Budget Deficit: For the year 2010-11 India's fiscal deficit is expected to be around 5.5%. The recent measure like the auctioning of the 3G license which brought more than expected revenue for the government will reduce the deficit. Other than the recent deregulation of the fuel prices will also help the government to improve its financial situation. Overall prospect for the government financials are very encouraging for the upcoming future. 4
Industry Structure and performance: 5
Major Risks: 6
Comparing the data from the industrial peer:- 7
References: 9
ABG Shipyard
Introduction: ABG Shipyard Ltd., incorporated in 1985, is the flagship company of ABG group. It is India's one of the largest private sector ship building company. It has a worldwide clientele base including Europe, Middle East and South East Asia. The order book of the company is huge and has orders worth USD 2.63 billion executable till 2014, which is almost five times the FY10 revenue.
Economic Analysis: The world economy is passing through turbulent times as the world is recovering from the sub-prime crisis in US due to diligent efforts of the US government another crisis is seems to be building up in the second dominant zone, Euro zone. It is hard to say which way the world economy will move; whether it will recuperate or will fall into the spiral of depression. The estimates of the WTO given below do provide hope that the turbulent patches will smoothen out in the upcoming time. These figures of recovery differ from institution to institution but there is strong sentiment that the emerging nations will maintain a growth rate of 6% and china and India will have a higher growth rate.
World economic outlook from World Bank, IMF and WEO:
Change in %
2010
2011
2012
Real GDP
3.3
3.3
3.5
R. GDP(PPP)
4.2
4.0
4.3
Exports
11.2
6.8
7.2
Imports
11.2
6.8
7.2
The shipping industry is driven by the trades among the nations and the oil exploration and production constitute the major part of the shipping industry demand. During the financial year 2009 the industry was under enormous pressure as the decline in major trading economies has led to cancellation of the orders but India was rather immune to this shock as the major order in Indian shipping industry are for the OSV which were in demand due to the high crude oil prices.
Gross Domestic Product: India GDP is expected to increase by 8.5% in the current year and 9% in the next year which are relatively strong indicators the growth in the region. There are strong indicators for the global recovery as shown from the upbeat data about the global economy from the large institution like IMF, WTO and World Bank. This growth rate is likely to persist in the near future making India a strong investment destination in the global world.
Inflation: Inflation has been a concern for the economy as the recent deregulation of the fuel prices is expected to increase the worries of the consumer. The latest data about inflation has given positive signals of smoothening of the inflation rates as food inflation has come down in single digits.
Unemployment: Unemployment rate in India is hovering around 7% which is a good sign as the country has dampen the unemployment rates caused by the recession in the global economy. The recovery has been quick in the Indian continent as the major economies are still grappling to get hold of the situation. The near term unemployment rates are likely to stay at lower levels.
Budget Deficit: For the year 2010-11 India's fiscal deficit is expected to be around 5.5%. The recent measure like the auctioning of the 3G license which brought more than expected revenue for the government will reduce the deficit. Other than the recent deregulation of the fuel prices will also help the government to improve its financial situation. Overall prospect for the government financials are very encouraging for the upcoming future.
Overall the economy is moving out of the recessionary phase and the prospect of growth are very positive.
Industry Analysis: Indian shipping industry holds fifth rank in the world and with 1.44% of the world shipping orders. The global shipping industry is dominated players like South Korea, China, and Japan which together holds 75% of the global market. Indian Shipbuilding industry consists of 32 shipbuilding yards belonging to the public and private sector. Indian shipping industry is a price competitive industry in the world due to availability of the cheap labour but poor infrastructure and lack of technological development in design and other aspects have hampered the growth potential of the Indian shipping industry.
Major focus of the Indian shipping company has been on the bulk cargo carriers. Indian shipping industry has shown positive sign of growth lately when the entry of private player enhances the competencies of industry which led to the order from USD 300million in 2002 to USD 6billion in 2008. Currently the Indian shipping industry has orders to be delivered till 2014; the major chunk of this order is for Offshore Vessels. The government of India has allowed 100% FDI in shipping industry which will further enhance the scope of the industry development and Indian government has predicted the CAGR of 30% for the shipping industry till 2019.
Given below is the current industry structure in India:
Industry Structure and performance:
Threats of entry: The threat of entry is minimal in the shipbuilding industry as the capital investment required is very high thus these high entry and exit barrier immunes the shipping industry from the entry of the new players.
Rivalry between existing firms: The rivalry among the firm is positively enforcing and brings competitiveness in the industry. The entry of the private players has made the industry much more efficient in technology and the better utilization of the cheap labour force.
Pressure from substitute: The ships are the main medium of transportation between countries for bulk goods. So practically there is no cost efficient substitute available and the pressure from the substitute is minimal.
Bargaining power of buyer: The buyers enjoy a moderate bargaining power as the production cycle is long and the order is mainly recurrent from the buyers. The major demand comes from the repairing and maintenance of the ships which requires the favourable terms for the buyers.
Bargaining power supplier: The major supplier of the industry is the steel industry and the bargaining power of supplier is very less as the steel prices is determined by the demand and supply and monitored by government closely.
Business Cycle: Indian shipping industry is still in a nascent stage and the government has included it in the priority sector so as to develop this industry as a major contributor of the economy. This industry is in direct co-relation with the world trade/ business cycles. The freight charges and the Oil exploration and production are the major contributor of the growth in this sector, the downturn in the world trading activities will adversely affect the prospects of the shipping industry. This industry is still in the growth stage and will see a high growth in the near future.
Major Risks:
The shipping industry is very sensitive to various factors prevalent in the market. This industry has a long product life cycle and this makes the shipping industry as more vulnerable to the shocks that affect the market. The major shocks that may affect the Shipping industry are:
The Price volatility in Steel: The steel constitute approximately 15% of the shipbuilding cost. The price rise in the steel may put downward pressure on the profit potential as the vessel price is fixed at the time of contract making industry vulnerable if price change during the production.
The fall in crude oil prices which will impact OSV segment: Offshore Vessel constitute a major portion of the ships production, the crude oil price decline will hamper the exploration and production of oil in deep sea putting downward pressure on the demand of the ships.
Overall the industry prospects are very bright due to the replacement demand for the worn out Indian ships; there is also an anticipated huge demand due to ruling of the International Maritime Organization (IMO) to scrap all the single hull tankers by 2010; increase in sea borne trade will also bring business opportunities.
Company Analysis: ABG shipyard, with a market capital of Rs. 1209.14 crores, is more of an export driven company as 76% of the order book is made of the export orders. The OSV segment forms 40% of the order book portfolio which is primarily driven by the exploration and production in deep sea drilling. The global demand for the vessel is upbeat as the crude oil prices are moving around $77.91 per barrel. ABG has a its order book occupied till 2014 which and has been immune to the recent crisis of the west as all its orders remain intact.
Segment wise break of the company's order book indicates that the company's business is dependent more on the crude oil outlook as fluctuation in the demands of the bulk carrier are not very dominant. This indicates stability in terms of the future revenue of the company but expose the profitability to the steel prices fluctuation.
The company's profit margin is very sensitive to the input prices as seen from the data, decline in the key input like steel prices have reduced the cost/sales ratio.
The company has gone under a huge expansion in the recent years to move up in the shipping products pyramid and gain access to global market. The new Dahej project will increase the capacity of the company enormously and decrease the time in execution of the orders. Capital expenditure incurred during this expansion of the company has increased its long-term Debt /Equity ratio to 0.93 and total Debt/Equity ratio to 2.09.
To further dwell into the pricing of the stock, key statists of the company:-
Comparing the data from the industrial peer:-
Sr
Company
Last Price
EPS *
P/E
1
Mercator Lines
46.5
0.27
172.22
2
Essar Shipping
85.65
1.46
58.66
3
Varun Shipping
40.2
0.84
47.86
4
Shipping Corp
161.65
10.59
15.26
5
GE Shipping
288.25
24.65
11.69
6
Great Offshore
406.3
46.9
8.66
7
Seamec
144.8
17.51
8.27
8
Garware Offshore
126.25
17.2
7.34
9
ABG Shipyard
237.75
44.96
5.29
10
BharatiShipyard
231.3
47.84
4.83
These figures indicate that the P/E of the company is relatively less for the company as compared to the industry peers coupled with the fact that the stocks are trading relatively very low makes it a lucrative target for long term investment as the industry and the company futures look very bright in the long run but for the medium and the short term horizon investors ABG Shipyard is not an interesting target. The Futures market which is a leading indicator of the expected prices in the future among investors also indicates that the prices in the near term are expected to hover around Rs 240-50per share.
The performance of the stock can be tracked against the industry and the benchmark nifty which further shows that the stock is currently underperforming the benchmark and thought the long term prospects are very bright in short term the stock is not worth to be hold as there are better investment opportunities available in the market.
Recommendation: The long term horizon investor should invest in the stock but the investors with investment horizon of less than one year should sell the stock.
