Bharati Shipyard Ltd - Rs 95.00
Incorporated in 1976, Bharati Shipyard LTD (BSL) is the second largest private shipyards in India. It is engaged in design and construction of sea-going, coastal, harbor, inland crafts and vessels apart from undertaking ship repair activities. Over the years, company has upgraded its product range from the simple inland cargo barges, passenger vessels to sophisticated deep-sea fishing trawlers and state-of-art dredgers, to the technological marvel of the highly maneuverable and power-packed ocean going tractor tugs, chemical carriers, bulkers, cargo/container ships, tankers etc. Importantly, company has special expertise in construction of offshore support vessel required for oil exploration industry. Infact, worldwide BSL ranks seventh in terms of order book for offshore vessels. It is also the sole Indian player with order of an oil rig. Actually, BSL is constructing a 350-feet self-elevating jack up drill rig for Great Offshore which is first of its kind for any Indian private shipyard. With delivery of this rig by end of this fiscal, BSL would join the elite club of global companies that manufacture off-shore rigs. Apart from above business, company has put up a wind farm in Dhule Maharashtra, consisting of 14 wind energy generators with a total capacity of 15 MW at an investment of Rs 85 cr.
At present, ship building industry is being dominated by Korea, China & Japan as they control nearly 90% of the total global market. Against this India hardly has 1% share, which indicates the growth potential of this sector in the country. The shipbuilding industry is witnessing robust demand, as shipping companies across the globe are undergoing aggressive expansion to cater the rising sea traffic on the back of strong growth in global economy. On the other hand the increase in E&P activity worldwide has stimulated a strong demand for offshore vessels like drill ships, support vessels and rigs, which are essential to oil exploration. Lastly the huge replacement demand has given a strong fillip to ship building industry. To avert potential accidents regulators fix age limit/criteria on ships whereby they are not allowed to operate after crossing a particular age limit or certain criteria. Ships are also generally scrapped as they get old, because rising maintenance cost makes them unfeasible to operate. And as shipbuilding is a very labor-intensive industry, India has an edge with availability of highly skilled labor at lowest cost compared to global peers like Korea, Japan, Norway and other European countries. Today, India ranks 8th in terms of order book and is looking to increase its share to 2%~3% globally in coming years. Also one of the prime reasons for orders flowing towards Indian yard is due to the fact that, all global shipyards are booked fully for next 4~5 years. Hence, Indian shipyards took advantage of this situation as they managed to offer attractive delivery dates and competitive prices.
Currently, BSL boast of having an all time high order book position of Rs 4800 cr which is almost 7x times its FY08 revenue. This is to be executed in next three years, ensuring a strong revenue visibility. And interestingly 70% of the order book constitutes of offshore vessels which offer better margins as they require high degree of technological skill and superior quality of engineering compare to other vessels like tankers, bulkers etc. BSL operates through 4 yards located at Ratnagiri, Ghodbunder(Thane), Goa and Kolkatta, with latter two yards being relatively smaller in size. Moreover, Ghodbunder yard mainly manufactures the body of the ship (hull), which is then towed to Ratnagiri yard where the major portion of the work is done. In order to cash on the buoyancy in the ship building industry, BSL in the midst of Greenfield expansion of setting up two new yards at Dabhol (Maharashtra) & Mangalore (Karnataka) with an investment of more than Rs 1000 cr. The Dabhol yard, spread across 250 acres will have capacity to manufacture vessels up to 100,000 Dwt and being a deep-water port is capable of constructing semi submersible rigs and other rigs. Whereas Mangalore yard, which is located in SEZ being promoted by ONGC will specialize in building tankers, bulk carriers, containership, chemical carries and rigs. This yard will be spread across 50 acre and will have the capacity to construct 5 to 6 vessels per year up to 60,000 Dwt. Further, BSL is contemplating to establish one more SEZ at Usgaon (Maharashtra).
For future growth, company is expecting to get good orders for oil rigs as it has the first mover advantage in rig construction. With average age of mobile offshore drilling rigs worldwide to be more than 25 years, a huge demand is anticipated in coming years either through a life enhancement program or by phasing out the older rigs with new built ones. And ironically, China, Korea and Japan have less presence in this segment as they have larger capacity yards which are more viable / economical for bulk carriers, tankers and containership rather than offshore vessels. Besides, BSL has entered into a 50:50 JV with the diversified Apeejay group to set-up a 250,000DWT large scale shipyard on the east coast of India catering primarily to cargo vessels. The total investment in the 900 acre project is estimated to the tune of Rs 2000 cr to be made over three and half years.
To fund its expansion plan, during 2005 BSL raised around Rs 450 cr in two tranches thru FCCB route to be convertible into equity at the rate of Rs 422 & Rs 498 respectively. Out of these more than 50% has already been converted and considering the current market price the chances for conversion of the balance bonds in near future are quite bleak. For FY08 it recorded 65% jump in sales to Rs 702 cr and 45% increase in PAT to Rs 107 cr posting an EPS of Rs 39 on equity of Rs 27.60 cr. It declared encouraging result for Q1FY09 as well. But importantly, BSL has been recognizing government subsidy as per 2002 scheme of 30% subsidy, although it is yet to receive it physically from the govt. As on March 2008 nearly Rs 160 cr is shown as subsidy receivable under Debtors. Moreover the subsidy scheme was officially valid upto August 2007 and no further clarification has been received from the govt. Despite this BSL continues to record the subsidy amount as revenue in its P&L A/c.
Hence as a matter of conservatism and excluding the subsidy part, BSL is estimated to clock a turnover of Rs 825 cr and PAT of Rs 65 cr for FY09. This translates to an EPS of 24 on current equity of Rs 27.60 cr. Even if we consider the fully diluted equity (post all conversion of FCCB) of Rs 32 cr the EPS works out to Rs 20. On the other hand, if subsidy is taken into consideration then it can register total revenue of Rs 900 cr and NP of Rs 110 cr i.e. EPS of Rs 40 on current equity. Ironically the scrip which hit a high of Rs 865 in Jan’08 has been mercilessly battered down to sub Rs 100 levels. This may be due to distress selling by FII’s like Merill Lynch, AIG, JP Morgan etc who were holding 14% stake. Fundamentally, BSL boast of having huge reserves to the tune of Rs 550 cr i.e. book value of Rs 208 and low debt equity ratio. Secondly, the sharp rupee depreciation may also have a positive impact on company’s bottomline. To conclude, although scrip may continue to slide in the current market sentiment, still investors are strongly recommended to buy at current levels as scrip has the potential to double in 12~15 months. Investor can expect much higher returns if kept for long term.
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