Bharati Shipyard Ltd - Rs 55.00

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 first 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, 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. Until last year shipbuilding industry was witnessing robust demand, as shipping companies across the globe were 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 had stimulated a strong demand for offshore vessels like drill ships, support vessels and rigs, which were 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 was due to the fact that, all global shipyards were 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.

However in the last few months, the whole scenario has changed dramatically. Crude oil price crashed to sub US$ 40 levels from high of nearly US$ 150, leading to a drastic fall in the oil E&P activities. The Baltic dry freight index tumbled down sharply by 80~90% in matter of few months. Although bailed out by govt, the US banking system nearly collapsed which resulted into a tight liquidity crunch across the world. The global trade almost came to stand still for few weeks which eventually resulted into most of the developed economies going into recession. Thus most of the shipping companies/oil companies across the world were forced to cancel or postponed their capex plan which directly led to order cancellation for ship building companies. Incidentally or fortunately, the scenario for Indian shipbuilders is not as bad as they haven’t seen the order cancellation yet. Moreover as the dust finally settles down and world economy stabilizes, ship building industry will back on track.

Recently, BSL has successfully bagged a contract to the tune of Rs 281 cr from Ministry of Defence, for supply of 15 Interceptor Boats for Indian Coast Guard. It is for the first time that vessels with an articulate surface piercing propulsion, is being built by an Indian Shipyard and is being included in Indian fleet. These vessels are fast patrol vessels meant for guarding coastal areas and other assets including E & P installations along the coastal area. With this, BSL now boast of having an all time high order book position of more than Rs 5000 cr which is 7x times its FY08 revenue. This is to be executed in next three years, ensuring a strong revenue visibility. And interestingly majority 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 little over 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. Even for the current year till date it has reported a remarkable performance. For the nine months ending Dec 2008, it has recorded 45% jump in revenue to Rs 713 cr and 30% rise in PAT to Rs 95 cr. 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 50 levels. It seems all the negatives have been already factored into the share price and accordingly it has bottomed out. 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, investors can 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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