Varun Shipping Ltd. - KRC Stock Recommendation
Varun Shipping Ltd.
Q3FY08 Result Update
Key Data
CMP Rs 73.7
Date April 11th 2008
Sector Shipping
Face Value Rs.10
BSE Code 500465
52 Week H/L Rs 110.5/ 52.5
Market Cap Rs 1105.5 Cr
Investment Rationale
Capacity addition to drive growth
Company plans to spend capex of $ 400 mn in 2008 mainly for expansion and modernization of its fleet. VSCL has acquired its 12th LPG carrier last year and its 5th Anchor Handling and Towing Supply Vessel (AHTS). It will be the most powerful AHTS vessel under Indian flag.
Presence in Offshore business to boost margins.
VSCL offers 2 AHTS for charter to oil and gas companies operating offshore last year. Both AHTS are deployed on long term charters with ONGC. Contribution from offshore business has been significant and this has been witnessed in the results this quarter. The 5th AHTS will be used for deep sea oil exploration activity going in areas like North Sea, KG basin and Atlantic Ocean off the coasts of Nigeria, Brazil and Mexico.
LPG to drive growth.
Being a clean fuel, LPG is preferred over other fuels and hence the demand for the same is ever increasing. VSCL has transported approximately 70% of all LPG cargoes imported in the country by the PSU sector and 81 percent of the total LPG tonnage (on DWT basis) under Indian flag.. Hence the contribution is going to be significant with LPG demand rising at a CAGR of 3.5-4 percent and low volatility of freight rates.
Key Developments
Acquired most powerful AHTS vessel under Indian flag
Varun Shipping Company Ltd has announced that the Company has taken delivery of third Anchor Handling and Towing Supply Vessel (AHTS), which is the most powerful AHTS vessel under Indian flag, with BHP of 16,085. This is a specialized vessel which is used for deep sea oil exploration activity going on in areas like North Sea, KG basin and Atlantic Ocean off the coasts of Nigeria, Brazil and Mexico. With this acquisition, the Company will own a diversified fleet of 21 vessels comprising of 12 LPG carriers, 3 double hull aframax crude tankers, 5 anchor handling towing and supply vessels and 1 product tanker. The acquisition was financed partly out of company’s internal resources and partly out of long term loans from State Bank of India and Bank of India, London
Huge capex plan lined up
Varun Shipping Co Ltd plans to spend $400 million during 2008 to expand its fleet, with focus on the offshore sector as well as tankers and gas carriers; Varun Shipping plans to fund its capital expenditure through a mix of internal accruals and debt.
Financial Performance
Top line up by 40.7 percent
During the quarter, Company reported 40.7 percent yoy and 14.15 percent qoq increase in revenue to Rs 229.95 crore. The increase in top line was mainly on account of addition of two vessels in the offshore services segment and the contribution of this segment to the company’s revenue increased to 19.2% in the December ’07 quarter, compared to 1.9 percent during the corresponding period in the previous year. The LPG segment accounted for almost 80% of its revenue in FY07, but this contribution fell to 67.3 percent in the December ’07 quarter. This augurs well for the company’s profitability as margins in the offshore business are better than that in LPG transportation.
Valuations
At CMP of Rs. 70, Varun Shipping is quoting at P/E multiple of 3.8x based on its Dec’07 TTM earnings basis. The stock currently quotes at EV/EBITDA of 4.5x and Mcap to sales of 1.3x. The company is expected to grow on account of fleet expansion, higher freight rates, increased LPG demand and higher margins from offshore business. We believe VSL can command premium to other shipping companies with more stability in earnings and leadership position in LPG Segment. We recommend a Strong Buy on the stock
Click Here for In-depth Varun Shipping Ltd. research report by KR Choksey, company profile along with stock recommendations, Varun Shipping Ltd. target price and for making informed investment decisions.
Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.
1102, Stock Exchange Tower, Dalal Street, Mumbai 400 001
Phone: 91-22-56338050 / 66965555. Fax: 5633 8060
Members: BSE & NSE
www.krchoksey.com
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