icicidirect_shippingsectorreport

September 29, 2010

ICICIdirect.com | Equity Research

Sector Report

Selective play Global Scenario Global steel production has grown at 2.7% CAGR in the last five years while demand for coal has grown at 3.5% CAGR over the same period. Strong demand for iron ore was mainly driven by China, which has a 45.1% share in global steel production. Going forward, demand for dry bulk commodities such as iron ore and coal is likely to remain strong resulting in demand for dry bulk carriers. Crude oil demand has grown at a CAGR of 0.2% over last five years. Crude oil demand is mainly driven by developed economies with the US and Europe having 26.4% and 23.5% share, respectively. As a recovery in Europe and US remain sluggish, demand for crude and product carriers will be modest. However, supply of vessels in both the dry bulk and tanker segment is expected to outpace demand growth by a large margin and remains a serious concern for the industry. The present global order book is approximately 62.8%, 43.1% and 51.4% of the existing dry bulk, crude tanker and product carrier fleet, respectively. Thus, supply of vessels is more than capable of absorbing additional demand. Dry bulk freight rates are expected to remain range bound. Import of iron ore by China is likely to fluctuate on account of destocking/restocking of inventory resulting in volatility in freight rates. Tanker and product carrier freight rates are likely to remain subdued on account of sluggish demand for crude oil and refined products combined with large supply of new vessels. Although scrapping of single hull crude and product carriers will reduce tonnage, the impact will be insignificant. Offshore companies are better placed as crude oil prices have sustained above $60/barrel in the last 15 months. This is expected to lead to increased spend on exploration/drilling activities leading to higher utilisation levels along with appreciation in vessel day rates. Shipbuilding has been worst hit with weakness in freight rates. Shipyards globally have reported shrinkage in their order book size. The main reason is drying up of new orders while execution of the existing order continues. Performance of shipyards is expected to peak in CY11 on the back of order book execution. After this, it is expected to slide and remain muted for the next few years as capacity utilisation drops. Domestic Scenario The outlook and performance of the domestic shipping industry is closely tied to the global shipping industry. Hence, under performance of the global shipping industry is bound to have an adverse impact on domestic companies as well. However, despite this, select domestic shipping companies are better placed on account of their inherent strengths such as presence in different segments, long-term contracts and attractive valuations.

Shipping Industry Report Rating Matrix

FY12E CMP TP Rating Upside

Essar Shipping 112 112 Reduce 0%

GE Shipping 307 356 Buy 16%

Mercator Lines 55 63 Buy 15%

SCI 162 162 Reduce 0%

Varun 42 36 Sell -14%

Aban Offshore 860 947 Buy 10%

Garware Offshore 121 139 Buy 15%

Great Offshore 385 444 Buy 15%

ABG Shipyard 244 241 Reduce -1%

Bharati Shipyard 223 258 Buy 16%

Key Financials ( | crore) FY12E Rev. PAT EPS MCap. Debt EV

Essar Shipping 4,227 328 5.3 6,959 7508 14186

GE Shipping 3,687 692 45.4 4,675 5370 8302

Mercator Lines 2,577 200 8.3 1,297 3017 3359

SCI 4,005 250 5.9 6,861 2694 7083

Varun 750 -56 - 630 2741 3335

Aban Offshore 3,680 868 199.7 3,742 14164 17670

Garware Offshore 231 42 17.7 288 503 780

Great Offshore 1,508 286 76.8 1,433 2343 3676

ABG Shipyard 2,613 242 47.4 1,242 2131 3312

Bharati Shipyard 1,143 179 64.9 615 2323 2722 Valuation Summary FY12E PE EV/EBITDA P/BV ROCE RONW

Essar Shipping 25.5 10.8 0.8 5.4 3.7

GE Shipping 6.8 5.8 0.7 8.7 10.4

Mercator Lines 6.6 2.7 0.5 8.3 7.7

SCI 20.3 11.5 1.0 2.3 2.0

Varun - 8.6 0.9 3.8 -

Aban Offshore 4.4 5.9 1.2 13.2 26.2

Garware Offshore 6.8 7.7 0.9 7.7 12.8

Great Offshore 5.0 4.1 0.9 12.8 18.0

ABG Shipyard 5.1 5.6 0.8 15.1 15.9

Bharati Shipyard 3.4 9.8 0.5 8.1 15.1 Analysts name

Bharat Chhoda [email protected]

Jehangir Master [email protected]

Shipping Sector Report

ICICIdirect.com | Equity Research Page 2

Stock Recommendations We recommend investments in select stocks to maximise returns: Shipping segment GE Shipping GE Shipping is the second largest shipping company in India and operates a fleet of 62 vessels, which is being expanded to 74 vessels by FY12. The company has a comfortable debt equity ratio and ~ | 1700 crore of cash on its balance sheet, which would be useful for acquiring assets in the second hand market at distressed valuations. The initial public offer of its subsidiary Greatship Ltd is expected in Q3FY11. This will be an added trigger. We recommend BUY with a price target of | 356. Mercator Lines Mercator Lines has a diversified fleet and operates tankers, bulk carriers, jack-up rigs and dredgers. The company owns and operates coal mines in Indonesia in addition to coal trading. Diverse revenue streams provide a significant hedge to the company from a downturn in any particular segment. Almost 70% of its dry bulk fleet is deployed on long-term contracts, which reduce volatility in earnings. From Q3FY10, Mercator Lines would be operating a floating production cum storage unit (FPSO), which is another new segment for the company. We expect the company to scale up its FPSO fleet after gaining initial operating experience. Mercator Lines is likely to increase its dredging fleet once dredging activity picks up pace in India. Despite the above advantages, Mercator Lines is trading at a significant discount and is likely to get re-rated. We recommend BUY with a price target of | 63.



Offshore segment Aban Offshore Aban Offshore is the sixteenth largest offshore drilling company in the world with operating margins in excess of 60%. The company operates a fleet of 19 vessels consisting of 15 jack-up rigs, three drill ships and one floating production unit. Currently, 14 of its assets are deployed on long-term contracts. The company has secured contracts for three other assets, which will be deployed from Q3FY11. This has improved the earnings visibility and the EPS is expected to report a significant improvement in FY12. Further, crude oil prices have sustained above $60/barrel in the last 15 months. This is likely to lead to increased spend towards exploration/drilling, which would be positive for Aban Offshore. The single biggest concern was its high debt (in excess of | 14000 crore) and its repayment. However, with improved earnings visibility the concern has eased significantly. We recommend BUY with a price target of | 947. Great Offshore Great Offshore is one of the largest offshore companies in India and operates a fleet of 46 vessels consisting of 16 AHTS vessels, 12 offshore support vessels, 12 harbour tugs, three jack-up rigs and three construction barges. A varied mix of a fleet coupled with long-term contracts ensure steady revenue visibility for the company. The company has also ramped up its presence in the marine engineering and construction segment and has successfully executed contracts for ONGC. Post open offer, Bharati Shipyard has secured a 51% stake and management control in Great Offshore. With the management team in place the company is likely to increase its capex spend for fleet expansion. The company is trading at a significant discount to its historical valuation level, which makes the stock an attractive investment bet. Further, Bharati Shipyard, the current promoter, has acquired a 51% stake in the company at an average price of | 476 per share, which provides an added comfort. We recommend BUY on the stock with a price target of | 444.



Table of Content Page No Industry Outlook 5 Demand Dynamics 6 Supply Dynamics 8 Freight outlook 9 Risk & Concerns 15 Indian Shipping Industry Key parameters 16 Ranking Scale 22 Coverage Universe Valuation 24 Global Valuation 25 Management View 26

Companies under coverage Shipping

Essar Shipping 30 GE Shipping 34 Mercator Lines 39 SCI 43 Varun Shipping 47

Offshore Aban Offshore 50 Garware Offshore 55 Great Offshore 59

Shipbuilding ABG Shipyard 63 Bharati Shipyard 67

Forthcoming Issues Essar Shipping Demerger of business 71 Greatship - IPO 75 SCI - FPO 76

Annexure: Global Fleet Status 77 Snapshot of companies not under coverage

Asian Oilfield Services 78 Chowgule Steamship 79 Dolphin Offshore 80 Dredging Corporation 81 Haryana Ship Breakers 82 Jindal Drilling 83 Pipavav Shipyard 84 Seamec 85 Shreyas Shipping 86 Western India Shipyard 87

Charts and Trend 89 Glossary 94 Rating Rationale 95



Industry outlook Demand outlook positive for dry bulk vessels but tanker demand sluggish Demand for dry bulk commodities such as iron ore has been strong over the last year mainly on account of strong demand revival from China (45.1% of global steel produced in China). Demand for dry bulk commodities is likely to remain strong mainly driven by China and India over the next couple of years resulting in demand for dry bulk carriers. Crude oil demand is mainly driven by developed economies with the US having 26.4% share and Europe having 23.5% share of global demand. As the recovery in the Europe and US remain sluggish, demand revival in the tanker and product carrier segment will be very gradual. Supply overhang to make recovery long and painful Supply overhang is serious and the single biggest concern for the industry over the next two years. At present, the global order book is approximately 62.8%, 43.1% and 51.4% of the existing dry bulk, crude tanker and product carrier fleet, respectively. The excess supply of vessels is likely to absorb additional demand. Freight rates likely to remain muted across segments Dry bulk freight rates are expected to remain range bound. The rise in demand is likely to be negated by the large number of vessel additions to the dry bulk fleet. The import of iron ore by China is likely to fluctuate leading to volatility in freight rates.

Tanker and product carrier freight rates are likely to remain suppressed. The reason for the bleak outlook is sluggish demand for crude oil and refined products combined with large new build supply of vessels. Although scrapping of single hull vessels is expected to reduce the tonnage, the impact will be insignificant.



Demand Dynamics

Dry Bulk Segment Exhibit 1: Global steel production

851 904970

1072 11441247

1346 13291227

0200400600800

1000120014001600

2001 2002 2003 2004 2005 2006 2007 2008 2009

Steel Production

mln

tonn

es

Source: Bloomberg, ICICIdirect.com Research Exhibit 2: Chinas share in world steel production July 2010

45.1%

12.1%7.6%

5.0% 3.3% 2.6%

24.4%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%

China EuropeanUnion

CIS India NorthAmerica

Brazil ROW

China's domination

Source: Bloomberg, ICICIdirect.com Research Exhibit 3: Chinas monthly steel production

30

35

40

45

50

55

60

Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10

mln

tonn

es

Source: Bloomberg, ICICIdirect.com Research

Steel production in China has been steadily rising over the last 1.5 years after dipping in H2CY08 Steel production was boosted by the stimulus package doled out by the Chinese government, which led to a sharp rise in infrastructure spend This led to a rise in import of iron ore leading to a surge in demand for dry bulk vessels

China commands 45.1% share in global steel production The dominance of China has a significant impact on dry bulk freight rates As supply of vessels is inelastic, production and inventory levels in China would impact the movements in BDI over the next few years

Global steel production has grown at a CAGR of 2.7% over the last five years



Exhibit 4: Chinas monthly iron ore inventory

50

55

60

65

70

75

80

85

Aug-06 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10m

ln to

nnes

Source: Bloomberg, ICICIdirect.com Research Exhibit 5: China iron ore import trend analysis

0

10

20

30

40

50

60

70

Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10

mln

tonn

es

Australia Brazil India South Africa Total

Source: Bloomberg, ICICIdirect.com Research Exhibit 6: Coal demand growth

2349 24032595 2764

2904 30393184 3286 3278

0

5001000

1500

2000

25003000

3500

2001 2002 2003 2004 2005 2006 2007 2008 2009

Coal Demand

mln

tonn

es


China has maintained a fairly stable inventory level over the last one year with inventory level of ~ 70 million tonnes The inventory level can drop if it slows down its steel production

Import of iron ore by China in the past one year has been strong. This has resulted in strength in dry bulk freight rates The rally in BDI last year can be attributed entirely to imports of iron ore by China

Global coal demand has grown at a CAGR of 3.5% over the last five years



Exhibit 7: Crude oil demand

5582 56175689

58325883

59225977 5968

5891

5300

5400

5500

5600

5700

5800

5900

6000

6100

2001 2002 2003 2004 2005 2006 2007 2008 2009

Crude Demandm

ln to

nnes

Source: Bloomberg, ICICIdirect.com Research Exhibit 8: US and Europe share in global crude oil demand July 2010

26.4%23.5%

10.4%

3.8% 2.7%

33.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

North America Europe andEurasia

China India Brazil ROW

US and Europe are key demand drivers


Supply Dynamics

Industry supply snapshot Exhibit 9: Global fleet order book

Vessels DWT ('000)Dry Bulk 6915 449688 62.8Crude Oil 2117 326587 43.1Product Carriers 1508 51706 51.4LPG 516 13298 25.9Containers 4623 178489 39.1

Present Fleet Order book as %of DWT

Source: Bloomberg, ICICIdirect.com Research The global dry bulk order book is 62.8% of the existing dry bulk fleet. Exceptionally high freight rates in 2007 and 2008 encouraged most shipping companies to expand their capacities. The global crude and product carrier order book is 43.1% and 51.4% of the crude and product tanker fleet, respectively. It is estimated that single hull tankers constitute ~9% of the global crude and product carrier fleet. Scrapping of single hull tankers by end of CY10 would be of limited help as the supply overhang is quite substantial.

New build vessels, which are expected to join the global

shipping fleet over the next couple of years, are likely to keep freight rates muted

Crude oil demand has reported a CAGR growth of 0.2% over the last five years

US and Europe are the major consumers of crude oil and refined products. Due to the sluggish growth in the US and Europe the demand has also remained very tepid



Freight outlook - Long road to recovery Dry bulk carriers

Exhibit 10: Dry bulk freight rates

500

3300

6100

8900

11700

14500

17300

Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10

Inde

x

BDI BCI BPI

Source: Bloomberg, ICICIdirect.com Research Dry bulk freight rates are expected to remain muted and range bound over the next couple of years. The rise in demand is likely to be negated by a large number of vessel additions to dry bulk fleet. Import of iron ore by China is likely to remain strong. However, fluctuations in iron ore inventory levels are likely to result in volatility in freight rates.

Crude and product carriers Exhibit 11: Tanker freight rates

500

25,500

50,500

75,500

100,500

125,500

150,500

Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10

US$/

day

VLCC Suezmax Aframax


After holding out for a major part of CY08, tanker rates started to decline and bottomed out in mid CY09 with VLCC freight rates dropping to ~ $4500 per day. Tanker freight rates reported a sign of improvement in the second half of CY09 and VLCC rates recovered to ~ $35000 per day. However, the recovery was short lived and rates corrected once again and are currently at their lowest level. The rates are expected to move up gradually over the next few months as heating oil demand picks up from the US and Europe. However, in the long-term, tanker and product carrier freight rates are likely to remain suppressed over the next couple of years. The reason for the bleak outlook is the sluggish demand for crude

The last two years have been very volatile for the dry bulk

market as the Baltic Dry Index touched an all-time high of

11793 in May 2008 and, thereafter, corrected by ~ 95%

in the next six months to 663 in December 2008

Since then, BDI has remained range bound between 2000

and 4500 levels

Going forward, BDI is expected to remain subdued on

account of supply overhang

Crude tanker rates are likely to remain suppressed over the

next couple of years



oil and refined products combined with the large supply of new vessel additions. Although scrapping of single hull vessels is expected to reduce the tonnage, the impact will be insignificant.

LPG carriers LPG freight rates have remained weak over the last one year. The LPG carrier order book is 25.9% of the present global LPG fleet. LPG freight rates are expected to remain subdued on account of new vessel additions. Exhibit 12: LPG freight rates

17,000

18,000

19,000

20,000

21,000

22,000

Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

$/da

y


Liner business The liner business has recovered as container shipments have picked up in the US and Europe. The new build container order book is 39.1% of the present container fleet, which is again a matter of concern. Any slowdown in the US and Europe is likely to adversely impact the freight rates. The impact on freight rates is likely to be much more severe as compared to the dry bulk or tanker segment.

Dredging business

The dredging business has been very subdued on account of a halt in sea reclamation projects in the Gulf region, which has reduced demand for dredgers. This has led to a drop in utilisation levels along with correction in day rates for dredgers. Day rates and utilisation levels are likely to post a gradual recovery.

LPG freight rates are likely to be subdued on account of new vessel supply

Any drop in container volumes to the US and Europe could

lead to a steep correction in freight rates on account of

supply overhang



Offshore business Exhibit 13: Crude oil prices

0

20

40

60

80

100

120

140

160

Aug-06 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10$/

barre

l

Source: Bloomberg, ICICIdirect.com Research The International Energy Agency (IEA) has estimated that global crude oil demand will rise from 84.9 million barrels in 2010 to 86.2 million barrels in 2011. This would lead to increased spend on offshore drilling/exploration activities leading to demand for offshore vessels. Exhibit 14: Offshore rig utilisation levels

60

70

80

90

100

Nov-09 Feb-10 May-10 Aug-10

% u

tilis

atio

n

Drillship Semisub Jack up

BP rig explosion in April 2010


The BP rig explosion led to a clamp down on deep offshore drilling activities in Gulf of Mexico. The moratorium imposed by the Obama administration, which suspended oil & gas drilling in waters deeper than 500 feet continues and has had an adverse effect on utilisation levels for deep water rigs globally. However, in the last couple of months, offshore drilling activities have gained traction on account of new offshore projects in South America, West Africa and Asia Pacific regions. We also expect deep offshore drilling activities to once again resume in the Gulf of Mexico region post November although with tighter security measures and regulations.

We are very optimistic on the outlook for offshore companies as crude oil prices have sustained above $60/barrel for the last 15 months. This, in turn, is expected to lead to increased spend on exploration/drilling activities and higher utilisation levels for offshore drilling rigs and offshore support vessels.

With the recovery in crude oil prices, offshore drilling/exploration is expected to pick up pace

The BP rig explosion and the resultant oil spill led to a

sharp fall in utilisation levels of drill ships, which are used

for deep water drilling

With strength in crude oil prices, offshore utilisation levels and day rates are expected to gain strength



Port & Terminal Services Business Stable cargo traffic at major ports

Exhibit 15: Monthly cargo traffic handled at major ports

45.4 43.5 45.4 42.546.7 48.2

49.1 51.345.7

52.046.6 47.8 44.8

20

30

40

50

60

June

'09

July

'09

Aug

'09

Sept

'09

Oct '

09

Nov

'09

Dec

'09

Jan'

10

Feb'

10

Mar

'10

Apr'

10

May

'10

June

'10

Milli

on to

nnes


Higher utilisation due to capacity constraints Exhibit 16: Utilisation levels at major ports over the years

Capacity Traffic Utilisation %

FY02 345 288 83%

FY03 365 314 86%

FY04 390 345 88%

FY05 398 384 97%

FY06 456 424 93%

FY07 516 464 90%

FY08 544 519 95%

FY09 555 530 96% Source: Bloomberg, ICICIdirect.com Research Exhibit 17: Turnaround time at major ports in days

Port FY07 FY08

1 New Mangalore 3.14 2.98

2 JNPT 1.67 1.98

3 Ennore 1.89 2.01

4 Cochin 2.19 2.03

5 Tuticorin 3.67 3.39

6 Visakhapatnam 3.65 4.73

7 Chennai 3.4 4.17

8 Kolkata 3.89 4.33

9 Mormugao 4.46 4.91

10 Kandla 5.46 5.42

11 Paradip 3.54 7.11

12 Mumbai 4.63 5.38 Source: Bloomberg, ICICIdirect.com Research

The outlook for port operators would continue to remain positive for the next couple of years as capacity utilisation levels increase for new port projects and existing ports continue to maintain high utilisation levels due to the increased imports of coal.

Monthly cargo traffic at major ports in India has been fairlystable with ~46 MT of cargo handled on an average permonth

Six out of the 12 major ports in India are operating at

more than 100% capacity utilisation while the remaining

six are also operating at close to their peak capacity with

average utilisation levels at 96%

Average capacity utilisation including major and minor

ports has been 85%

Major ports in India have been operating at peak levels for

the last eight years

As the ports are operating at close to peak capacity, it

leads to port congestion. This results in a high turnaround

time at major ports in India



Shipbuilding business

The shipbuilding business has been the worst hit by weakness in freight rates. Shipyards, globally, have reported shrinkage in their order book size. The main reason for this is that new build orders have dried up while execution continues with respect to existing orders.

Shipbuilding companies would continue to report satisfactory results over the next couple of years as order execution picks up pace and deliveries continue. We expect the performance of shipyards to peak in CY11. After this it is expected to remain muted for a few years as utilisation levels drop leading to subdued earnings for most shipyards. Exhibit 18: BPR Asia Pacific Shipbuilding Index

0

200

400

600

800

1000

1200

Nov-06 Aug-07 May-08 Feb-09 Nov-09 Aug-10

Inde

x


Exhibit 19: New building orders

Dry Bulk Tankers Containers LPG/LNG Others Total

Jan-10 42 12 0 6 8 68

Feb-10 35 18 0 4 18 75

Mar-10 71 29 5 3 13 121

Apr-10 32 16 0 1 0 49

May-10 63 20 0 2 3 88

Jun-10 75 32 1 0 14 122

Jul-10 70 51 15 8 15 159 Source: Bloomberg, ICICIdirect.com Research Exhibit 20: Vessel value (US$ million) Asset ClassTankers DWT NB 5Yr. NB 5Yr. NB 5Yr. NB 5Yr.VLCC/ULCC 300,000 112.0 89.0 1.8 3.5 14.3 11.3 1.8 15.6SUEZMAX 150,000 72.9 61.8 4.1 4.7 5.7 4.7 2.0 1.6AFRAMAX 105,000 58.6 47.0 1.0 0.0 14.9 11.9 16.0 16.6PANAMX 70,000 48.0 39.0 6.7 2.6 9.1 14.7 6.2 4.0MR TANKERS 47,000 37.5 28.0 -1.3 0.0 10.3 7.7 -1.3 -0.7Bulk DWT

CAPESIZE 170,000 69.5 57.0 -0.7 3.6 -4.8 -6.6 6.9 12.9

PANAMAX 74,000 43.5 38.0 1.2 0.0 -1.6 -2.6 11.5 11.8SUPRAMAX 52,000 34.0 29.7 -2.9 0.7 -2.6 2.4 6.3 8.0

1 M Change (%) 1Yr. Change(%)Current (USD Mn) 3 M Change(%)


The Shipbuilding index has recovered from its low with marginal new build orders flowing to global shipyards

There has been a steady stream of new build orders over the last few months

New build asset prices of tankers as well as dry bulk carriers have recovered from their lows The second-hand market has also become active with the recovery in freight rates



Ship breaking business

The ship breaking business has been on an upswing for the last two years and demolitions are likely to continue for a few more years. Phasing out of single hull tankers by the end of CY10 would provide steady business for ship breakers throughout CY10. Even beyond that we expect the business to be fairly stable on account of large supply of vessels across asset categories resulting in low freight rates. This, in turn, would lead to scrapping of old vessels. Exhibit 21: Leading countries involved in demolition work

India China Bangladesh Pakistan All Others Total UnitsJan-10 56 11 12 4 2 85Feb-10 35 7 10 5 10 67Mar-10 45 29 37 17 39 167Apr-10 57 13 14 16 44 144May-10 57 13 8 16 44 138Jun-10 15 24 3 5 20 67Jul-10 36 20 5 10 33 104Aug-10 32 14 2 8 19 75Total 333 131 91 81 211 847

Source: Bloomberg, ICICIdirect.com Research Exhibit 22: Demolition statistics by vessel type

Dry Bulk Tankers Containers Others Total

Jan-10 13 38 25 9 85

Feb-10 24 10 14 19 67

Mar-10 37 57 47 26 167

Apr-10 49 52 11 36 148

May-10 46 45 11 36 138

Jun-10 9 3 15 39 66

Jul-10 29 21 11 21 82 Source: Bloomberg, ICICIdirect.com Research Exhibit 23: Demolition by DWT & scrap prices

DWT LDT Scrap rate $/LDT

Jan-10 3940656 908529 355

Feb-10 2622021 643697 345

Mar-10 4623534 1017093 372

Apr-10 2621450 653917 442

May-10 2032487 436169 408

Jun-10 2160889 468851 370

Jul-10 2111023 452063 395 Source: Bloomberg, ICICIdirect.com Research

Demolition work has continued unabated in India, China and Pakistan

Demolition activities registered a sharp increase particularly for dry bulk (up from nine to 29) and tanker segment (up from three to 21) with 82 vessels being scrapped in July 2010 as against 66 in the previous month

Stable scrap prices have encouraged demolition of vessels



Risks and Concerns

Sluggish global recovery and resulting in subdued demand The global economy, especially of developed countries, has managed to emerge out of the recession on account of some extraordinary measures initiated by the US and Europe to infuse liquidity by resorting to expansionary monetary, liberal fiscal policy and lastly quantitative easing. The International Monetary Fund (IMF) has revised upwards its GDP growth forecasts for CY10 and CY11. However, despite the above measures, GDP growth in developed economies remains tentative and a drop in growth rates could adversely affect the shipping sector. The Chinese government has also initiated steps to slow down the growth pace especially in the overheated housing market. China has been the main driver of dry bulk shipping volumes. The early recovery in BDI can largely be attributed to China. A slowdown in the Chinese economy could lead to weakness especially in dry bulk freight rates.

Supply overhang Supply overhang is serious and the single biggest concern for the industry over the next two years. At present, the global order book is approximately 62.8%, 43.1% and 51.4% of the existing dry bulk, crude tanker and product carrier fleet, respectively. A large supply glut of vessels is likely to accentuate the concerns for the shipping industry.

Weakness in freight rates Dry bulk freight rates are expected to remain muted and range bound for the next couple of years. The rise in demand is likely to be negated by a large number of vessel additions to the dry bulk fleet. Tanker and product carrier freight rates are likely to remain suppressed over the next couple of years. The reason for the bleak outlook is sluggish demand for crude oil and refined products combined with large new build supply of vessels. However, if freight rates remain weak for a prolonged period of time it can accentuate the pain for shipping stocks.

Drop in vessel scrapping and reduction in slippages Scrapping of vessels continued unabated throughout 2009 as depressed freight rates and high scrap metal prices forced many ship-owners to scrap their vessels before the end of their useful life. However, if scrapping activity slows down it could pressurise freight rates. As many shipping companies faced a liquidity squeeze, shipbuilding work slowed down and there were significant slippages in new deliveries in CY09. With improvement in liquidity, the amount of slippages is expected to reduce, going forward. This could lead to pressure on freight rates as additional vessels join the existing fleet.

The global recovery is expected to gather pace in FY11 with India and China leading it. However, if the global recovery falters then it could lead to a drop in shipping volumes, thereby adversely affecting the prospects of shipping companies

The pipeline of new vessels entering the market is very large and such large additions will pose the biggest challenge and hurdle towards a recovery in freight rates

The strength of freight rates would largely depend on the demand for commodities especially from China, which is the main driver of iron ore demand and US/Europe, which are the main drivers for crude and refined products demand If there is a softening of freight rates it would not only directly affect the revenues of shipping companies but would also act as a sentiment dampener for shipping stocks

Any decline in scrapping of vessels would delay the exit of older vessels. This would lead to excess supply of vessels in the market leading to a softening of freight rates Despite the vast order book prevailing with major shipyards, there was a considerable slippage in deliveries, which managed to keep the supply of vessels under check. If the slippages continue in CY11 as well it would lend support to freight rates. Conversely, a reduction in slippages could exert pressure on freight rates



Indian shipping industry Key parameters

Indian fleet size Exhibit 24: Domestic fleet - Number of vessels %

Global94%

Indian6%

Source: Bloomberg, ICICIdirect.com Research Exhibit 25: Domestic fleet Tonnage %

Indian1%

Global99%


India has 6% share in terms of number of vessels

In terms of fleet tonnage, India has just 1% share



Exhibit 26: Vessel capacities

39

75

30

84

20

19

13

48

0 10 20 30 40 50 60 70 80 90

Essar Shipping

GE Shipping

Mercator Lines

SCI

Varun

Aban Offshore

Garware Offshore

Great Offshore

Vessels (FY12E)

Source: Company, ICICIdirect.com Research

Exhibit 27: Capex plans (| Crore)

3,368

1,675

0

4,195

0

0

258

420

250

220

1,675

1482

0

1628

0

0

0

476

241

258

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

Essar Shipping

GE Shipping

Mercator Lines

SCI

Varun

Aban Offshore

Garware Offshore

Great Offshore

ABG Shipyard

Bharati Shipyard

FY11E FY12E


Vessel capacities post expansion of the fleet in FY12 has

been shown in the table given alongside

SCI will continue to have the largest fleet of 84 vessels

among domestic companies. This will consist of 25 crude

tankers, 20 dry bulk carriers and 15 product carriers

GE Shipping will be narrowing the gap with SCI with a

fleet of 75 vessels. This will constitute of 19 product

carriers, 15 crude tankers and 13 dry bulk carriers. Its

offshore fleet would consist of 15 offshore support

vessels, 10 AHTS vessels and two jack-up rigs

Among offshore companies, Great Offshore would have

the largest fleet of 48 vessels consisting of 16 AHTS

vessels, 13 offshore support vessels, 12 harbour tugs,

four jack-up rigs and three construction barges

SCI, Essar and GE Shipping have the most aggressive

capex plans

SCI has already committed capex spend to acquire 31

new vessels over the next two years. It will help the

company to replace its ageing fleet. The orders have

already been placed and construction of new vessels is

under way at various yards in India and abroad

Essar Shipping is also incurring significant capex to build

capacities for its various operating segments. The

company is acquiring two jack-up rigs. It would be

expanding its port capacity at Vadinar and Hazira in

addition to setting up new ports at Salaya and Paradip

GE Shipping would be incurring the capex to mainly

expand its offshore fleet of vessels along with expansion of dry bulk and tanker fleet



Exhibit 28: Shipbuilding order book size (| Crore)

12470

8160

5076

2560

0 3000 6000 9000 12000

Gross order book (FY10)

Order book pendingexecution (FY10)

ABG Shipyard Bharati Shipyard


Exhibit 29: Revenue and PAT (| Crore)

4,227

3,687

2,577

4,195

750

3,680

231

1,508

2,613

1,143

273

692

200

868

42

286

242

179

337

-56

(500) - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

Essar Shipping

GE Shipping

Mercator Lines

SCI

Varun

Aban Offshore

Garware Offshore

Great Offshore

ABG Shipyard

Bharati Shipyard

Rev. (FY12E) PAT (FY12E)


ABG Shipyard has a sizeable order book (pending

execution) which is 4.5 times its FY10 revenue while

Bharati Shipyards order book (pending execution) is 1.9

times its FY10 revenue

Execution of order book would provide stable revenues

over the next two years and one year to ABG Shipyard

and Bharati Shipyard, respectively. However, beyond that the earnings are likely to be subdued for a few years

Essar Shippings revenues are likely to be highest among

all domestic shipping companies by FY12, closely

followed by SCI

However, in terms of profitability Aban Offshore and GE

Shipping are expected to be the two most profitable companies among domestic shipping companies



Exhibit 30: Market cap/debt/enterprise value (| Crore)

7,390

4,569

1,132

6,903

660

3,779

317

1,512

1,242

629

7508

5370

3017

2694

2741

14210

503

2343

2131

2323

13917

8195

3193

7125

3365

17607

809

3755

3312

2736

0 4,000 8,000 12,000 16,000 20,000

Essar Shipping

GE Shipping

Mercator Lines

SCI

Varun

Aban Offshore

Garware Offshore

Great Offshore

ABG Shipyard

Bharati Shipyard

MCap.(FY10) Debt (FY10) EV (FY10)


Aban Offshore is the most leveraged company with debt

of | 14,210 crore. The debt was accumulated post the

acquisition of Sinvest. Currently, the company has no

other capex plans. Over the next two years, the debt level

is likely to moderate to | 10810 crore by FY12

Essar Shipping and GE Shipping would also have

significantly high debt levels on account of their capex plans



Exhibit 31: Return ratios (%)

Chart Title

6.0

8.7

8.3

2.3

3.8

12.9

7.7

12.8

15.1

8.1

3.7

10.4

7.7

2.0

0.0

26.3

12.8

18.0

15.9

15.1

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Essar Shipping

GE Shipping

Mercator Lines

SCI

Varun

Aban Offshore

Garware Offshore

Great Offshore

ABG Shipyard

Bharati Shipyard

ROCE (FY12E) RONW (FY12E)


Offshore shipping companies would have better return

ratios, going ahead, on account of better earnings

visibility. Among them, Aban Offshore would have the best return ratios



Exhibit 32: Valuation ratios

27.0

6.6

5.8

20.5

0.0

4.4

7.5

5.3

5.1

3.5

9.9

5.7

2.5

11.5

8.7

6.0

7.9

4.2

5.6

9.8

0.8

0.7

0.4

1.0

1.0

1.1

1.0

1.0

0.8

0.5

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Essar Shipping

GE Shipping

Mercator Lines

SCI

Varun

Aban Offshore

Garware Offshore

Great Offshore

ABG Shipyard

Bharati Shipyard

PE (FY12E) EV/EBITDA (FY12E) P/BV (FY12E)


On a valuation basis, among shipping companies,

Mercator Lines is trading at most attractive valuations.

Among offshore companies, Aban Offshore offers the

most attractive valuation while among shipbuilding

companies Bharati Shipyard is the most attractive



Rating scale We have constructed a rating scale based on a few key parameters to arrive at rankings for each of the companies under our coverage. Exhibit 33: Key parameters used for rating

Company P/BV EV/EBITDA PE Debt/Equity RONWInterest

Coverage Promoter

Holding %Essar Shipping 0.8 9.9 27.0 1.0 3.7 1.4 83.7G.E Shipping 0.7 5.7 6.6 0.7 10.4 3.0 30.0Mercator Lines 0.4 2.5 6.1 1.0 7.2 2.5 38.0SCI 1.0 12.8 27.6 0.9 0.8 0.9 80.1Varun Shipping 1.0 8.7 -11.7 3.3 -8.2 0.7 42.2Aban Offshore 1.1 6.0 4.4 3.3 26.3 2.1 53.1Garware Offshore 1.0 7.9 7.5 2.0 12.8 2.1 30.6Great Offshore 1.0 4.2 5.3 1.2 18.0 3.7 49.7ABG Shipyard 0.8 5.6 5.1 1.3 15.9 3.2 57.1Bharati Shipyard 0.5 9.8 3.5 1.7 15.1 1.3 41.8

Source:ICICIdirect.com Research Exhibit 34: Rank based on above parameters

CompanyP/BV Rank

EV/EBITDA Rank

PE Rank D/E Rank

RONW Rank

Interest Coverage

RankPromoter

Holding %Essar Shipping 6 9 8 4 8 7 1G.E Shipping 3 4 6 1 6 3 10Mercator Lines 1 1 5 3 7 4 8SCI 9 10 9 2 9 9 2Varun Shipping 8 7 10 10 10 10 6Aban Offshore 10 5 2 9 1 5 4Garware Offshore 5 6 7 8 5 6 9Great Offshore 7 2 4 5 2 1 5ABG Shipyard 5 3 3 6 3 2 3Bharati Shipyard 2 8 1 7 4 8 7

Source:ICICIdirect.com Research Exhibit 35: Weightage assigned to each parameter

CompanyP/BV

WeightageEV/EBITDA Weightage

PE Weightage

D/E Weightage

RONW Weightage

Interest Coverage

Weightage

Promoter Holding %

WeightageEssar Shipping 25% 15% 10% 20% 15% 10% 5%G.E Shipping 25% 15% 10% 20% 15% 10% 5%Mercator Lines 25% 15% 10% 20% 15% 10% 5%SCI 25% 15% 10% 20% 15% 10% 5%Varun Shipping 25% 15% 10% 20% 15% 10% 5%Aban Offshore 25% 15% 10% 20% 15% 10% 5%Garware Offshore 25% 15% 10% 20% 15% 10% 5%Great Offshore 25% 15% 10% 20% 15% 10% 5%ABG Shipyard 25% 15% 10% 20% 15% 10% 5%Bharati Shipyard 25% 15% 10% 20% 15% 10% 5%

Source:ICICIdirect.com Research

We have used three valuation ratios (P/BV + EV/EBITDA

+ PE) and three other ratios (debt/equity + RONW +

interest coverage) for our rating purpose. In addition, we

have also used promoter holding as one additional parameter for arriving at the rating scale

Based on the above parameters, we have arrived at the ranks for each of the coverage companies

We have assigned a weightage to each of the categories

to arrive at the final ranking

We have assigned maximum weightage of 25% to P/BV

as shipping is an asset heavy business with wide

fluctuations in bottomline. Hence, P/BV would be a better

indicator to arrive at our final valuations

As shipping companies have significant debt on their

books we have assigned second highest weight of 20% to the debt-equity ratio



Exhibit 36: Final rank of companies based on above parameters

Weighted Average Ranking

Final Ranking

Essar Shipping 6.4 8G.E Shipping 3.9 2Mercator Lines 3.4 1SCI 7.4 9Varun Shipping 8.9 10Aban Offshore 6.1 6Garware Offshore 6.3 7Great Offshore 4.1 4ABG Shipyard 4.0 3Bharati Shipyard 5.0 5

Source: ICICIdirect.com Research

Based on the above parameters, Mercator Lines and GE

Shipping have emerged as the top picks with No. 1 and

No. 2 spot, respectively

Mercator Lines and GE Shipping have a presence in the

tanker, dry bulk and offshore segment. Mercator Lines in

addition also operates four dredgers, would be

commissioning a floating production unit in Q4FY11 and

is also carries out coal mining, handling and trading.

Due to the diversified revenue streams, both companies

are better placed to tide over the volatility in any single

business segment

Both companies also have a low debt-equity ratio, which

is an additional comfort in a downturn

The valuation of Mercator Lines looks especially

attractive as the stock is trading at ~ half its FY10 book

value

ABG Shipyard is ranked at No. 3 because of its superior

financial performance. However, we would remain

cautious on account of the decline in order book pending

execution with each passing quarter. We expect the

revenue to peak out in FY12. After this, it is expected to

contract

Great Offshore is ranked at No. 4 again on account of its

superior operating parameters, attractive valuation and

conservative debt-equity ratio

Bharati Shipyard is ranked at No. 5 mainly on account of

its investment in Great Offshore as the consolidated

numbers are superior despite the under performance in its

core business



ICICIdirect.com coverage universe (Shipping) ESPLL Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code ESSSHI CMP (|) 113 FY10 2999.4 1.5 74.2 13.5 1.1 3.7

Target (|) 112 FY11E 3222.0 2.5 44.5 13.4 2.3 4.3MCap 6958.5 % Upside -1 FY12E 4227.4 5.3 25.5 10.8 3.7 5.4G.E Shipping Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code GESHIP CMP (|) 307 FY10 2856.5 33.7 9.1 8.7 9.0 4.8

Target (|) 356 FY11E 3194.7 36.7 8.4 7.4 9.1 6.5MCap 4666.4 % Upside 16 FY12E 3687.5 45.4 6.8 5.8 10.4 8.7Mercator Lines Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code MERLIN CMP (|) 55 FY10 1808.7 2.2 24.9 5.2 2.3 5.3

Target (|) 63 FY11E 2163.5 3.4 16.3 4.2 3.4 6.1MCap 1298.0 % Upside 15 FY12E 2576.9 8.3 6.6 2.7 7.7 8.3SCI Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code SCI CMP (|) 162 FY10 3463.1 8.9 18.2 13.4 3.5 1.6

Target (|) 162 FY11E 3771.8 10.5 15.4 13.6 3.3 2.1MCap 6860.7 % Upside 0 FY12E 4004.9 8.0 20.3 11.5 2.0 2.3Varun Shipping Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code VARSHI CMP (|) 42 FY10 666.2 0.8 50.2 13.9 1.5 0.1

Target (|) 36 FY11E 636.7 - - 12.8 - -MCap 630.0 % Upside -14 FY12E 749.7 - - 8.6 - 3.8Aban Offshore Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code ABALLO CMP (|) 860 FY10 3358.7 71.5 12.0 8.4 14.3 10.0

Target (|) 947 FY11E 3553.0 87.9 11.7 6.8 13.1 11.9MCap 3250.8 % Upside 10 FY12E 3679.8 199.7 4.4 5.9 26.2 13.2

Garware Offshore Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code GARSHI CMP (|) 121 FY10 212.4 17.3 7.0 7.2 15.4 9.6

Target (|) 139 FY11E 207.8 12.4 9.8 9.3 10.1 6.4MCap 288.0 % Upside 15 FY12E 230.7 17.7 6.8 7.7 12.8 7.7Great Offshore Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code GREOFF CMP (|) 385 FY10 1165.6 54.0 7.1 6.8 18.1 11.6

Target (|) 444 FY11E 1246.7 59.0 6.5 6.0 16.7 10.7MCap 1428.4 % Upside 15 FY12E 1507.6 76.8 5.0 4.1 18.0 12.8ABG Shipyard Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code BHASHI CMP (|) 244 FY10 1812.4 42.8 5.7 7.0 19.6 13.6

Target (|) 241 FY11E 2299.2 45.1 5.8 6.0 16.4 15.3MCap 673.4 % Upside -1 FY12E 2613.3 47.4 5.1 5.6 15.9 15.1Bharati Shipyard Sales (| Crore) EPS (|) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)Idirect Code BHASHI CMP (|) 223 FY10 1348.1 50.1 4.4 8.6 16.6 9.9

Target (|) 258 FY11E 1421.0 70.2 3.2 8.3 19.1 10.2MCap 615.5 % Upside 16 FY12E 1143.3 64.9 3.4 9.8 15.1 8.1



Global Valuation (Shipping)

CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12EDry BulkDiana Shipping* USA 0.9 0.9 0.8 7.9 8.3 10.5 5.7 5.8 6.9 11.3 9.2 6.9DryShips* USA 0.4 0.4 0.4 5.0 4.1 3.4 10.5 8.5 7.7 5.3 9.0 8.3Genco Shipping* USA 0.5 0.5 0.5 4.0 5.9 10.0 5.9 6.2 8.1 13.4 7.8 3.3Mercator Lines# India 0.6 0.5 0.5 24.9 16.3 6.6 5.2 4.2 2.7 2.3 3.4 7.7TankerFrontline Ltd* Norway 2.6 2.5 2.5 9.9 10.0 10.0 8.4 8.2 8.2 28.2 22.8 24.5Overseas Shipholding Group* USA 0.6 0.6 0.5 - 15.1 17.0 12.1 7.8 7.9 - 2.3 3.1Teekay Corp.* USA 1.0 1.0 0.9 - 19.5 16.7 9.5 8.6 8.4 - 5.4 5.5GE Shipping# India 0.8 0.8 0.7 9.1 8.4 6.8 8.7 7.4 5.8 9.0 9.1 10.4SCI# India 1.1 1.0 1.0 18.2 15.4 20.3 13.4 13.6 11.5 3.5 3.3 2.0LPG/LNGBW Gas* Norway - - - 6.7 - - - - - - - -Exmar* Belgium 1.1 1.0 0.9 - 39.3 19.3 13.5 11.3 10.4 0.7 11.7 9.8Varun Shipping# India 0.8 0.8 0.9 50.2 - - 13.9 12.8 8.6 1.5 - -OffshoreDiamond Offshore* USA 2.3 2.0 1.9 9.0 9.2 11.0 5.1 5.2 5.8 26.8 24.4 19.4ENSCO* USA 1.1 1.0 0.9 12.4 10.6 9.0 6.6 5.6 4.9 9.0 10.4 11.5Hercules Offshore* USA 0.3 0.3 0.4 - - - 7.2 6.9 9.6 - - -Transocean* USA 0.9 0.8 0.8 8.5 7.6 7.9 5.7 5.3 5.5 10.9 11.1 10.6Aban Offshore# India 1.7 1.5 1.2 12.0 11.7 4.4 8.4 6.8 5.9 14.3 13.1 26.2Garware Offshore# India 1.1 1.0 0.9 7.0 9.8 6.8 7.2 9.3 7.7 15.4 10.1 12.8Great Offshore# India 1.3 1.1 0.9 7.1 6.5 5.0 6.8 6.0 4.1 18.1 16.7 18.0ShipbuildingDaewoo Shipbuilding* South Korea 1.3 1.2 1.1 8.0 8.7 10.3 6.9 7.4 8.5 17.3 14.5 11.0Hyundai Heavy Industries* South Korea 1.8 1.5 1.3 7.4 8.5 9.0 6.5 7.1 7.5 27.1 19.2 15.6Keppel Corp. Ltd* Singapore 2.0 1.9 1.7 11.9 13.0 12.8 9.9 10.7 10.4 18.2 15.5 14.3Samsung Heavy Industries* South Korea 1.9 1.6 1.4 8.3 8.8 10.3 6.9 7.2 8.1 24.8 19.3 14.3Sembcorp Marine* Singapore 3.6 3.3 2.9 12.8 15.3 16.1 7.2 8.5 8.7 30.9 22.6 19.3ABG Shipyard# India 1.1 1.0 0.8 5.7 5.8 5.1 7.0 6.0 5.6 19.6 16.4 15.9Bharati Shipyard# India 0.7 0.6 0.5 4.4 3.2 3.4 8.6 8.3 9.8 16.6 19.1 15.1Port and TerminalDubai Ports World* Dubai 1.1 1.1 1.1 26.6 21.3 16.6 12.1 10.6 9.4 4.5 5.3 6.2Mundra Port* India 9.3 7.6 6.0 46.4 35.5 23.1 35.5 26.3 18.7 20.2 22.9 27.5ConglomerateA P Moller - Maersk A/S* Denmark 1.2 1.1 0.9 9.6 9.9 8.4 3.8 3.8 3.7 15.5 12.4 13.2COSCO Group* China 1.6 1.5 1.4 15.1 13.7 10.6 10.0 9.4 8.1 11.0 10.8 12.5Kawasaki Kisen*# Japan 0.9 0.7 0.7 - 7.6 7.2 - 6.3 5.8 - 10.7 9.8Mitsui OSK Lines*# Japan 1.1 0.9 0.9 67.6 9.7 8.7 13.9 6.6 6.2 1.7 9.9 10.1Nippon Yusen*# Japan 0.9 0.8 0.8 - 8.3 8.2 17.3 6.4 6.2 - 10.0 10.0ESPLL# India 0.8 0.8 0.8 74.2 44.5 25.5 13.5 13.4 10.8 1.1 2.3 3.7*consensus# With regards to Indian companies and Mitsui, three year data represents FY10, FY11 and FY12 (financial year ending in March)

EV/EBITDA (x) ROE (%)Company Country

P/BV (x) P/E (x)



Management view

Demand situation GE Shipping On tankers, there seem to be some signs of demand coming back in the last few months. We have seen storage going down between January and June. Also, the tanker phase out of the single hull is likely to happen by the end of 2010 or early 2011. Those are a few positives for the tanker business. However, everything is dependent on the state of the global economy and how the western economy recovers. On the dry bulk side, there is still a worry mainly on the China story. We do not know which way China would move i.e. whether it is going to continue growing at a very hectic pace that will absorb most of dry bulk tonnage. Also, you have got Europe, which is a very large consumer of steel where steel production has gone down over the last couple of years. Essar Shipping Demand for commodities both dry bulk as well as wet bulk is expected to show positive growth, going forward. The sustaining GDP growth rates of China and India augur well for maintaining the demand side, with the recovery in the European area adding more positive sentiments. India related cargo movements should show substantial growth prospects, with the upcoming power plants needing very substantial increase in coal imports. The growth in the refining sector will also result in increased the imports of crude oil. At some point of time this will also entail export of products from the more modern refineries in India. Project cargo movement and handling is another area that will see good prospects in the next few years. Exim trade in India is expected to rise in the next three years to a level that will require the port handling facilities in India to double. The tonne-mile demand for various commodities is also rising with long haul movements of crude oil as well as iron ore, etc. All these factors will result in positive growth in demand for shipping services. Great Offshore While there are spare assets available in case of rigs in certain markets the utilisation as well as charter rates continue to be soft and are expected to remain so for a while contingent to : US stand on deep water drilling in Gulf of Mexico post November

2010 when the moratorium ends Winter demand and requirement of crude oil in the western

hemisphere Stability of oil prices over the long-term Initiation of exploration & production budgets and planning for

exploration Lastly, the geo political situation and environment can create

spurts in charter rates and vitiate the demand-supply equation Bharati Shipyard There is really no movement in the cargo sector. Demand is still weak in the cargo sector but it is picking up in offshore and defence sector.



Supply situation GE Shipping The order book in the bulk carrier market is much higher than in tanker as it appears on paper. The order book is somewhere around 55-60% of the total fleet. We are continuously having slippages of about 40-50% The tanker order book is between 20-30% and is smaller than the dry bulk order book that gives a little bit more comfort on the tanker business. Essar Shipping The current order book in various shipyards of Japan, Korea and China indicate substantial number of new building deliveries in 2010 and 2011. While there was anticipation of a large number of cancellations consequent to the global financial crisis in 2008, actual cancellations have been lesser than anticipated. There have been many deliveries rescheduled or ship types converted. The support lent by the government especially in China and Korea in terms of funding support have helped the shipyards to continue with their ship construction activities. The lenders have also shown positive sentiments in the recent past. Hence, the build-up of tonnage is likely to continue. The phenomenon of VLCCs being used for storage by traders has seen a significant decline in the last few weeks. This would obviously result in these ships coming back into normal play, adding to the number of ships available for chartering. While scrapping of single hull tankers will provide some relief, the impact of lower scrap rates per tonne will also have an effect on moderating scrapping activities. However, the excess tonnage position in the near term is likely to put pressure on freight rates. This, in turn, may induce owners to look towards scrapping older vessels. Mercator Lines As far as supply side is concerned, similar to what happened last year, there were some slippages in supply. I do not think the current year is likely to be different. If there are slippages, this finally means it will result in a delivery. It is cancellation, which will only result into non-delivery. There are going to be some slippages. Last year, the slippages were quite large. This year, we do not expect it to be any different from last year. Great Offshore While the asset supply side is more or less known with deliveries already slated in the rig as well as OSV segments, they will get impacted by probable delays by the envisaged slowdown and financial constraints on part of shipyard (first generation) and reluctance on part of OEM suppliers to extend credit as well as first generation clients



Future outlook Essar Shipping A cautious outlook with freight rates under pressure in the near term. The China and India growth story will help moderate any significant effect of downward pressure on freight rates. If the recovery in the western hemisphere is sustained and there are no more surprises from the Euro zone, then freight sentiments are bound to pick up. Consumer sentiments and consumer spending in the US will, of course, have a substantial impact. Mercator Lines Going forward, the environment for shipping continues to remain challenging, especially in the tanker trade. The dry bulk trade has been a bit surprising for all of us. It is far better than what we, the shipping fraternity as a whole, were expecting and what the market was expecting. The tanker environment continues to remain challenging. You see, what happens is that unless there is a recovery in the economic situation, the chances of the shipping trade or shipping, improvement will be always challenging. On e has to appreciate that the major consumption of oil products continues to be in the US and Europe. US is roughly 25% of world volumes. Hence, there has been a huge surge in demand from China and India but relative to the US our consumption is very low. So, the driver of demand continues to remain the US. Unless these economies recover, personally I feel the environment for shipping will continue to remain challenging. As far as dredging is concerned, the demand continues to remain good because all the ports in India require dredging. We have currently bid for four or five tenders in India. All this work will start post-monsoon because during monsoon one cannot do dredging. Whatever we do is very little. We are doing some and it is not large. All these will pick up in September and October. There is a huge mismatch between demand and supply. The demand for dredgers in India is far greater than supply. Great Offshore The requirement or demand for offshore oil field assets is linked to the E&P plans, oil security aspects and the extent of energy intensity. Interestingly, the usage of alternative/renewal fuel is insufficient to meet the increased demand for hydrocarbons. Hence, demand for oil being directly linked to GDP growth would continue. Bharati Shipyard Most of the new demand will be from the offshore oil sector and defence. We do not see much demand coming from the cargo sector.



Expansion Plans GE Shipping Expansion plans would depend on how the shipping cycle develops. The idea of keeping a large amount cash is not that this cash is going to stay on our balance sheet permanently, which would be a bit of a waste of resources. However, the intention is that this cash is being kept for us to be able to take advantage of any asset opportunities that may come up. If we are able to see assets at reasonable valuations then it will help us to move quickly to buy the asset. Essar Shipping Essar Shippings existing shipping tonnage is well protected and hedged against the downturn in freight rates through a mix of long-term charters and contracts of affreightment (COAs). The new buildings on order are also backed by long-term committed business. The company has currently on order six Supramax bulk carriers and six minicape vessels. These vessels are due for delivery over the next six quarters. The company is constantly on the look out for suitable opportunities to acquire control of tonnage, with visible contracts behind them. The company will focus in a large way on catering to the core sectors of power, steel and oil that are expected to grow tremendously in the years to come. These sectors, besides being fundamental to any economys growth, are also sectors where Essar Shipping can leverage third party business with its own cargo base. Great Offshore

As a company we have two new builds on order, 350 feet jack up rigs and one multi support vessel. In line with the industry we continuously evaluate sale & purchase opportunities both in the second-hand market as well as in case of new build contracts. This enables us to keep abreast of market valuations and cherry pick value buys at an appropriate time. Bharati Shipyard Expansion work is going on in two of the shipyards, one at Dabhol and the second at Mangalore. At both places it is going on at a satisfactory pace. Hence, I think very soon in the next 1.5 years Dabhol would get completed while in two years Mangalore would get completed.



WHATS CHANGED PRICE TARGET .............................................................................................. Unchanged

EPS (FY11E) .................................................................................................. Unchanged


RATING.......................................................................................................... Unchanged

Diversified play Essar Shipping Ports and Logistics Ltd (Essar Shipping) offers a play on the Indian shipping, logistics and ports business. In the last few years, the company has not only consolidated its position in its traditional shipping and logistics business but also ramped up its presence in the ports and terminal business with the Vadinar (46 MTPA wet cargo) port terminal and Hazira (30 MTPA dry cargo) port. Over the next three years, the company has chalked out plans to further increase its port capacity to 158 MTPA with the establishment of new ports and expansion of existing port operations. Essar Shipping is also scaling up its presence in the offshore space and will receive delivery of two jack-up rigs by FY12. The company currently operates one semi submersible rig and 12 onshore rigs. It is also acquiring 12 dry bulk vessels over the next two years to add to its fleet of 19 dry bulk vessels. In the last couple of years, Essar Shipping has been rapidly expanding its scope of operations across segments and has committed to substantial capex. The benefits from this would be visible over the next couple of years. Changing revenue mix to drive growth Revenue from the port business is expected to grow by 82% in FY11 to | 753 crore and by 68% in FY12 to | 1268 crore making it the second largest segment for the company. The operating margin is expected to expand from 35% in FY10 to 39% in FY12 as the share from the ports and terminals business (high margin business) increases. PAT is also expected to rise from | 93.8 crore in FY10 to | 328.5 crore in FY12.

Valuation We have valued each division of ESPLL on a DCF basis and arrived at our SOTP price target of | 112.

Exhibit 37: Financial Performance ( | cr) Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11

Net Sales 676.1 671.2 800.6 851.6 795.1EBITDA 275.6 236.4 267.2 269.6 240.8EBITDA Margin (%) 40.8 35.2 33.4 31.7 30.3Depreciation 116.6 107.1 116.7 106.6 116.8Interest 135.1 128.6 128.8 144.9 158.2Reported PAT 6.1 2.3 21.9 63.5 39.5EPS (`) 0.1 0.0 0.4 1.0 0.6


Essar Shipping (ESSSHI) | 113

Rating matrix Rating : Reduce

Target : | 112

Target Period : 12 months

Potential Upside : -1%

Key Financials (| cr) FY09 FY10 FY11E FY12E

Net Sales 2574.2 2999.4 3222.0 4227.4EBITDA 834.5 1048.7 1259.8 1656.8Net Profit 77.2 93.8 167.3 328.5

Valuation summary FY09 FY10 FY11E FY12E

PE (x) 3.1 74.2 44.5 25.5Target PE (x) 89.0 73.3 44.0 25.2EV to EBITDA (x) 16.3 13.5 13.4 10.8Price to book (x) 0.9 0.8 0.8 0.8RoNW (%) 1.0 1.1 2.3 3.7RoCE (%) 3.1 3.7 4.3 5.4 Stock data Market Cap. (| cr) 6959Debt( FY10E) (| cr) 7508Cash (FY10E) (| cr) 281EV (| cr) 1418652 week H/L (| cr) 136 / 54Equity capital (| cr) 615.8Face value | 10MF Holding (%) 0.2FII Holding (%) 8.3 Price movement

3000350040004500

500055006000

Aug-09 Nov-09 Feb-10 May-1030

60

90

120

150

NIFTY Essar Shipping (RHS)



Exhibit 38: Revenue expected to steadily rise

1842.4

2574.22999.4

3222.0

4227.4

0

500

1000

1500

2000

2500

3000

3500

4000

4500

FY08 FY09 FY10 FY11E FY12E|

cr

Revenue


Exhibit 39: Operating margin expected to inch up gradually

382.0

834.5

1048.7

1259.8

1656.8

3235

39 39

21

0

200

400

600

800

1000

1200

1400

1600

1800

FY08 FY09 FY10 FY11E FY12E

| cr

15

20

25

30

35

40

45

%

EBITDA OPM


Exhibit 40: PAT, net profit margin to improve

277.4

77.293.8

156.4

273.315

33

56

0

50

100

150

200

250

300


| cr

0

2

4

6

8

10

12

14

16

%

PAT NPM


We expect the company to report a steady rise in

revenue over the next two years as additional port

capacity gets commissioned

The operating margin is also likely to improve as the

company ramps up its port business, which offers higher

margin compared to Essar Shippings traditional shipping

business

The bottomline is also expected to grow significantly over

the next two years



Exhibit 41: Current fleet profile

19

2

6

1

12

0

2

4

6

8

10

12

14

16

18

20

Dry Bulk VLCC Tugs Semisub Rig Onshore RigN

o of

ves

sels


Exhibit 42: Operating margin comparison

15

20

25

30

35

40

45

50


%

ESPLL MLL GE Shipping


Exhibit 43: Debt-equity ratio analysis

4170

67397508

1014611196

3468

79278629 8777 9041

1.2

0.9 0.9

1.21.2

0

2000

4000

6000

8000

10000

12000

FY 08 FY 09 FY 10 FY 11E FY 12E

| cr

0.6

0.8

1.0

1.2

1.4

Debt Equity D/E Ratio


The current fleet consists of 40 vessels, which include 19

bulk carriers, two VLCCs, six tugs, one semi submersible

rig and 12 onshore rigs

The operating margin for Essar Shipping has been

consistently improving on account of a rise in revenue

from the ports and terminal business, which is a high

margin business compared to its traditional shipping and

logistics business

The company is appropriately leveraged as its debt-equity

ratio has hovered close to 1.0 in the last three years. We

expect the debt-equity ratio to inch up higher to 1.1 levels

over the next two years as it expands its offshore oilfield

presence with the acquisition of two jack-up rigs. It will

also aggressively expand its ports and terminal business

with the establishment of new port at Salaya in Gujarat and two berths in Orissa (CQ3 and Coal)



Essar Shipping offers a diversified play in the Indian shipping, logistics and ports business. In the last few years, the company has not only consolidated its position in its traditional shipping and logistics business but has also ramped up its presence in the ports and terminal business with the Vadinar (46 MTPA wet cargo) port terminal and Hazira (30 MTPA dry cargo) port. Over the next three years, the company has chalked out plans to further increase its port capacity to 158 MTPA with the establishment of new ports and expansion of existing port operations. Further, the company will also receive the delivery of two new jack-up rigs over the next 1.5 years, thereby increasing its presence in the offshore oilfield business. We have valued each division of ESPLL on a DCF basis and arrived at our SOTP price target of | 112. Exhibit 44: Valuation parameters Business DCF/|

Sea and Surface Transport Business 23

Oilfield Services Business 21

Ports & Terminal

VOTL & VPTL 18

Hazira Bulk Terminal 33

Salaya Bulk Terminal 11

Paradip CQ3 Berth 3

Paradip Coal Berth 3

Total Value 68

Total SOTP Valuation 112


Exhibit 45: Valuation

Sales Sales EPS EPS PE EV/EBITDA RoNW RoCE(| cr) Growth (%) (|) Growth (%) (x) (x) (%) (%)

FY10 2999.4 16.6 1.5 23.2 74.2 13.5 1.1 3.7FY11E 3222.0 7.4 2.5 66.8 44.5 13.4 2.3 4.3FY12E 4227.4 31.2 5.3 110.0 25.5 10.8 3.7 5.4




WHATS CHANGED PRICE TARGET ............................................................. Changed from Rs 334 to Rs 356




Subsidiary IPO to lead to value unlocking Great Eastern Shipping Ltd (GE Shipping) is one of the largest shipping companies in India operating a fleet of 62 shipping and offshore vessels. The company has the best financials in the shipping space. Its under leveraged balance sheet would enable it to acquire additional shipping assets in the second-hand market. Due to the challenging business environment, the operating performance of the company could remain volatile in the near term. However, the company would benefit immensely as the shipping cycle turns around in the next couple of years. Greatship Ltd, a subsidiary company of GE Shipping, has filed its DRHP and is expected to get listed in Q3FY11. The offshore business of GE Shipping is housed under its subsidiary Greatship Ltd. Its listing will lead to value unlocking for the parent company i.e. GE Shipping. Consistent performer in volatile industry The company is ramping up its fleet (especially in the offshore segment), which will be scaled up to 27 vessels and the total fleet size would rise to 74 vessels in FY12. Scaling up of the fleet along with improvement in tanker freight rates is likely to result in an improvement in the operating performance. We expect the topline to report a steady rise over the next two years on account of new vessel additions accompanied by a marginal rise in tanker freight rates. GE Shipping is likely to report an operating margin expansion along with a rise in bottomline.

Valuation We have valued GE on multiple valuation parameters and recommend BUY with a price target of | 356.


Net Sales 720.8 662.7 706.3 766.7 644.3EBITDA 256.7 168.4 199.3 335.1 261.4EBITDA Margin (%) 35.6 25.4 28.2 43.7 40.6Depreciation 96.1 107.8 109.3 111.3 104.7Interest 44.6 70.7 50.5 46.4 93.1Reported PAT 154.2 108.5 94.4 155.7 171.8EPS (`) 10.1 7.1 6.2 10.2 11.3


GE Shipping (GESHIP) | 307

Rating matrix Rating : Buy

Target : | 356


Potential Upside : 16 %

Key Financials (| cr) FY09 FY10 FY11E FY12ENet Sales 3800.8 2856.5 3194.7 3687.5EBITDA 1662.1 959.5 1158.1 1475.0Net Profit 1407.6 512.8 558.5 691.9

Valuation summary FY09 FY10 FY11E FY12E

PE (x) 3.3 9.1 8.4 6.8Target PE (x) 3.6 9.9 9.1 7.4EV to EBITDA(x) 4.0 8.7 7.4 5.8Price to book (x) 0.9 0.8 0.8 0.7RoNW (%) 26.9 9.0 9.1 10.4RoCE (%) 12.7 4.8 6.5 8.7 Stock data Market Cap. (| cr) 4675Debt( FY10E) (| cr) 5370Cash (FY10E) (| cr) 1743EV (| cr) 830252 week H/L (| cr) 345 / 227Equity capital (| cr) 152.3Face value | 10MF Holding (%) 12.7FII Holding (%) 12.6 Price movement

3000

3500

4000

4500

5000

5500

6000

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10200

250

300

350

NIFTY Great Eastern Shipping Company Ltd



Exhibit 47: Revenue to gain traction

3130.8

3800.8

2856.53194.7

3687.5

0500

1000150020002500300035004000


| cr

Revenue


Exhibit 48: Operating margin expected to steadily improve

1385.6

1662.1

959.51158.1

1475.0

44 40

3634

44

0200400600800

10001200140016001800


| cr

05101520253035404550

%

EBITDA OPM


Exhibit 49: PAT expected to rise significantly in FY12

1453.6 1407.6

512.8 558.5691.9

46

37

18 17 19

0200400600800

1000120014001600


| cr

0

10

20

30

40

50%

PAT NPM




Exhibit 50: Revenue days Register a drop

3374

3315

3200

3300

3400

Q4FY10 Q1FY11Revunue Days


Exhibit 51: Average TCE $ per day

29322

17920

2396320444

15485

24484

05000

100001500020000250003000035000

Crude Product Dry Bulk

TCE

$/da

y

Q4FY10 Q1FY11


Exhibit 52: Present fleet and fleet size post expansion

12

19

1

8

2

8

11

15

19

1

13

2

10

15

0

2

4

6

8

10

12

14

16

18

20

Crude Product LPG Dry Bulk Rig AHTS OSV

No.

of v

esse

ls

FY10 FY12E


Revenue days dropped from 3,374 days in Q4FY10 to

3,315 days in Q1FY11

Crude oil tanker rates declined 30.3% QoQ while product

carrier rates declined by 13.6% QoQ. However, dry bulk

freight rates rose by 2.2% over the same period



Exhibit 53: NAV

317

303 303

339

280

290

300

310

320

330

340

350

Q2FY10 Q3FY10 Q4FY10 Q1FY11

NAV


Exhibit 54: Coordination between NAV and market price

67 67 84139

282335

405

632

356 339

24 33

154 167231 200

557

202280 296

0

100

200

300

400

500

600

700

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

NAV Market Price




The company is ramping up its fleet (especially in the offshore segment), which will be scaled up to 27 vessels and total fleet size would rise to 74 vessels in FY12. Scaling up of fleet along with improvement in tanker freight rates is likely to result in an improvement in performance over the next one year. We have valued GE on multiple valuation parameters and recommend BUY with a price target of | 356. Exhibit 55: Valuation parameters Valuation based on Global average Target multiple Target price (|)

PE multiple (x) 14.5 6.00 273

Price to book value (x) 1.3 1.00 438

Average target price (|) 356

Current market price (|) 307

Upside (%) 15.8 Source: Company, ICICIdirect.com Research


Sales Sales EPS EPS PE EV/EBITDA RoNW RoCE

(| Cr) Growth (%) (|) Growth (%) (x) (x) (%) (%)

FY10 3358.7 10.1 71.5 -50.0 12.0 8.4 14.3 10.0FY11E 3553.0 5.8 87.9 22.8 11.7 6.8 13.1 11.9FY12E 3679.8 3.6 199.7 127.2 4.4 5.9 26.2 13.2




WHATS CHANGED PRICE TARGET ................................................................. Changed from Rs 56 to Rs 63




Re-rating candidate In the last few years, Mercator Lines (MLL) has not only reported a steady growth in its core business but has also diversified into related areas. This has not only enabled MLL to scale up its business significantly but has also reduced the exposure to the volatile shipping business. MLL operates dry bulk carriers, crude and product carriers, offshore jack-up rig and dredgers. The company also owns and operates coal mines in Indonesia. In addition, it also carries out significant quantity of coal trading. MLL is also entering into new business areas such as floating production cum storage unit, which would get operational in FY11. It is well placed to ride the volatility of the shipping business on account of inherent advantages such as diversified revenue stream, presence across segments, long-term charter contracts, comfortable debt-equity ratio and strong management capability. MLL would be the most likely outperformer among shipping stocks in case of an upturn in the shipping cycle. The stock is trading at half its FY10 BV of | 97 and is a likely re-rating candidate. Diversified operations to insulate MLL from volatile shipping business FY11 is likely to be a very volatile year for the company as earnings are likely to be volatile on account of wide fluctuations in freight rates. A majority of dry bulk revenues is derived from long-term contracts, which insulate the company from volatile freight rates. However, its tanker fleet is deployed on medium-term contracts ranging from 6-12 months. This can drag down the performance as crude and product carrier rates have been extremely subdued. However, the company is ramping up its coal trading and mining activities, which would result in an improvement in the topline and bottomline in FY12.

Valuation We have valued MLL on a P/BV and P/E multiple basis to arrive at a price target of | 63 and recommend BUY rating on the stock.


Net Sales 447.3 406.6 472.8 482.0 599.3

EBITDA 223.9 140.1 141.2 139.7 198.2EBITDA Margin (%) 50.1 34.5 29.9 29.0 33.1Depreciation 88.3 92.5 84.9 75.2 76.0Interest 56.3 48.4 48.7 52.4 48.8Reported PAT 44.5 -1.8 1.0 9.6 61.7EPS (`) 1.9 - 0.0 0.4 2.6


Mercator Lines (MERLIN) | 55

Rating matrix Rating : Buy

Target : | 63


Potential Upside : 15 %

Key Financials (| cr) FY09 FY10 FY11E FY12ENet Sales 2210.5 1808.7 2163.5 2576.9EBITDA 949.3 644.9 671.3 801.3

Net Profit 376.5 53.3 81.5 200.5

Valuation summary

FY09 FY10 FY11E FY12EPE (x) 3.4 24.9 16.3 6.6

Target PE (x) 3.5 25.3 16.6 6.7EV to EBITDA(x) 3.5 5.2 4.2 2.7Price to book (x) 0.6 0.6 0.5 0.5RoNW (%) 16.5 2.3 3.4 7.7RoCE (%) 12.6 5.3 6.1 8.3 Stock data Market Cap. (| cr) 1297Debt( FY10E) (| cr) 3017

Cash (FY10E) (| cr) 956EV (| cr) 335852 week H/L (| cr) 72 / 42Equity capital (| cr) 24.1Face value | 1MF Holding (%) 3.9FII Holding (%) 17.3 Price movement

4000

4500

5000

5500

6000

Oct-09 Jan-10 Apr-10 Jul-100

20

40

60

80

NIFTY Mercator Lines Ltd (RHS)



Exhibit 58: Revenue to report steady growth

1476.9

2210.5

1808.72163.5

2576.9

0

500

1000

1500

2000

2500

3000


| cr

Revenue


Exhibit 59: Operating margin to soften, going ahead, as share of coal trading increases

609.4

949.3

644.9 671.3

801.3

41

3131

36

43

0

100

200

300

400

500

600

700

800

900

1000


| cr

0

5

10

15

20

25

30

35

40

45

50

%

EBITDA OPM


Exhibit 60: PAT expected to improve sharply

327.7

376.5

53.381.5

200.5

8

43

17

22

0

50

100

150

200

250

300

350

400


| cr

0

5

10

15

20

25

%

PAT NPM




Exhibit 61: Current fleet profile

11

15

4

1

0

2

4

6

8

10

12

14

16

Tankers Dry Bulk Dredgers Offshore


Exhibit 62: Operating days and TCE - Dry bulk division

1097

29258

1251

30001

0

5000

10000

15000

20000

25000

30000

35000

Operating Days TCE

Q1FY10 Q1FY11


Exhibit 63: Shareholding pattern change

38.0

17.3

5.0

39.735.0

8.6

18.4

38.0

0.05.0

10.015.020.025.030.035.040.045.0

Promoters FII DII Others

%

Mar-10 Jun-10


The current fleet has 31 vessels, which include 15 dry

bulk carriers, 11 crude/product tankers, four dredgers and

one jack-up rig

Operating days of the dry bulk division increased from

1,097 days in Q1FY10 to 1,251 days in Q1FY11

TCE of the dry bulk division increased from $29,258 per

day in Q1FY10 to $30,001 per day in Q1FY11

Due to volatility in freight rates, FIIs and DIIs pared their

holding in the stock in Q1FY11, which was one of the

factors leading to the correction in the stock price



MLL reported a sharp improvement in its operating performance in Q1FY11 with the dry bulk division performing reasonably well. The company has also ramped up its coal business (mining as well as trading), which would increasingly contribute to its topline. Freight rates are expected to be volatile over the next one year, which could lead to fluctuations in the operating performance of the company, going ahead. However, MLL is well placed to ride the volatility of the shipping business on account of inherent advantages such as a diversified revenue stream, presence across segments, long-term charter contracts, comfortable debt-equity ratio and strong management capability. MLL is trading at a significant discount to its global peers and almost at 0.5x its FY10 book value, which provides an appropriate entry point for long-term investors. We have valued MLL on a P/BV and P/E basis to arrive at a price target of | 63 and recommend BUY rating on the stock. Exhibit 64: Valuation parameters Valuation based on Global average Target multiple Target price (|)

PE multiple (x) 8.0 6.0 50

Price to book value (x) 0.6 0.7 76

Average target price (|) 63

Current market price (|) 55

Upside (%) 15 Source: Company, ICICIdirect.com Research


Sales Sales EPS EPS PE EV/EBITDA RoNW RoCE

(| cr) Growth (%) (|) Growth (%) (x) (x) (%) (%)FY10 1808.7 -18.2 2.2 -86.3 24.9 5.2 2.3 5.3FY11E 2163.5 19.6 3.4 53.0 16.3 4.2 3.4 6.1FY12E 2576.9 19.1 8.3 145.9 6.6 2.7 7.7 8.3




WHATS CHANGED PRICE TARGET .............................................................................................. Unchanged




Disinvestment play SCI is trading at a significant premium to its domestic peers. The premium valuation is justified on account of it being the largest shipping company in India and a Navratna PSU. In addition, the company has insignificant debt, which will enable it to leverage its balance sheet and borrow in the international market at competitive interest rates. In addition, the follow on public offer (FPO) of SCI has revived investor interest in the stock. The average age of SCIs fleet is 18.1 years, which is twice the age of Indian shipping companies. In order to replace its ageing fleet, SCI has committed to incur capex of ~| 8000 crore over the next two years. Despite the improvement in topline and operating margin, higher depreciation and interest costs is likely to exert pressure on the bottomline. A rise in the equity base on fresh issue of shares is further expected to dilute the earnings. Capex to fuel topline growth SCI has reported an improvement in performance over the last two quarters with the rise in freight rates across vessel categories. Th

icicidirect_shippingsectorreport

Documents