ShippingSectorReport-29 Sep 2010

8/8/2019 ShippingSectorReport-29 Sep 2010

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September 29, 2010

ICICIdirect.com|Equity Research

Sector Report

Selective play

Global ScenarioGlobal steel production has grown at 2.7% CAGR in the last five yearswhile 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 a45.1% share in global steel production. Going forward, demand for drybulk commodities such as iron ore and coal is likely to remain strongresulting in demand for dry bulk carriers. Crude oil demand has grownat a CAGR of 0.2% over last five years. Crude oil demand is mainlydriven by developed economies with the US and Europe having 26.4%and 23.5% share, respectively. As a recovery in Europe and US remainsluggish, demand for crude and product carriers will be modest.

However, supply of vessels in both the dry bulk and tanker segment isexpected to outpace demand growth by a large margin and remains aserious concern for the industry. The present global order book isapproximately 62.8%, 43.1% and 51.4% of the existing dry bulk, crudetanker and product carrier fleet, respectively. Thus, supply of vessels ismore than capable of absorbing additional demand.

Dry bulk freight rates are expected to remain range bound. Import ofiron ore by China is likely to fluctuate on account ofdestocking/restocking of inventory resulting in volatility in freight rates.

Tanker and product carrier freight rates are likely to remain subdued onaccount of sluggish demand for crude oil and refined productscombined with large supply of new vessels. Although scrapping ofsingle hull crude and product carriers will reduce tonnage, the impactwill be insignificant.

Offshore companies are better placed as crude oil prices have sustainedabove $60/barrel in the last 15 months. This is expected to lead toincreased spend on exploration/drilling activities leading to higherutilisation 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. Themain reason is drying up of new orders while execution of the existingorder continues. Performance of shipyards is expected to peak in CY11on the back of order book execution. After this, it is expected to slideand remain muted for the next few years as capacity utilisation drops.

Domestic Scenario

The outlook and performance of the domestic shipping industry isclosely tied to the global shipping industry. Hence, under performanceof the global shipping industry is bound to have an adverse impact ondomestic companies as well. However, despite this, select domesticshipping companies are better placed on account of their inherent

strengths such as presence in different segments, long-term contractsand attractive valuations.

Shipping Industry Reportting Matrix

12E CMP TP Rating Upside

sar Shipping 112 112 Reduce 0%

Shipping 307 356 Buy 16%

ercator Lines 55 63 Buy 15%

I 162 162 Reduce 0%

run 42 36 Sell -14%

an Offshore 860 947 Buy 10%

rware Offshore 121 139 Buy 15%

eat Offshore 385 444 Buy 15%

BG Shipyard 244 241 Reduce -1%

arati Shipyard 223 258 Buy 16%

y Financials ( | crore)12E Rev. PAT EPS MCap. Debt EVsar Shipping 4,227 328 5.3 6,959 7508 14186

Shipping 3,687 692 45.4 4,675 5370 8302

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

I 4,005 250 5.9 6,861 2694 7083

run 750 -56 - 630 2741 3335

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

rware Offshore 231 42 17.7 288 503 780

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

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

ara ti Shipyard 1,143 179 64.9 615 2323 2722

12E PE EV/EBITDA P/BV ROCE RONW

sar Shipping 25.5 10.8 0.8 5.4 3.7

Shipping 6.8 5.8 0.7 8.7 10.4

ercator Lines 6.6 2.7 0.5 8.3 7.7

I 20.3 11.5 1.0 2.3 2.0

run - 8.6 0.9 3.8 -

an Offshore 4.4 5.9 1.2 13.2 26.2

rware Offshore 6.8 7.7 0.9 7.7 12.8

eat Offshore 5.0 4.1 0.9 12.8 18.0

BG Shipyard 5.1 5.6 0.8 15.1 15.9

arati Shipyard 3.4 9.8 0.5 8.1 15.1

harat [email protected]

ehangir [email protected]


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Shipping Sector Report

ICICIdirect.com|Equity ResearchPage 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 andoperates a fleet of 62 vessels, which is being expanded to 74 vessels byFY12. The company has a comfortable debt equity ratio and ~ | 1700crore of cash on its balance sheet, which would be useful for acquiringassets in the second hand market at distressed valuations. The initialpublic offer of its subsidiary Greatship Ltd is expected in Q3FY11. This willbe an added trigger. We recommend BUY with a price target of | 356.

Mercator LinesMercator Lines has a diversified fleet and operates tankers, bulk carriers,jack-up rigs and dredgers. The company owns and operates coal mines inIndonesia in addition to coal trading. Diverse revenue streams provide asignificant hedge to the company from a downturn in any particularsegment. Almost 70% of its dry bulk fleet is deployed on long-termcontracts, which reduce volatility in earnings. From Q3FY10, MercatorLines would be operating a floating production cum storage unit (FPSO),which is another new segment for the company. We expect the companyto scale up its FPSO fleet after gaining initial operating experience.Mercator Lines is likely to increase its dredging fleet once dredgingactivity picks up pace in India. Despite the above advantages, Mercator

Lines is trading at a significant discount and is likely to get re-rated. Werecommend BUY with a price target of | 63.


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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 afleet of 19 vessels consisting of 15 jack-up rigs, three drill ships and onefloating production unit. Currently, 14 of its assets are deployed on long-term contracts. The company has secured contracts for three otherassets, which will be deployed from Q3FY11. This has improved theearnings visibility and the EPS is expected to report a significantimprovement in FY12. Further, crude oil prices have sustained above$60/barrel in the last 15 months. This is likely to lead to increased spendtowards 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 theconcern has eased significantly. We recommend BUY with a price targetof | 947.

Great Offshore

Great Offshore is one of the largest offshore companies in India andoperates a fleet of 46 vessels consisting of 16 AHTS vessels, 12 offshoresupport vessels, 12 harbour tugs, three jack-up rigs and threeconstruction barges. A varied mix of a fleet coupled with long-termcontracts ensure steady revenue visibility for the company. The companyhas also ramped up its presence in the marine engineering andconstruction segment and has successfully executed contracts for ONGC.Post open offer, Bharati Shipyard has secured a 51% stake andmanagement control in Great Offshore. With the management team inplace the company is likely to increase its capex spend for fleetexpansion. The company is trading at a significant discount to itshistorical valuation level, which makes the stock an attractive investmentbet. Further, Bharati Shipyard, the current promoter, has acquired a 51%stake in the company at an average price of | 476 per share, whichprovides an added comfort. We recommend BUY on the stock with aprice target of | 444.


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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 coverageShipping

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

Offshore

Aban Offshore 50Garware Offshore 55Great Offshore 59

ShipbuildingABG Shipyard 63Bharati Shipyard 67

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

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

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

Charts and Trend 89

Glossary 94Rating Rationale 95


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Industry outlook

Demand outlook positive for dry bulk vessels but tanker demandsluggishDemand for dry bulk commodities such as iron ore has been strong overthe last year mainly on account of strong demand revival from China

(45.1% of global steel produced in China). Demand for dry bulkcommodities is likely to remain strong mainly driven by China and Indiaover the next couple of years resulting in demand for dry bulk carriers.

Crude oil demand is mainly driven by developed economies with the UShaving 26.4% share and Europe having 23.5% share of global demand.As the recovery in the Europe and US remain sluggish, demand revival inthe tanker and product carrier segment will be very gradual.

Supply overhang to make recovery long and painfulSupply overhang is serious and the single biggest concern for theindustry 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, crudetanker and product carrier fleet, respectively. The excess supply ofvessels is likely to absorb additional demand.

Freight rates likely to remain muted across segmentsDry bulk freight rates are expected to remain range bound. The rise indemand is likely to be negated by the large number of vessel additions tothe dry bulk fleet. The import of iron ore by China is likely to fluctuateleading 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 andrefined products combined with large new build supply of vessels.

Although scrapping of single hull vessels is expected to reduce thetonnage, the impact will be insignificant.


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Demand Dynamics

Dry Bulk Segment

Exhibit 1:Global steel production

851 904970

10721144

12471346 1329

1227

0

200

400

600

800

1000

1200

1400

1600

2001 2002 2003 2004 2005 2006 2007 2008 2009

Steel Production

mlntonnes

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 European

Union

CIS India North

America

Brazil ROW

China's domination


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

mlntonnes


Steel production in China has been steadily rising overthe last 1.5 years after dipping in H2CY08

Steel production was boosted by the stimulus packagedoled out by the Chinese government, which led to asharp rise in infrastructure spend

This led to a rise in import of iron ore leading to a surgein demand for dry bulk vessels

China commands 45.1% share in global steel production

The dominance of China has a significant impact on drybulk freight rates

As supply of vessels is inelastic, production andinventory levels in China would impact the movementsin BDI over the next few years

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


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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-10

mlntonnes


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

mlntonnes

Australia Brazil India South Africa Total


Exhibit 6:Coal demand growth

2349 24032595

2764 29043039 3184

3286 3278

0

500

1000

1500

2000

2500

3000

3500

2001 2002 2003 2004 2005 2006 2007 2008 2009

Coal Demand

mlntonnes


China has maintained a fairly stable inventory level overthe last one year with inventory level of ~ 70 million

tonnes

The inventory level can drop if it slows down its steelproduction

Import of iron ore by China in the past one year has beenstrong. This has resulted in strength in dry bulk freightrates

The rally in BDI last year can be attributed entirely toimports of iron ore by China

Global coal demand has grown at a CAGR of 3.5%

over the last five years


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Exhibit 7:Crude oil demand

55825617

5689

58325883

59225977 5968

5891

5300

5400

5500

5600

5700

5800

5900

6000

6100

2001 2002 2003 2004 2005 2006 2007 2008 2009

Crude Demand

mlntonnes


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 bookVessels DWT ('000)

Dry Bulk 6915 449688 62.8Crude Oil 2117 326587 43.1

Product Carriers 1508 51706 51.4

LPG 516 13298 25.9

Containers 4623 178489 39.1

Present Fleet Order book as %

of DWT


The global dry bulk order book is 62.8% of the existing dry bulk fleet.Exceptionally high freight rates in 2007 and 2008 encouraged mostshipping companies to expand their capacities. The global crude andproduct carrier order book is 43.1% and 51.4% of the crude and producttanker 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 overhangis 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 andrefined products. Due to the sluggish growth in the USand Europe the demand has also remained very tepid


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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

Index

BDI BCI BPI


Dry bulk freight rates are expected to remain muted and range boundover the next couple of years. The rise in demand is likely to be negatedby a large number of vessel additions to dry bulk fleet. Import of iron oreby China is likely to remain strong. However, fluctuations in iron oreinventory 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 declineand bottomed out in mid CY09 with VLCC freight rates dropping to ~$4500 per day. Tanker freight rates reported a sign of improvement in thesecond half of CY09 and VLCC rates recovered to ~ $35000 per day.However, the recovery was short lived and rates corrected once againand 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 fromthe US and Europe. However, in the long-term, tanker and product carrier freight rates are likely to remain suppressed over the next couple ofyears. The reason for the bleak outlook is the sluggish demand for crude

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


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

LPG carriers

LPG freight rates have remained weak over the last one year. The LPGcarrier order book is 25.9% of the present global LPG fleet. LPG freightrates are expected to remain subdued on account of new vesseladditions.

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

$/day


Liner business

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

Dredging business

The dredging business has been very subdued on account of a halt in seareclamation projects in the Gulf region, which has reduced demand for

dredgers. This has led to a drop in utilisation levels along with correctionin day rates for dredgers. Day rates and utilisation levels are likely to posta gradual recovery.

G freight rates are likely to be subdued on account of new

ssel supply

ny drop in container volumes to the US and Europe could

ad to a steep correction in freight rates on account of

pply overhang


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Offshore business

Exhibit 13:Crude oil prices

0

20

40

60

80

100120

140

160

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

$/barrel


The International Energy Agency (IEA) has estimated that global crude oildemand will rise from 84.9 million barrels in 2010 to 86.2 million barrels in2011. This would lead to increased spend on offshore drilling/explorationactivities 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

tilisation

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 Obamaadministration, which suspended oil & gas drilling in waters deeper than500 feet continues and has had an adverse effect on utilisation levels fordeep water rigs globally. However, in the last couple of months, offshoredrilling activities have gained traction on account of new offshore projectsin South America, West Africa and Asia Pacific regions. We also expectdeep offshore drilling activities to once again resume in the Gulf ofMexico region post November although with tighter security measuresand regulations.

We are very optimistic on the outlook for offshore companies as crude oilprices have sustained above $60/barrel for the last 15 months. This, in

turn, is expected to lead to increased spend on exploration/drillingactivities and higher utilisation levels for offshore drilling rigs and offshoresupport 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


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Port & Terminal Services Business

Stable cargo traffic at major ports

Exhibit 15:Monthly cargo traffic handled at major ports

45.443.5

45.442.5

46.7 48.249.1

51.3

45.7

52.0

46.6 47.844.8

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

Milliontonnes


Higher utilisation due to capacity constraints

Exhibit 16:Utilisation levels at major ports over the yearsCapacity 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 daysPort 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 thenext couple of years as capacity utilisation levels increase for new portprojects and existing ports continue to maintain high utilisation levels dueto 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


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Shipbuilding business

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

Shipbuilding companies would continue to report satisfactory results overthe next couple of years as order execution picks up pace and deliveriescontinue. We expect the performance of shipyards to peak in CY11. Afterthis it is expected to remain muted for a few years as utilisation levelsdrop 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

Index


Exhibit 19:New building ordersDry 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 Class

Tankers 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 15.6

SUEZMAX 150,000 72.9 61.8 4.1 4.7 5.7 4.7 2.0 1.6

AFRAMAX 105,000 58.6 47.0 1.0 0.0 14.9 11.9 16.0 16.6

PANAMX 70,000 48.0 39.0 6.7 2.6 9.1 14.7 6.2 4.0

MR TANKERS 47,000 37.5 28.0 -1.3 0.0 10.3 7.7 -1.3 -0.7

Bulk 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 11.8

SUPRAMAX 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 ordersover the last few months

New build asset prices of tankers as well as dry bulkcarriers have recovered from their lows

The second-hand market has also become active withthe recovery in freight rates


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Ship breaking business

The ship breaking business has been on an upswing for the last two yearsand demolitions are likely to continue for a few more years. Phasing outof 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 acrossasset categories resulting in low freight rates. This, in turn, would lead toscrapping of old vessels.

Exhibit 21:Leading countries involved in demolition workIndia China Bangladesh Pakistan All Others Total Units

Jan-10 56 11 12 4 2 85

Feb-10 35 7 10 5 10 67

Mar-10 45 29 37 17 39 167

Apr-10 57 13 14 16 44 144

May-10 57 13 8 16 44 138

Jun-10 15 24 3 5 20 67

Jul-10 36 20 5 10 33 104Aug-10 32 14 2 8 19 75

Total 333 131 91 81 211 847 Source: Bloomberg, ICICIdirect.com Research

Exhibit 22:Demolition statistics by vessel typeDry 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 pricesDWT LDT Scrap rate $/LDT

Jan-10 3940656 908529 355

Feb-10 2622021 643697 345

Mar-10 4623534 1017093 372

Apr-10 2621450 653917 442May-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 increaseparticularly for dry bulk (up from nine to 29) andtanker segment (up from three to 21) with 82 vesselsbeing scrapped in July 2010 as against 66 in theprevious month

Stable scrap prices have encouraged demolition ofvessels


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Risks and Concerns

Sluggish global recovery and resulting in subdued demand

The global economy, especially of developed countries, has managed toemerge out of the recession on account of some extraordinary measures

initiated by the US and Europe to infuse liquidity by resorting toexpansionary monetary, liberal fiscal policy and lastly quantitative easing.The International Monetary Fund (IMF) has revised upwards its GDPgrowth forecasts for CY10 and CY11. However, despite the abovemeasures, GDP growth in developed economies remains tentative and adrop in growth rates could adversely affect the shipping sector. TheChinese government has also initiated steps to slow down the growthpace especially in the overheated housing market. China has been themain driver of dry bulk shipping volumes. The early recovery in BDI canlargely be attributed to China. A slowdown in the Chinese economy couldlead to weakness especially in dry bulk freight rates.

Supply overhang

Supply overhang is serious and the single biggest concern for theindustry over the next two years. At present, the global order book isapproximately 62.8%, 43.1% and 51.4% of the existing dry bulk, crudetanker and product carrier fleet, respectively. A large supply glut ofvessels 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 forthe 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 productcarrier freight rates are likely to remain suppressed over the next coupleof years. The reason for the bleak outlook is sluggish demand for crudeoil and refined products combined with large new build supply of vessels.However, if freight rates remain weak for a prolonged period of time it canaccentuate 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 toscrap 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 workslowed down and there were significant slippages in new deliveries inCY09. With improvement in liquidity, the amount of slippages is expectedto reduce, going forward. This could lead to pressure on freight rates asadditional 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


16/95



Indian shipping industry Key parameters

Indian fleet size

Exhibit 24:Domestic fleet - Number of vessels %

Global

94%

Indian

6%


Exhibit 25:Domestic fleet Tonnage %Indian

1%

Global

99%


India has 6% share in terms of number of vessels

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


17/95



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 crudetankers, 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


18/95



Exhibit 28:Shipbuilding order book size (| Crore)

12470

8160

5076

2560

0 3000 6000 9000 12000

Gross order book (FY10)

Order book pending

execution (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


19/95



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


20/95



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


21/95



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


22/95



Rating scale

We have constructed a rating scale based on a few key parameters toarrive 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 RONW

Interest

Coverage

Promoter

Holding %

Essar Shipping 0.8 9.9 27.0 1.0 3.7 1.4 83.7

G.E Shipping 0.7 5.7 6.6 0.7 10.4 3.0 30.0

Mercator Lines 0.4 2.5 6.1 1.0 7.2 2.5 38.0

SCI 1.0 12.8 27.6 0.9 0.8 0.9 80.1

Varun Shipping 1.0 8.7 -11.7 3.3 -8.2 0.7 42.2

Aban Offshore 1.1 6.0 4.4 3.3 26.3 2.1 53.1

Garware Offshore 1.0 7.9 7.5 2.0 12.8 2.1 30.6

Great Offshore 1.0 4.2 5.3 1.2 18.0 3.7 49.7

ABG Shipyard 0.8 5.6 5.1 1.3 15.9 3.2 57.1

Bharati Shipyard 0.5 9.8 3.5 1.7 15.1 1.3 41.8Source:ICICIdirect.com Research

Exhibit 34:Rank based on above parameters

Company

P/BV

Rank

EV/EBITDA

Rank

PE

Rank D/E Rank

RONW

Rank

Interest

Coverage

Rank

Promoter

Holding %

Essar Shipping 6 9 8 4 8 7 1

G.E Shipping 3 4 6 1 6 3 10

Mercator Lines 1 1 5 3 7 4 8

SCI 9 10 9 2 9 9 2

Varun Shipping 8 7 10 10 10 10 6

Aban Offshore 10 5 2 9 1 5 4

Garware Offshore 5 6 7 8 5 6 9

Great Offshore 7 2 4 5 2 1 5ABG Shipyard 5 3 3 6 3 2 3

Bharati Shipyard 2 8 1 7 4 8 7Source:ICICIdirect.com Research

Exhibit 35:Weightage assigned to each parameter

Company

P/BV

Weightage

EV/EBITDA

Weightage

PE

Weightage

D/E

Weightage

RONW

Weightage

Interest

Coverage

Weightage

Promoter

Holding %

Weightage

Essar 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 widefluctuations 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


23/95



Exhibit 36:Final rank of companies based on above parameters

Weighted Average

Ranking

Final

Ranking

Essar Shipping 6.4 8

G.E Shipping 3.9 2

Mercator Lines 3.4 1

SCI 7.4 9

Varun Shipping 8.9 10

Aban Offshore 6.1 6

Garware Offshore 6.3 7

Great Offshore 4.1 4

ABG Shipyard 4.0 3

Bharati Shipyard 5.0 5Source: 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 especiallyattractive 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


24/95



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 5.4

G.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 8.7

Mercator 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


SCI 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


Varun 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 - 3.8

Aban 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


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


Great 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 15.1

Bharati 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



25/95



Global Valuation (Shipping)

CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12E

Dry 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 6.9

DryShips* USA 0.4 0.4 0.4 5.0 4.1 3.4 10.5 8.5 7.7 5.3 9.0 8.3

Genco Shipping* USA 0.5 0.5 0.5 4.0 5.9 10.0 5.9 6.2 8.1 13.4 7.8 3.3

Mercator Lines# India 0.6 0.5 0.5 24.9 16.3 6.6 5.2 4.2 2.7 2.3 3.4 7.7

Tanker

Frontline Ltd* Norway 2.6 2.5 2.5 9.9 10.0 10.0 8.4 8.2 8.2 28.2 22.8 24.5

Overseas Shipholding Group* USA 0.6 0.6 0.5 - 15.1 17.0 12.1 7.8 7.9 - 2.3 3.1

Teekay Corp.* USA 1.0 1.0 0.9 - 19.5 16.7 9.5 8.6 8.4 - 5.4 5.5

GE Shipping# India 0.8 0.8 0.7 9.1 8.4 6.8 8.7 7.4 5.8 9.0 9.1 10.4

SCI# India 1.1 1.0 1.0 18.2 15.4 20.3 13.4 13.6 11.5 3.5 3.3 2.0

LPG/LNG

BW 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 9.8

Varun Shipping# India 0.8 0.8 0.9 50.2 - - 13.9 12.8 8.6 1.5 - -Offshore

Diamond Offshore* USA 2.3 2.0 1.9 9.0 9.2 11.0 5.1 5.2 5.8 26.8 24.4 19.4

ENSCO* USA 1.1 1.0 0.9 12.4 10.6 9.0 6.6 5.6 4.9 9.0 10.4 11.5

Hercules 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 10.6

Aban Offshore# India 1.7 1.5 1.2 12.0 11.7 4.4 8.4 6.8 5.9 14.3 13.1 26.2

Garware Offshore# India 1.1 1.0 0.9 7.0 9.8 6.8 7.2 9.3 7.7 15.4 10.1 12.8

Great Offshore# India 1.3 1.1 0.9 7.1 6.5 5.0 6.8 6.0 4.1 18.1 16.7 18.0

Shipbuilding

Daewoo 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 11.0

Hyundai 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 15.6

Keppel 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 14.3

Samsung 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 14.3

Sembcorp Marine* Singapore 3.6 3.3 2.9 12.8 15.3 16.1 7.2 8.5 8.7 30.9 22.6 19.3

ABG Shipyard# India 1.1 1.0 0.8 5.7 5.8 5.1 7.0 6.0 5.6 19.6 16.4 15.9

Bharati Shipyard# India 0.7 0.6 0.5 4.4 3.2 3.4 8.6 8.3 9.8 16.6 19.1 15.1

Port and Terminal

Dubai 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 6.2

Mundra Port* India 9.3 7.6 6.0 46.4 35.5 23.1 35.5 26.3 18.7 20.2 22.9 27.5

Conglomerate

A 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 13.2

COSCO Group* China 1.6 1.5 1.4 15.1 13.7 10.6 10.0 9.4 8.1 11.0 10.8 12.5

Kawasaki Kisen*# Japan 0.9 0.7 0.7 - 7.6 7.2 - 6.3 5.8 - 10.7 9.8

Mitsui 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 10.1

Nippon Yusen*# Japan 0.9 0.8 0.8 - 8.3 8.2 17.3 6.4 6.2 - 10.0 10.0

ESPLL# 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)


26/95



Management view

Demand situation

GE Shipping

On tankers, there seem to be some signs of demand coming back in thelast few months. We have seen storage going down between January andJune. Also, the tanker phase out of the single hull is likely to happen bythe end of 2010 or early 2011. Those are a few positives for the tankerbusiness. However, everything is dependent on the state of the globaleconomy and how the western economy recovers.

On the dry bulk side, there is still a worry mainly on the China story. Wedo not know which way China would move i.e. whether it is going tocontinue growing at a very hectic pace that will absorb most of dry bulktonnage. Also, you have got Europe, which is a very large consumer ofsteel 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 isexpected to show positive growth, going forward. The sustaining GDPgrowth rates of China and India augur well for maintaining the demandside, with the recovery in the European area adding more positivesentiments. India related cargo movements should show substantialgrowth prospects, with the upcoming power plants needing verysubstantial increase in coal imports. The growth in the refining sector willalso result in increased the imports of crude oil. At some point of time thiswill also entail export of products from the more modern refineries inIndia. Project cargo movement and handling is another area that will seegood prospects in the next few years. Exim trade in India is expected torise in the next three years to a level that will require the port handling facilities in India to double. The tonne-mile demand for variouscommodities is also rising with long haul movements of crude oil as wellas iron ore, etc. All these factors will result in positive growth in demandfor shipping services.Great Offshore

While there are spare assets available in case of rigs in certain marketsthe 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 November2010 when the moratorium ends

Winter demand and requirement of crude oil in the westernhemisphere

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 inthe cargo sector but it is picking up in offshore and defence sector.


27/95



Supply situation

GE Shipping

The order book in the bulk carrier market is much higher than in tankeras it appears on paper. The order book is somewhere around 55-60% ofthe total fleet. We are continuously having slippages of about 40-50%

The tanker order book is between 20-30% and is smaller than the drybulk order book that gives a little bit more comfort on the tankerbusiness.

Essar Shipping

The current order book in various shipyards of Japan, Korea and Chinaindicate substantial number of new building deliveries in 2010 and 2011.While there was anticipation of a large number of cancellationsconsequent to the global financial crisis in 2008, actual cancellations have

been lesser than anticipated. There have been many deliveriesrescheduled or ship types converted. The support lent by the governmentespecially in China and Korea in terms of funding support have helped theshipyards to continue with their ship construction activities. The lendershave also shown positive sentiments in the recent past. Hence, the build-up of tonnage is likely to continue. The phenomenon of VLCCs beingused for storage by traders has seen a significant decline in the last fewweeks. This would obviously result in these ships coming back intonormal play, adding to the number of ships available for chartering. Whilescrapping of single hull tankers will provide some relief, the impact oflower scrap rates per tonne will also have an effect on moderatingscrapping activities. However, the excess tonnage position in the near

term is likely to put pressure on freight rates. This, in turn, may induceowners 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 islikely to be different. If there are slippages, this finally means it will resultin a delivery. It is cancellation, which will only result into non-delivery.There are going to be some slippages. Last year, the slippages were quitelarge. 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 alreadyslated in the rig as well as OSV segments, they will get impacted byprobable delays by the envisaged slowdown and financial constraints onpart of shipyard (first generation) and reluctance on part of OEM suppliersto extend credit as well as first generation clients


28/95



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 effectof downward pressure on freight rates. If the recovery in the westernhemisphere is sustained and there are no more surprises from the Eurozone, then freight sentiments are bound to pick up. Consumer sentimentsand consumer spending in the US will, of course, have a substantialimpact.

Mercator Lines

Going forward, the environment for shipping continues to remainchallenging, especially in the tanker trade. The dry bulk trade has been abit surprising for all of us. It is far better than what we, the shippingfraternity as a whole, were expecting and what the market was expecting.

The tanker environment continues to remain challenging. You see, whathappens is that unless there is a recovery in the economic situation, thechances of the shipping trade or shipping, improvement will be alwayschallenging. On e has to appreciate that the major consumption of oilproducts continues to be in the US and Europe. US is roughly 25% ofworld volumes. Hence, there has been a huge surge in demand fromChina and India but relative to the US our consumption is very low. So,the driver of demand continues to remain the US. Unless theseeconomies recover, personally I feel the environment for shipping willcontinue 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 forfour or five tenders in India. All this work will start post-monsoon becauseduring 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 Septemberand 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 theE&P plans, oil security aspects and the extent of energy intensity.Interestingly, the usage of alternative/renewal fuel is insufficient to meetthe increased demand for hydrocarbons. Hence, demand for oil beingdirectly linked to GDP growth would continue.Bharati Shipyard

Most of the new demand will be from the offshore oil sector anddefence. We do not see much demand coming from the cargo sector.


29/95


30/95



WHATS CHANGED

PRICE TARGET .............................................................................................. Unchanged

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


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

Diversified playEssar Shipping Ports and Logistics Ltd (Essar Shipping) offers a play onthe 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 theports and terminal business with the Vadinar (46 MTPA wet cargo) portterminal and Hazira (30 MTPA dry cargo) port. Over the next threeyears, the company has chalked out plans to further increase its portcapacity to 158 MTPA with the establishment of new ports andexpansion of existing port operations.

Essar Shipping is also scaling up its presence in the offshore space andwill receive delivery of two jack-up rigs by FY12. The company currentlyoperates one semi submersible rig and 12 onshore rigs. It is alsoacquiring 12 dry bulk vessels over the next two years to add to its fleetof 19 dry bulk vessels. In the last couple of years, Essar Shipping has

been rapidly expanding its scope of operations across segments andhas committed to substantial capex. The benefits from this would bevisible 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 secondlargest segment for the company. The operating margin is expected toexpand from 35% in FY10 to 39% in FY12 as the share from the ports andterminals business (high margin business) increases. PAT is alsoexpected to rise from | 93.8 crore in FY10 to | 328.5 crore in FY12.

ValuationWe have valued each division of ESPLL on a DCF basis and arrived at ourSOTP price target of |112.

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

Net Sales 676.1 671.2 800.6 851.6 795.1

EBITDA 275.6 236.4 267.2 269.6 240.8

EBITDA Margin (%) 40.8 35.2 33.4 31.7 30.3

Depreciation 116.6 107.1 116.7 106.6 116.8

Interest 135.1 128.6 128.8 144.9 158.2

Reported PAT 6.1 2.3 21.9 63.5 39.5

EPS (`) 0.1 0.0 0.4 1.0 0.6


Essar Shipping (ESSSHI)| 113

ing matrix

ng : Reduceget : | 112

get Period : 12 months

ential Upside : -1%

y Financials

r) FY09 FY10 FY11E FY12E

Sales 2574.2 2999.4 3222.0 4227.4

TDA 834.5 1048.7 1259.8 1656.8

Profit 77.2 93.8 167.3 328.5

uation summary

FY09 FY10 FY11E FY12E

(x) 3.1 74.2 44.5 25.5

get PE (x) 89.0 73.3 44.0 25.2

to EBITDA (x) 16.3 13.5 13.4 10.8

ce to book (x) 0.9 0.8 0.8 0.8

NW (%) 1.0 1.1 2.3 3.7CE (%) 3.1 3.7 4.3 5.4

ck data

rket Cap. (| cr) 6959

bt( FY10E) (| cr) 7508

sh (FY10E) (| cr) 281

(| cr) 14186

week H/L (| cr) 136 / 54

uity capital (| cr) 615.8

e value | 10

Holding (%) 0.2

Holding (%) 8.3

ce movement

3000

3500

4000

4500

5000

5500

6000

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

30

60

90

120

150

NIFTY Essar Shipping (RHS)


31/95



Exhibit 38:Revenue expected to steadily rise

1842.4

2574.2

2999.43222.0

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

32

35

39 39

21

0

200

400

600

800

1000

1200

1400

1600

1800


|cr

15

20

25

30

35

40

45

%

EBITDA OPM


Exhibit 40:PAT, net profit margin to improve277.4

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


32/95



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 Rig

Noofvessels


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)


33/95



Essar Shipping offers a diversified play in the Indian shipping, logisticsand ports business. In the last few years, the company has not onlyconsolidated its position in its traditional shipping and logistics businessbut has also ramped up its presence in the ports and terminal businesswith the Vadinar (46 MTPA wet cargo) port terminal and Hazira (30 MTPAdry cargo) port. Over the next three years, the company has chalked out

plans to further increase its port capacity to 158 MTPA with theestablishment of new ports and expansion of existing port operations.Further, the company will also receive the delivery of two new jack-uprigs over the next 1.5 years, thereby increasing its presence in theoffshore oilfield business.

We have valued each division of ESPLL on a DCF basis and arrived at ourSOTP price target of | 112.Exhibit 44:Valuation parametersBusiness DCF/|Sea and Surface Transport Business 23Oilfield Services Business 21Ports & TerminalVOTL & VPTL 18

Hazira Bulk Terminal 33

Salaya Bulk Terminal 11

Paradip CQ3 Berth 3

Paradip Coal Berth 3

Total Value 68Total SOTP Valuation 112


Exhibit 45:ValuationSales 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 3.7

FY11E 3222.0 7.4 2.5 66.8 44.5 13.4 2.3 4.3

FY12E 4227.4 31.2 5.3 110.0 25.5 10.8 3.7 5.4



34/95



WHATS CHANGEDPRICE TARGET ............................................................. Changed from Rs 334 to Rs 356




Subsidiary IPO to lead to value unlockingGreat Eastern Shipping Ltd (GE Shipping) is one of the largest shippingcompanies in India operating a fleet of 62 shipping and offshore vessels.The company has the best financials in the shipping space. Its underleveraged balance sheet would enable it to acquire additional shipping

assets in the second-hand market. Due to the challenging businessenvironment, the operating performance of the company could remainvolatile in the near term. However, the company would benefitimmensely as the shipping cycle turns around in the next couple ofyears. Greatship Ltd, a subsidiary company of GE Shipping, has filed itsDRHP and is expected to get listed in Q3FY11. The offshore business ofGE Shipping is housed under its subsidiary Greatship Ltd. Its listing willlead 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 to74 vessels in FY12. Scaling up of the fleet along with improvement intanker freight rates is likely to result in an improvement in the operatingperformance. We expect the topline to report a steady rise over the nexttwo years on account of new vessel additions accompanied by amarginal rise in tanker freight rates. GE Shipping is likely to report anoperating margin expansion along with a rise in bottomline.

ValuationWe have valued GE on multiple valuation parameters and recommendBUY with a price target of | 356.


Net Sales 720.8 662.7 706.3 766.7 644.3

EBITDA 256.7 168.4 199.3 335.1 261.4

EBITDA Margin (%) 35.6 25.4 28.2 43.7 40.6

Depreciation 96.1 107.8 109.3 111.3 104.7

Interest 44.6 70.7 50.5 46.4 93.1

Reported PAT 154.2 108.5 94.4 155.7 171.8

EPS (`) 10.1 7.1 6.2 10.2 11.3


GE Shipping (GESHIP)| 307

ting matrix

ing : Buyget : | 356


ential Upside : 16 %

y Financials

cr) FY09 FY10 FY11E FY12E

t Sales 3800.8 2856.5 3194.7 3687.5

ITDA 1662.1 959.5 1158.1 1475.0

t Profit 1407.6 512.8 558.5 691.9

luation summary


(x) 3.3 9.1 8.4 6.8

rget PE (x) 3.6 9.9 9.1 7.4

to EBITDA(x) 4.0 8.7 7.4 5.8

ce to book (x) 0.9 0.8 0.8 0.7NW (%) 26.9 9.0 9.1 10.4

CE (%) 12.7 4.8 6.5 8.7

ock data

arket Cap. (| cr) 4675

bt( FY10E) (| cr) 5370

sh (FY10E) (| cr) 1743

(| cr) 8302

week H/L (| cr) 345 / 227


ce value | 10

F Holding (%) 12.7

Holding (%) 12.6 ce movement

000

500

4000

4500

5000

5500

6000

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

200

250

300

350

NIFTY Great Eastern Shipping Company Ltd


35/95



Exhibit 47:Revenue to gain traction

3130.8

3800.8

2856.53194.7

3687.5

0

500

1000

15002000

2500

3000

3500

4000


|c

r

Revenue


Exhibit 48:Operating margin expected to steadily improve

1385.6

1662.1

959.5

1158.1

1475.0

44 40

36

34

44

0

200

400

600

800

1000

1200

1400

1600

1800


|cr

0

5

10

15

20

25

30

35

40

45

50

%

EBITDA OPM


Exhibit 49:PAT expected to rise significantly in FY121453.6 1407.6

512.8 558.5691.9

46

37

18 17 19

0

200400

600

800

1000

1200

1400

1600


|cr

0

10

20

30

40

50

%

PAT NPM



36/95



Exhibit 50:Revenue days Register a drop3374

3315

3200

3300

3400

Q4FY10 Q1FY11Revunue Days


Exhibit 51:Average TCE $ per day

29322

17920

2396320444

15485

24484

0

5000

10000

15000

20000

25000

30000

35000

Crude Product Dry Bulk

TCE$/day

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.

ofvessels

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 bulkfreight rates rose by 2.2% over the same period


37/95


38/95



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 74vessels in FY12. Scaling up of fleet along with improvement in tankerfreight rates is likely to result in an improvement in performance over thenext one year. We have valued GE on multiple valuation parameters andrecommend BUY with a price target of | 356.

Exhibit 55:Valuation parametersValuation 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 (|) 356Current market price (|) 307

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

Exhibit 56:ValuationSales 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 10.0

FY11E 3553.0 5.8 87.9 22.8 11.7 6.8 13.1 11.9

FY12E 3679.8 3.6 199.7 127.2 4.4 5.9 26.2 13.2 Source: Company, ICICIdirect.com Research


39/95



WHATS CHANGED

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




Re-rating candidateIn the last few years, Mercator Lines (MLL) has not only reported asteady growth in its core business but has also diversified into relatedareas. This has not only enabled MLL to scale up its business

significantly but has also reduced the exposure to the volatile shippingbusiness. MLL operates dry bulk carriers, crude and product carriers,offshore jack-up rig and dredgers. The company also owns and operatescoal mines in Indonesia. In addition, it also carries out significantquantity of coal trading. MLL is also entering into new business areassuch as floating production cum storage unit, which would getoperational in FY11. It is well placed to ride the volatility of the shippingbusiness on account of inherent advantages such as diversified revenuestream, presence across segments, long-term charter contracts,comfortable debt-equity ratio and strong management capability. MLLwould be the most likely outperformer among shipping stocks in case ofan upturn in the shipping cycle. The stock is trading at half its FY10 BVof | 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 arelikely to be volatile on account of wide fluctuations in freight rates. Amajority of dry bulk revenues is derived from long-term contracts, whichinsulate the company from volatile freight rates. However, its tanker fleetis deployed on medium-term contracts ranging from 6-12 months. Thiscan drag down the performance as crude and product carrier rates havebeen extremely subdued. However, the company is ramping up its coaltrading and mining activities, which would result in an improvement inthe topline and bottomline in FY12.

ValuationWe have valued MLL on a P/BV and P/E multiple basis to arrive at a pricetarget of | 63 and recommend BUY ratingon the stock.


Net Sales 447.3 406.6 472.8 482.0 599.3

EBITDA 223.9 140.1 141.2 139.7 198.2

EBITDA Margin (%) 50.1 34.5 29.9 29.0 33.1

Depreciation 88.3 92.5 84.9 75.2 76.0

Interest 56.3 48.4 48.7 52.4 48.8

Reported PAT 44.5 -1.8 1.0 9.6 61.7EPS (`) 1.9 - 0.0 0.4 2.6


Mercator Lines (MERLIN)| 55

ting matrix

ing : Buyget : | 63


ential Upside : 15 %

y Financials

cr) FY09 FY10 FY11E FY12E

t Sales 2210.5 1808.7 2163.5 2576.9

ITDA 949.3 644.9 671.3 801.3

t Profit 376.5 53.3 81.5 200.5

luation summary


(x) 3.4 24.9 16.3 6.6

rget PE (x) 3.5 25.3 16.6 6.7

to EBITDA(x) 3.5 5.2 4.2 2.7

ce to book (x) 0.6 0.6 0.5 0.5

NW (%) 16.5 2.3 3.4 7.7CE (%) 12.6 5.3 6.1 8.3

ock data

arket Cap. (| cr) 1297

bt( FY10E) (| cr) 3017

sh (FY10E) (| cr) 956

(| cr) 3358

week H/L (| cr) 72 / 42


ce value | 1

F Holding (%) 3.9

Holding (%) 17.3

ce movement

4000

4500

5000

5500

6000

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

0

20

40

60

80

NIFTY Mercator L ines L td (RHS)


40/95


41/95



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 change38.0

17.3

5.0

39.7

35.0

8.6

18.4

38.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

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

factors leading to the correction in the stock price


42/95



MLL reported a sharp improvement in its operating performance inQ1FY11 with the dry bulk division performing reasonably well. Thecompany has also ramped up its coal business (mining as well astrading), which would increasingly contribute to its topline.

Freight rates are expected to be volatile over the next one year, whichcould lead to fluctuations in the operating performance of the company,going ahead. However, MLL is well placed to ride the volatility of theshipping business on account of inherent advantages such as adiversified revenue stream, presence across segments, long-term chartercontracts, comfortable debt-equity ratio and strong managementcapability.

MLL is trading at a significant discount to its global peers and almost at0.5x its FY10 book value, which provides an appropriate entry point forlong-term investors. We have valued MLL on a P/BV and P/E basis toarrive at a price target of | 63 and recommend BUY ratingon the stock.Exhibit 64:Valuation parametersValuation b ased 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 (|) 63Current market price (|) 55

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

Exhibit 65:ValuationSales 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 5.3

FY11E 2163.5 19.6 3.4 53.0 16.3 4.2 3.4 6.1

FY12E 2576.9 19.1 8.3 145.9 6.6 2.7 7.7 8.3 Source: Company, ICICIdirect.com Research


43/95



WHATS CHANGED

PRICE TARGET .............................................................................................. Unchanged




Disinvestment playSCI is trading at a significant premium to its domestic peers. Thepremium valuation is justified on account of it being the largestshipping company in India and a Navratna PSU. In addition, the

company has insignificant debt, which will enable it to leverage itsbalance sheet and borrow in the international market at competitiveinterest rates. In addition, the follow on public offer (FPO) of SCI hasrevived investor interest in the stock.

The average age of SCIs fleet is 18.1 years, which is twice the age ofIndian shipping companies. In order to replace its ageing fleet, SCI hascommitted to incur capex of ~| 8000 crore over the next two years.Despite the improvement in topline and operating margin, higherdepreciation and interest costs

ShippingSectorReport-29 Sep 2010

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Transcript of ShippingSectorReport-29 Sep 2010