>SHIPPING & OFFSHORE SERVICES: Summary valuations on Aban, SCI, & GE SHIPPING

Outlook bleak; low profitability to continue
Indian shipping companies are reeling under the global supply glut which has kept the day rates under pressure. The net profit for Great Eastern Shipping (GE Shipping) is expected to be down 10.3% YoY to Rs1.1bn. Shipping Corp of India (SCI) is likely to be hit the hardest due to its presence in the container liner segment. It is likely to be impacted by higher bunker cost, lower freight rates and higher depreciation and interest costs. It is expected to report losses of Rs149mn at net level vs. a net profit of Rs1,231mn last year. These companies are diversifying
their operations into offshore support and drilling services to ride the downturn in the shipping cycle.


■ Bunker costs remains high; up 39% YoY; container and spot charter segment to remain impacted: Price of bunker oil (fuel for shipping vessels) continued to remain at record levels of $675 per barrel during Q3FY12 vs. $485/bbl last year. We believe this would impact shipping companies and lead to increase in cost of operation. SCI, which is present in the container liner segment, would be most impacted. Its bunker costs increased 125% in Q2FY12, is likely to go up by 63% in Q3 to Rs3.4bn leading to a 827bp decline in operating margins to 9.9%.


■ Offshore oil services (drilling) industry too remains under pressure: The offshore drilling industry continued to remain under pressure during Q3FY12. According to Rigzone.com the global overall rig utilisation rate remained low at 77.6%, although it improved from 76.5% last year. Offshore rig day rates remained stable, while jack-up market continued to face pricing pressures. Utilisation of jack-up was at 77% vs. 75% recorded last year. Demand for deepwater rigs was strong globally, as fleet utilisation for Semi-subs remained above 80%.


■ Top Pick: GE Shipping (Buy with TP of Rs331): We believe GE Shipping is better placed compared to peers due to its diversified presence in the offshore segment and strong under-leveraged balance sheet which is likely to help it take advantage of the current downturn and increase fleet at lower costs. Further, it is expanding only in the offshore segment giving its better visibility and higher profitability


■ Neutral on SCI, Sell on Aban: We have a neutral stance on SCI with a target of Rs60. We maintain Sell on Aban Offshore as concerns persist with two of its assets remaining idle and others coming for re-negotiations at the bottom of the day-rate cycle, over-leveraged balance sheet and high exposure in Iran.

Great Eastern Shipping (Buy; Target Price: Rs311)

• Q3FY12 consolidated revenue is likely to increase 26.8% YoY and 3.9% QoQ to Rs7,049mn, driven by an increase in fleet size and improvement in dry bulk freight rates. Operating profit is expected to grow 30.8% YoY to Rs2,661mn on the back of improvement in offshore profitability.
• EBITDA margin is likely to improve YoY (up 115bp) but decline QoQ (down 196bp) to 37.8% as higher operating costs continue to put pressure on shipping business’ profitability.
• However, adjusted net profit expected at Rs1,054mn will be down 10.3% YoY, mainly on account of no profit from sale of ships this quarter.
• During the quarter, the company sold one GP (general purpose) product carrier (29,100 dwt) and another MR (medium range) product carrier (45,600 dwt).

 Shipping Corp. of India (Hold; Target Price: Rs60)

•  We expect SCI’s Q3FY12 revenues to increase 13.8% YoY but remain flat QoQ to Rs10,113mn, led by improvement in the liner business and higher freight rates in the dry bulk segment.
• Operating profit is expected to decline 38.1% YoY and remain flat QoQ to Rs998mn, with operating margin likely to contract 827bp YoY to 9.9% in Q3FY12 vs. 18.1% in Q3FY11.
• We expect SCI to report losses at net level of Rs149mn from profit of Rs1,231mn in Q2 and losses of Rs1,406mn in Q1FY12. Apart from lower profit from sale of ships, higher interest cost and depreciation will impact this quarter vs. last year. Net margin will in effect contract to 1.5% vs. 13.8% last year.
• During the quarter, SCI bought two new built supramax bulk carries (57,200 DWT). The company also took delivery of two new built AHTSV (anchor handling tug-cum-supply vessel) of 80 ton and 120 ton bollard pull capacity each.
• The company also scrapped a chemical tanker ‘m.t. Tirumalai’ (21,035 DWT) and seven Handymax Bulk Carriers of 47,300 DWT each.

Aban Offshore (Sell; Target Price: Rs350)

• Aban Offshore’s consolidated revenue is expected to remain flat YoY at Rs7,888mn, as rigs continue to remain idle and day rates are lower for new contracts. The current market rates for jack-ups have dropped significantly since the peak in 2008 on the back of lower rig utilisation globally.
• Operating profit is expected to decline 10.5% YoY to Rs4,625mn, while operating margin is likely to contract 777bp YoY to 58.6% on the back of higher operating and other expenses.
• Adjusted PAT is likely to decline only 4.9% YoY to Rs718mn, as JV related losses had depressed earnings last year. Adjusted net profit margin in effect is likely to contract only 61bp YoY to 9.1% vs. 9.7% last year and 10.4% in Q2FY12.
• During Q3, Aban got an extension for the new jack-up Rig ‘Deep Driller 1’ from its operator for a period of 1 year. The contract now ends in Q3FY13 with additional revenues of US$39.2mn (~US$107,500/day).
• Aban also received an order from ONGC for the deployment of jack-up rig Aban II for a period of 3 years for a total consideration of US$57mn (~$52,500 per day). The contract is expected to commence in Q4FY12.
• With this, Aban currently has only two rigs (Aban V and VII) idle and ready stacked for operations.

RISH TRADER