>Ship Building (EMKAY)

Subsidy disbursement – Temporary respite...

· Government commits to pending subsidy disbursement…
The Government of India has approved the subsidy claims of private Indian shipbuilders with respect to all ongoing ship building contracts entered upto 14th August, 2007, the date of expiry of the subsidy scheme. Subsidy will be released as per guidelines, subject to modifications, and on submission of requisite documents. Department of Shipping (Ministry of Shipping, Road Transport & Highways) and Ministry of Defence shall make budgetary provisions for shipyards for subsidy disbursal.

Press reports expect the total liability of the government on this count at about Rs51bn. Subsidy receivable by ABG Shipyard from Government stood at Rs3.1 bn in FY08 (Rs61.4 per share) and is expected to increase to Rs6.8 bn by FY12E (Rs134.4 per share) while that for Bharati Shipyard is Rs1.7 bn as on FY08 (Rs60.9 per share) and is expected to increase to Rs4.4 bn as on FY12E (Rs157.9 per share).

· …To give respite to Indian shipbuilders, though temporary
We believe that the above approval brings much needed respite to the Indian shipbuilders and prima facie serves as a sentiment booster. This is especially in light of miniscule budgetary allocations (refer table below) by the government so far. However, in the absence of committed timelines for disbursal, it will be difficult to quantify when the exact benefit is expected to accrue to the shipbuilders. Further, the subsidy disbursement is presently contingent on delivery of vessels by the shipyards and is not liable for payment in the event of cancellation of the contract. Both ABG Shipyard and Bharati Shipyard have not witnessed any cancellations yet. However, both have\ experienced delays and postponement in delivery schedules to the tune of 7-14 months. Such postponements will result in delayed receipt of subsidy from the government.

· We maintain negative outlook on the industry
We continue to maintain a negative outlook on the industry based on our top-down analysis. We expect no revival in order inflows in the near future and expect cancellations in existing shipbuilding contracts as well as delay and defaults in payments by customers. Order inflows have been the key stock driver for Indian shipbuilders as against earnings growth. In absence of other positive news flows, we believe that lack of order inflows will continue to restrict re-rating of the sector going forward. We maintain our ‘SELL’ rating on ABG Shipyard with target price of Rs63 and ‘REDUCE’ rating on Bharati Shipyard with target price of Rs45 (DCF based).

To see full report: SHIP BUILDING