of SCI has not been decided as of now,in the secondary market it trades at Rs 156 which is near its 52 week low in anticipation of the share dilution due to the FPO.Here is a list of the pros and cons.

Disadvantages

1) Cyclical Industry – SCI operates in a very cyclical industry characterized by peaks and troughs with corresponding change in the stock prices of the shipping companies as well.In FY10,the trough was seen with a 14% decline in revenues and a sharp 59% fall in net profits.Most investors would not understand the intricacies of the industry to get in and out at the right time.

2) Risks with Fleet Addition,Age of Fleet,Charter Rates – Shipping Corporation has a Fleet Age of 16 years and it adding around 20-30 ships each year in order to expand capacity and replace old vessels.Note Charter Rates have become volatile due to the Global Financial Crisis.It requires a dedicated management to navigate through the dangerous waters post Lehman crisis .Being a government company,the management may not have the dedication and skin in the game to perform to the necessary level of expertise here.

3) Low Margins and Negative Growth in the Past 5 Years – The company has seen low operating margins compared to other private Indian companies and has seen negative profit growth over the past 5 years despite the Indian Economy growing by almost 50% in the past 5 years.

Advantages

1) Large Capacity Expansion – SCI has given orders for around 49 vessels which should increase its fleet numbers of 74 vessels by more than 50%.Indian Flag Vessel marketshare has reduced to under 10% in 2010 from 37%.SCI is looking to increase this percentage

2) Preferred Government Contacts and PSU Relationships – SCI is the preferred contractor under “cabotage laws”.It also has good relationships with other PSU’s which are also its largest customers.SCI derives almost 70% of its revenues from oil/gas and commodities whose customers are large PSUs like ONGC ,GAIL etc.

3) Valuation – The current valuation of SCI is not high at around 1.2x P/B and around 9x trailing PE based on its current quarter earnings of Rs 180 crores.The company is net debt free unlike other shipping companies which have high debt equity ratio.However note that SCI is not cheap compared to the sector as shipping companies trade in the same range like GE Shipping.

Summary

SCI is not a very attractive stock given its negative growth in the past year and volatile sector.However its low current valuation,future expansion backed by the growing Indian economy.The company is relatively small by world standards despite being the largest shipping company in India.The pricing of the stock will be crucial in deciding to buy the stock .If the company makes the FPO price attractive like the Powergrid FPO then it might make sense to buy,otherwise you don’t have a compelling reason to buy the SCI FPO.Note high valuation and steep pricing had led to investor losses in the FPO of other PSU companies like NTPC and NMDC which are trading well below their FPO prices despite a strong bull run.The government needs to divest shares of other listed companies like SAIL,ONGC and IOC.It needs to price this issue favorably for the other issues to go through smoothly.