Buy Bharathi Shipyard
Buy Bharathi Shipyard : target for Rs 795
Research Report on Bharathi Shipyard by Anand Rathi
Swan Hunter acquisition to add new dimension
The company recently acquired Swan Hunter Shipyard (U.K). The machinery as well as the dry dock would be dismantled and shipped to Mangalore. The acquisition, dismantling, transport and re-installing cost would be around Rs 2,500 million. The acquisition would enable Bharati to build vessels up to 100,000 DWT.
Robust order book to fuel growth
BSL’s order book is Rs 40,000m; the unexecuted portion is Rs 33,000 million (details in annexure). About 50% of the order book will be executed at Mangalore, the rest at other yards. The Mangalore yard would execute the Rs 7,500 million orders for rig. The delivery of rigs is expected by December 2008. The normal revenue recognition formula is 15 x 6 (15% of revenue booked every quarter for six quarters). In FY08, the company posted a turnover of Rs 4,210 million. Of this, Rs 3,540 million arose from its core shipbuilding. It recognized a subsidy of Rs 617m.illion Revenue has come from Godbunder / Ratnagiri, Goa and Kolkata. Godbunder is running at full capacity and is expected to generate revenue of Rs 3,000 million. The Goa and Kolkata yards would be expanded at the capex of Rs 200 million. This would yield revenue of Rs 500 million and Rs 750 million respectively. Sales from the present yards can touch Rs 4,250 million.
Consistency expected in operating margins
The major contribution comes from the offshore supply vessel (OSV) and cargo segments. The operating margin, at 18%, is expected to be consistent (excluding the subsidy). In OSVs and rigs, the operating margin is as high as 18.5% whereas it is 17% in the cargo segment. In the cargo segment, bought components constitute 25-30% of the value of the ship; steel constitutes about 25%. In OSVs, bought components constitute 55% whereas steel is around 10%. Less labor is required for OSVs than for cargo vessels.
Raw material price fluctuation built into contracts
The company places back-to-back orders for steel (on securing an order). This helps shield it from fluctuations in raw material prices. This is also the case with bought components. The company also receives about 5-15% of the order in advance.
Investment Concerns Working capital management -- the key
BSL’s strategy is to buy the steel required as soon as an order is confirmed. Its steel inventory is expected to be about 10- 15% of the unexecuted portion of the order book. As the order book swells, the company would see its resources locked into the steel inventory. the inventory is expected to be around 200 days. Similarly, a sharp rise in Loans and Advances has been seen. Due to the large number of bought components required for rigs, the initial outlay has risen sharply.
Subsidy delay is the biggest concern
Globally, shipbuilding is zero-tax. Many countries offer subsidies to support their shipbuilding business as it generates vast employment and helps in infrastructure creation. In India, subsidies were originally made available for public sector shipyards; then extended to the private sector. Subsidies to the public sector are provided at various stages, whereas they are given to the private sector only after order completion. These subsidies are provided as relief from taxes imposed on Indian shipbuilders. The industry is pressing for SEZ status to avoid the incidence of tax and delays in subsidies. The five-year subsidy period lapsed in Aug.’07.
The government is reconsidering extending the subsidy for a further five years. Bharati Shipyard has unrecognized subsidy of Rs 1,082.6 million. It has not received any previous years’ subsidy so far. Rigs are not covered under the subsidy. All vessels except those used for the domestic market benefit under the subsidy scheme. Valuation and Analyst View We expect Bharati shipyards bottom line to grow by 39% in FY08 and 61% in FY09. Further growth would come from higher capacity utilization at the Mangalore facility and from further investments in new or existing yards.
The healthy order book provides sustained revenue visibility. On comparing with ABG, the stock is at a substantial discount. At its current price, we recommend a buy with a target of Rs 795. That discounts FY09E earnings by 15 times.
Source : moneycontrol
Research Report on Bharathi Shipyard by Anand Rathi
Swan Hunter acquisition to add new dimension
The company recently acquired Swan Hunter Shipyard (U.K). The machinery as well as the dry dock would be dismantled and shipped to Mangalore. The acquisition, dismantling, transport and re-installing cost would be around Rs 2,500 million. The acquisition would enable Bharati to build vessels up to 100,000 DWT.
Robust order book to fuel growth
BSL’s order book is Rs 40,000m; the unexecuted portion is Rs 33,000 million (details in annexure). About 50% of the order book will be executed at Mangalore, the rest at other yards. The Mangalore yard would execute the Rs 7,500 million orders for rig. The delivery of rigs is expected by December 2008. The normal revenue recognition formula is 15 x 6 (15% of revenue booked every quarter for six quarters). In FY08, the company posted a turnover of Rs 4,210 million. Of this, Rs 3,540 million arose from its core shipbuilding. It recognized a subsidy of Rs 617m.illion Revenue has come from Godbunder / Ratnagiri, Goa and Kolkata. Godbunder is running at full capacity and is expected to generate revenue of Rs 3,000 million. The Goa and Kolkata yards would be expanded at the capex of Rs 200 million. This would yield revenue of Rs 500 million and Rs 750 million respectively. Sales from the present yards can touch Rs 4,250 million.
Consistency expected in operating margins
The major contribution comes from the offshore supply vessel (OSV) and cargo segments. The operating margin, at 18%, is expected to be consistent (excluding the subsidy). In OSVs and rigs, the operating margin is as high as 18.5% whereas it is 17% in the cargo segment. In the cargo segment, bought components constitute 25-30% of the value of the ship; steel constitutes about 25%. In OSVs, bought components constitute 55% whereas steel is around 10%. Less labor is required for OSVs than for cargo vessels.
Raw material price fluctuation built into contracts
The company places back-to-back orders for steel (on securing an order). This helps shield it from fluctuations in raw material prices. This is also the case with bought components. The company also receives about 5-15% of the order in advance.
Investment Concerns Working capital management -- the key
BSL’s strategy is to buy the steel required as soon as an order is confirmed. Its steel inventory is expected to be about 10- 15% of the unexecuted portion of the order book. As the order book swells, the company would see its resources locked into the steel inventory. the inventory is expected to be around 200 days. Similarly, a sharp rise in Loans and Advances has been seen. Due to the large number of bought components required for rigs, the initial outlay has risen sharply.
Subsidy delay is the biggest concern
Globally, shipbuilding is zero-tax. Many countries offer subsidies to support their shipbuilding business as it generates vast employment and helps in infrastructure creation. In India, subsidies were originally made available for public sector shipyards; then extended to the private sector. Subsidies to the public sector are provided at various stages, whereas they are given to the private sector only after order completion. These subsidies are provided as relief from taxes imposed on Indian shipbuilders. The industry is pressing for SEZ status to avoid the incidence of tax and delays in subsidies. The five-year subsidy period lapsed in Aug.’07.
The government is reconsidering extending the subsidy for a further five years. Bharati Shipyard has unrecognized subsidy of Rs 1,082.6 million. It has not received any previous years’ subsidy so far. Rigs are not covered under the subsidy. All vessels except those used for the domestic market benefit under the subsidy scheme. Valuation and Analyst View We expect Bharati shipyards bottom line to grow by 39% in FY08 and 61% in FY09. Further growth would come from higher capacity utilization at the Mangalore facility and from further investments in new or existing yards.
The healthy order book provides sustained revenue visibility. On comparing with ABG, the stock is at a substantial discount. At its current price, we recommend a buy with a target of Rs 795. That discounts FY09E earnings by 15 times.
Source : moneycontrol
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