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ABG Shipyard

ABG Shipyard

The Bharti wave is a booster

The issue is being made at the top of shipping upcycle and its capacity utilisation. Bulging orders books and a gestation till FY 2008 await investors.  

ABG Shipyard, which is a part of the ABG Group, is the largest private sector shipyard in India. It builds marine ships, including bulk carriers, deck barges, interceptor boats, anchor handling supply ships, driving support ships, tugs and offshore vessels.

ABG Shipyard has built over 88 ships since its inception in 1990, and currently has an order book position for 27 ships under construction. The shipyard is located at Magdala near Surat on the banks of the river Tapi and is spread across 35 acres. Currently, it can manufacture ships of a maximum length of 155 metres and a maximum weight of 20000 DWT.

The company is coming out with its initial public offering (IPO) on 18 November 2005 (which will close on 24 November 2005) of 85 lakh shares in the price band of Rs 155-Rs 185. The net proceeds from the issue, after meeting issue expenses, will be used to finance the setting up of a new shipyard at Dahej, and to meet working capital requirements. The new shipyard facility at Dahej will be 150 kms away from the current yard. The total capital expenditure is estimated at Rs 450 crore (excluding the issue expenses) out of which Rs 400 crore will be for setting up a new shipyard (including margin money) and Rs 50 crore will be for incremental working capital margin for the existing business. ABG Shipyard is planning to finance the capital expenditure through loan funds from IL & FS (Rs 100 crore) and ICICI Bank (Rs 135 crore), equity placement with financial investors, which includes the Merilion India Fund (Rs 100 crore) and rest through the IPO.

The new facility will consist of two dry docks measuring 400 metres in length, 45 metres breadth and 10 metres in depth. The two dry docks will be able to accommodate bulk carriers up to the weight of 120000 DWT. Two major process sheds of 70 meters x 200 meters are also being constructed in front of each dry dock and a common facility shed of 60 metres x 200 meters is also being set up.

ABG has entered into an equipment sale agreement with Irving Shipbuilding, Canada to acquire shipbuilding machinery / equipments. The management of the company estimates that the equipment / machinery acquired from Irving Shipbuilding Inc will have a remaining life span of a minimum 20 years and the buy out of the Irving Shipbuilding has resulted in a significant cost savings for the company.

Strengths

  • The Indian government has announced a major new project known as "Sagar Mala" for development of India’s maritime sector. It is estimated that the project will result in additional demand for 2,500 new ships.
  • The Government of India has extended the subsidy scheme for ships built in Indian shipyards both for Indian owners as well as on exports. The subsidy is now available to the private players too. The amount of subsidy is pegged at 30% of the sale price of the ship, subject to fulfillment of certain conditions. This policy augurs well for ABG since the company is actively engaged in manufacturing ships for foreign clients.
  • The director general shipping in India has announced a mandatory CAP 2 rating for all the vessels that are 20 years old and a complete ban on all tankers aged over 25 years from entering into India’s waters with effect from 1st April 2004. This is expected to boost demand for tanker vessels in the future.
  • Another positive for the industry as a whole is the scrapping of old ships especially bulk carriers due to introduction of higher structural standards. All maritime states have decided to scrap ships over the age of 15 years. This will result in increase in demand for bulk carriers. The IMO decision of scrapping single hull carriers over a period of time will also add to the demand of new ships.
  • ABG shipyard has an order book position of Rs 1,330 crore (as on October 2005), wherein export orders account for Rs 671 crore. These orders are expected to be executed over a period of the next three years. Of the order book of Rs 1,330 crore, approximately 64% of the shipbuilding orders will be catering to the oil industry.

Weaknesses

  • Increasing competition from China and increased automation at shipyards of developed countries could pose a threat to the company.
  • Increase in freight rates boost new ship orders while any downfall in freight rates could effect the company adversely. The shipping cycle has run through most of its upcycle, though there are, as of now, no signs of a sustained downtrend.
  • In the current year, the company will be operating at almost 100% capacity utilisation and the new facility will commence commercial operations only from April 2008.

Valuation

Over the last 5 years, the promoters’ other listed venture, ABG Heavy Industries, has been recording EPS in the range of Rs 8 to Rs 10. The 52 W H / L for this company was Rs. 280 / Rs. 49.

Cut to Bharti Shipyard, the only listed player having similar business. This company offered its shares on a plattter at Rs 66, a multiple of 6 times. Within just a year, the shares are quoting at Rs. 325, commanding a PE of 25.5 x FY05 earnings of Rs 11.80.

ABG Shipyard’s IPO at a price band of Rs 155-Rs 185 gives a PE of 15.7 to 18.7x FY05 earnings of Rs 9.9 on post issue equity of Rs 50.92 crore. So don’t expect a spectacular gain as in the case of Bharti, but certainly, the wind is still blowing northwards. Had one been lucky enough to have known the promoters closely, one could have bought in the last three months at only Rs 113!

ABG Shipyard : Financials
  0103(12) 0203(12) 0303(12) 0403(12) 0503(12) 0509(6)
Sales 82.7 209.4 198.0 204.9 304.1 215.4
OPM (%) 23.2% 12.2% 14.8% 11.7% 32.4% 26.2%
Operating Profit 19.2 25.6 29.4 24.0 98.5 56.4
Other income 0.0 0.0 0.3 2.3 0.0 0.6
PBIDT 19.2 25.6 29.7 26.3 98.5 57.0
Interest 11.1 16.4 14.9 13.3 20.2 8.7
PBDT 8.1 9.2 14.8 13.0 78.3 48.3
Depreciation 2.8 3.4 3.3 3.0 3.1 1.6
PBT before EO 5.3 5.8 11.5 10.0 75.2 46.7
EO 0.1 0.1 0.0 1.6 0.1 2.6
PBT after EO 5.4 5.9 11.5 11.6 75.3 49.3
Tax 0.6 0.9 3.1 2.9 5.2 7.7
Deferred Tax 1.2 1.5 -0.1 1.5 19.8 9.0
PAT 3.6 3.5 8.5 7.2 50.3 32.6
EPS (Rs)* 0.7 0.7 1.7 1.4 9.9 12.8
* Annualised on post issue equity of Rs 50.92 crore. Face Value: Rs 10
Var. (%) exceeding 999 has been truncated to 999
LP: Loss to Profit PL: Profit to Loss
EO: Extraordinary items
EPS is calculated after excluding EO and relevant tax
Figures in Rs crore
Source: Capitaline Corporate Database

 

ABG Shipyard : Issue Highlights
Sector Ship building
Sector TTM P/E 24.2
No. of shares on offer 8500000
Post issue Equity (Rs cr) 50.92
Upper Price band (Rs) 155
Lower Price band (Rs) 185
#Post issue promoter stake (%) 56.7
Issue open date 18th Nov'05
Issue close date 24th Nov'05
Listing BSE
Rating 46/100