>Varun Shipping (KARVY)

We recently met the management of Varun shipping and come back with conviction that the company's strategies are paying off. The timely exit from drybulk segment in FY08 where freight rates have fallen by 85% since MAY 2008 and entry into promising deepwater support services segment by acquiring high end anchor handling tugs (AHTS) are expected to help the company to grow operating profits in current turbulent time in shipping. Considering 49% discount to current net asset value (NAV) and attractive dividend yield of 12%, we reiterate BUY.

Presence across less volatile segments: The Company has significantly reduced cyclicality associated with the shipping industry with selection of low risk assets and building diversified fleet across three segments viz. the Liquefied Petroleum Gas i.e. LPG, crude and offshore. The company is also cushioned to an extent against a downside in international freight rates, as it derives ~45% of revenues from transportations of LPG where freight rates for LPG carriers are more stable as compared to crude or dry bulk carrying vessels to long term nature of contracts and organized market with 83-99% business from repeat customers. In tanker segment, company has three Aframax carriers where volatility is significantly lower than other tankers like VLCC and Suezmax.

Offshore revenue to contribute ~40% in FY10: The company has six anchor handling tugs (4 high end) operating in offshore support business. We expect the charter rates for support service to remain strong as demand is mainly driven by committed capital expenditure for exploration by oil companies. . We expect the offshore segment to report revenue growth of 64% CAGR from Rs 1.6 bn in FY08 to Rs 4.3 bn in FY11 contributing ~ 40% of total revenue on back of vessel addition.

Attractive dividend yield: Varun has declared the dividends in each of past 24 consecutive years on expanded capital. With current stock price of Rs 44 the stock is trading at attractive dividend yield of 11%. With relatively stable cash flow and support from offshore business, we expect the company to maintain attractive dividend yield going ahead.

To see full report: VARUN SHIPPING