Growth seen, but only in long term

Updated: Nov 20 2005, 05:30am hrs
ABG Shipyard Limited is one of the leading private sector ship building companies in India having facilities to build and repair a wide variety of ships for commercial and government customers. The company manufactures ships, including bulk carriers, deck barges, interceptor boats, anchor handling supply ships, diving support ships, tugs and offshore vessels. The company has an annual sales turnover of Rs 304 crore for the year ended March 2005 and net profit of Rs 50.30 crore. It has built 88 ships in the last 14 years and has order worth Rs 1300 crore for another 27 ships.

For FY 2005, ABG Shipyard derived 73% of its revenue from commercial customers and 27% from the Indian government, while the revenue from international business accounts for 56.5% and 43.5% from domestic market.

The issue

The company, through its initial public offer of 85 lakh equity shares, plans to raise around Rs 132-157 crore The net issue will constitute 16.3% of the fully diluted post-issue paid-up capital of the company. However, there is no dilution of the promoter's stake in company, which will stand at 59.6% post-IPO.

With the proceeds of the issue, the company is planing to establish a new shipyard facility in Dahej, Gujarat, at an estimated cost of Rs 400 crore. It will consist of two dry docks measuring 400 metres in length, 45 metres breadth and 10 metres in depth. These two dry docks will accommodate bulk carriers up to the weight of 1,20,000 DWT, which is considered as very high and used for crude oil carriers, etc.

Industry overview

Ship building industry is a global industry with China, South Korea and Japan controlling 78% of the world market. Being high capital intensive as well as technology driven, Indian shipbuilding industry is dominated by very few players. India is a very small player with an insignificant market share. The increasing wage structure in Japan and South Korea is enabling the emergence of China and Taiwan as the other leading ship building nations. Japan, although no longer considered as low cost producer, is expected to continue to dominate the world market due to larger scale automation and robotisation in its shipyards.

Indian ship building industry is evolving, with the announcement of 100% FDI in the sector. The government has realised the significance of the industry for the growth of the economy and is supporting by providing tax subsidy. It has recently announced a major project known as ' Sagar Mala' to develop India's maritime sector

Financials

For the year ended 2005, ABG has registered net sale of Rs 304.10 crore showing a growth of 48.41% as compared to Rs 204.90 crore last year 2004. Driven by rise in sales it has shown a significant rise in operating profit and net profit at Rs 98.50 crore and 50.20 crore showing a significant growth of 310.41% and 598.00% respectively. The company has generated operating profit margin and net profit margin of 32.4% and 16.5% as compared to 11.7% and 3.5% respectively in the last year 2004.

Valuations

ABG has an order book position of Rs 1330 crore, consisting of building 27 ships, which will be delivered over a period of three years. The new project is expected to start contributing by year 2008. At the upper price band of the issue the stock is priced at annualised P/E(x) 14.4, which is considered as being low as compared Bharti shipyard's P/E at 24.1, however it generates almost 35.40% RONW. The price to book value post dilution works out at 2.7-3.2. Company is currently operating at full capacity and visibility of revenue will start from 2008-2010 and this can put a cap on the revenue growth of the company. The market capitalisation to annualised sales is 2.2x as compared to Bharti shipyard's 2.8x. In the long run outlook for shipbuilding in India as well as globally is considered positive. However, considering the amount of capital required in shipbuilding, bottleneck infrastructure and availability of technical manpower, the Indian shipbuilding companies have a long way to go.