Friday, March 2, 2012

>SHIPPING CORPORATION OF INDIA: Disappointment continues, downgrade to Sell

Shipping Corporation of India’s (SCI) Q3FY12 results continued to remain weak and was below expectations. Apart from the container liner segment which continues to report losses, the bulk division (adjusted for profit from sale of ships) also remained in red. The company reported losses of Rs390mn at the EBIT level (adjusted for profit from sale of ships). We believe SCI would remain impacted by lower freight rates and higher operating costs, which would result in operational losses for FY12 and FY13. We have lowered our estimates and downgrade the stock to Sell. We believe that the recent run-up in the stock is not sustainable; especially given that the global supply glut and slower demand growth is likely to mar the shipping industry until the end of 2013.

■ Q3 results below expectations: Revenue grew 29.1% YoY to Rs11,475mn, 13.5% above our estimate mainly on the back of foreign exchange gain of Rs1,686mn included in other operating income. EBITDA plunged 26.8% YoY to Rs1,180mn while margins declined 785pp YoY to 10.3%. Operating expenses (including bunker costs) at 69.2% of revenue increased 14.5pp YoY and 265bp higher than anticipated. Bunker cost at 42.2% of revenue increased 18.5pp YoY and 145bp QoQ to Rs4,082mn.

 ■ Operational losses across segments: Though SCI reported EBIT profits in its bulk division at Rs1,377mn in Q3 these were not the operating profits at it included Rs1,751mn profit from the sale of eight old vessels. The container liner segment continued its losses at Rs241mn. This led to overall operational (EBIT) loss of Rs390mn vs. a profit of Rs600mn last year.

■ Forex movement further dents profitability resulting in losses at net level: SCI managed to report profits at net level only from profits from the sale of ships and foreign exchange gain booked under other operating income. Adjusted for the forex gain of Rs1,686mn and Rs784mn MTM loss on forex borrowings charged to interest cost in accordance with AS-16, adjusted PAT came at a loss of Rs161mn vs. our estimate of a loss of Rs149mn. If we adjust for the profit form sale of ships, the loss further increases to Rs1,919mn.

 Estimates lowered, downgrade to Sell: We have revised our estimates to factor in losses in bulk and liner segments. We have also factored in the impact of changes in foreign exchange in interest cost. We expect SCI to report a net loss of Rs1.2bn in FY12 and a marginal loss of Rs147mn in FY13. We continue to value the company at 0.4x P/B (which factors in the company’s dismal performance) but roll-forward it to FY13. Hence, we downgrade the stock to Sell with a target price of Rs60.