STOCK IDEAS- ABG Shipyard Limited

ABG Shipyard Limited

BSE Code: 532682

NSE Code: ABGSHIP

The growing demand facilitated by growing exports, rising crude prices, cost efficiency of sea-borne trade, and advantage of vast coastline is encouraging new shipbuilding activity in India. ABG Shipyard (ABG), a part of the ABG Group is one of the largest private sector shipbuilding companies in India. Established in 1985, ABG is now an established manufacturer and service provider of a variety of ships, including bulk carriers, interceptor boats, diving support vessels, anchor handling supply ships, dynamic positioning vessels, anchor handling tugs & other multipurpose vehicles.

Business:

ABG with existing open order book position of around Rs 8,300 crore to be executed over next

4-5 years, covers 0.38% of the world’s shipbuilding order book. It build ships for basically two segments – shipping segment and offshore segment.

Shipping segment: This segment includes tankers, merchant ships, container ships and dry bulk ships which are used for short sea trade and fleet owners. The growth for the shipping segment is being driven by growing bulk trade scenario & replacement demand due to mandate scrapping of aging single hulled tankers and vessels. Approximate revenue generated per vessel is in the range of Rs. 10 crore to Rs. 17 crore. ABG has capacity to build 12 such vessels simultaneously. Its current order book consists of 39 bulk carriers, forming 64% of the current order book.

Offshore segment: This segment includes Anchor Handling Tug Supply, Platform supply

vessels, diving support vessels, Pollution control vessels, Oil Rigs, etc. Replacement demand coupled with increasing demand for offshore vessels on the back of intense activity in Oil & Gas exploration is driving the growth for offshore segment. Currently 87% of jack up rigs, 73% of the AHTS fleet and 62% of the PSV fleet is more than 20 years old thereby presenting huge potential for ABG to grow in offshore segment where ABG enjoys a dominant position in the world. Approximate revenue generated per AHTS/OSV ranges from Rs. 40crore to Rs. 100crore. ABG has 32 such vessels in the current order book forming 17%.

Ship repair segment: ABG has also entered into the lucrative ship repair segment (where margins are in the range of 35-40%) by acquiring a stake in Western India Shipyard (WISL). WISL offers ship maintenance management, conversion and upgradation of vessels, On shore applications for both marine and non-marine. Acquisition of WISL will add ship and rig repair expertise to existing business.

ABG’s diversified product mix of vessels leads to de-risking of revenue flows in case of downward trend in any one sector. Also it caters to customers in domestic market as well as overseas clients from Europe, Middle East and South East Asia leading to good insulation. 46% of the orders are from repeat customers while 90% orders are for Export.

Expansion plans:

ABG current facilities are located at Surat and Dahlej. AHG has recently acquired a strategic stake in Vipul Shipyard, which is located near to its Surat facility. It is reengineering this facility at a cost of Rs. 400 crore to augment shipbuilding capacity to 40 from current 32 ships. Further it is setting up Greenfield shipyard near Surat at a cost of Rs. 800 crore. This new deepwater seafront shipyard capable of building larger vessels upto 350mtrs in length, is expected to get ready by 2011. In order to fund the expansion, the company has issued four million warrants to its promoter at a price of Rs796. Further, the company plans to raise Rs8bn through a QIB issue. The estimated equity dilution post issue is likely to be 22%.

Dahej Yard: ABG Shipyard is setting up a green field shipyard at Dahej at a cost of Rs. 440 crore. The yard which will be fully operational by December 2008, will increase ABG’s manufacturing capacity to 12 ships of 120,000 DWT simulataneously from 20,000DWT currently and shipbuilding length up to 400m from the current 220m. We believe this would enable ABG improve its margins going ahead as vessels with higher capacity command better margins.

To capitalize on the surging de mand for oil rigs globally, the company is also setting up a new Rig Yard at Dahej at a cost of Rs. 670cr for building jack-up oil rigs. The rig yard will have a capacity of building 4 rigs a year and will be fully operational by 2009. This will mark the entry of the company in the rapidly growing rig building space. The funding would be partly through equity and partly through debt and internal accruals.

Investment rationale:

Increasing seaborne activity, heightened oil exploration activities, huge replacement demand due IMO’s mandate to phase out ageing vessels, and capacity shortage at major shipbuilding yards across the world are some of the drivers for ABG’s growth. With various port projects and investments envisaged in the National Maritime Development Policy (NMDP), the Indian Government had unveiled its initiatives to boost the shipping sector. Allowing 100% FDI in the sector, introduction of Tonnage Tax and developing the vast coastline and envisaging an addition of 2,400 mercantile ships under the proposed “Sagarmala” project are some of the positive initiatives under the said policy.

ABG Shipyard is expected to sustain its growth momentum given the competitive advantage it enjoys over peers in terms of project management, lower design costs, cheap skilled labour and its capability to set up a large facility at a lower cost.

Strong order backlog coupled with capacity expansion, derisked business model catering to different sectors for manufacturing and repairs, strategically located shipyards and large value chain manufacturing jack up rigs and specialized oil & gas vessels provide strong earnings visibility.

Concerns: Any delay in commissioning of internal capacity expansion, steep rise in raw material cost of steel and imported major equipment, change in government policies related to port, oil & shipping sectors or any adverse foreign currency fluctuation would affect the revenues and margins.

Valuations:

ABG’s has good growth prospects backed by capacity expansions, robust industry scenari and strong current order book providing sustainable revenue visibility. ABG’s margins are set to increase as it moves up the value chain into building vessels of higher size and complexity. ABG earnings are expected to grow at CAGR of 47% over FY07-FY10E and net profit at CAGR of 49% between FY07-10. At CMP of Rs 686.15 it trades at a P/E of 21.37x its FY08 earnings and at 11.84x & 9.08x its FY09 & FY10 earnings respectively. Considering the strong revenue growth and superior margins compared to global peers, ABG can be looked at current levels.

Sales and Profit Projections
	Q3	Annual	Annual	Annual	Annual
in Rs. Crore	FY08	FY07	FY08(E)	FY09(E)	FY10(E)
Net sales	274.96	704.36	976.00	1725.00	2200.00
OP	81.57	195.33	283.04	513.19	671.00
PAT	47.12	116.29	163.48	294.98	385.00
EPS (Rs.)	9.25	22.84	32.11	57.93	75.61
Capital	50.92	50.92	50.92	50.92	50.92

Valuation Ratios
Price	686.15	Date	28/3/2008
PE	21.37	PB	5.13
Book value per share	133.80	EV	3953.00
EV/EBIDTA	12.95	Mcap	3493.90

Shareholding Pattern
Share holding	Dec 2007
Promoter owned	56.19
Public owned	4.24
FIIs owned	15.05
Others owned	24.52