Shipping Corporation of India - A Brief Stock Analysis Report

Market Snapshot of Shipping Corporation of India

A. Company Performance

Profitability Analysis:

(Rs. Crore/ Rs. 10 million)	SCI  (Year ending 31st March 2016)	Great Eastern (Year ending 31st March 2016)
Net Sales	4,247.98	3,804.47
All expenses other than finance cost, depreciation	3,151.32	1969.71
EBDITA (Operating Profits)	1,096.66	1834.76
EBDITA (Operating Profits) %	26.03%	48.23%
Depreciation	610.72	674.63
EBITA	485.94	1160.13
EBITA %	11.53%	30.49%
Interest	210.89	284.64
Interest Cost to Sales - %	4.96%	7.48%
EBT	275.05	875.49
EBT %	6.53%	23.01%
Net Non-Operating Income	160.89	274.04
FINAL PBT	435.94	1149.53
FINAL PBT %	10.35%	30.22%
Income Tax	46.54	110.13
PAT	389.40	1039.40
PAT %	9.24%	27.32

Highlights:

1.     It is quite obvious that even though the revenues of both the companies are more or less same, the expenses of SCI are 160% higher compared to Great Eastern. The reasons in our opinion are:

a.     SCI being a public sector company has limitations in reducing its expenses;

b.     The operations of SCI are almost in every area of shipping, including passenger travel, whereas the latter is only in selected areas. However a more diversified operation though may not be highly profitable brings in stability and safety comforts.

2.     SCI’s interest costs as a percentage of revenues is significantly lower compared to Great Eastern (4.96% as against 7.48%). Further, SCI is consistently bringing down borrowings by abstaining from paying dividends and going forward we believe interest costs of SCI will come down even more.

Conclusion:

Though Great Eastern’s operations are significantly more efficient than those of SCI, the latter’s margins are decent in the challenging market conditions and operating expenses are declining steadily since FY 2011-12 (see graph in annexure).

Balance Sheet Analysis

(Rs. Crore/ Rs. 10 million)	SCI  (Year ending 31st March 2016)	Great Eastern (Year ending 31st March 2016)
Short term borrowings	0	0
Other current liabilities	3,194.23	2,379.83
Total current Liabilities	3,194.23	2,379.83
Long term Borrowings	5,248.32	4,930.21
Total term liabilities	5,392.92	4,967.82
Total outside liabilities (TOL)	8,587.15	7,347.65
Net Worth	6,908.36	8,283.90
Total Liabilities	15,495.51	15,631.55
Current Assets	2,496.62	4,141.85
Total Fixed Assets (Net Block) + Capital Work In Progress	12,611.11	11,017.69
Investments and other non current assets	387.20	471.38
Total Intangible Assets including those under development	0.58	0.63
Total Assets	15,495.51	15,631.55

(Rs. Crore/ Rs. 10 million)	Desirable/ Recommended	SCI  (Year ending 31st March 2016)	Great Eastern (Year ending 31st March 2016)
Tangible Net Worth (Net Worth – Intangible Assets)		6,907.78	8,283.27
Current Ratio	More than 2	0.78	1.74
Quick Assets		2,085.88
Quick Ratio	More Than 1	0.65	1.24
Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW)	Below 3	1.24	0.89
Total Term Liabilities/Tangible Net Worth (Long term Debt-Equity) Ratio	1 or less	0.78	0.60

1.     The current and quick ratios of SCI are poor. The liquidity ratios must have deteriorated with losses in the last few years and it will take another two to three years for them to reach the acceptable levels.
Highlights:

2.     The TOL/ TNW and long-term debt-equity ratios of SCI are well within the norms.

3.     Great Eastern’s numbers on the other hand are quite attractive.

Conclusion:  

Based on Balance Sheet analysis SCI is not justified to be included in a value-investing portfolio.

Only because the P2BV Ratio is very attractive and the company is definitely on the recovery mode and the market conditions are likely to improve, SCI may be considered. 

Cash Flow Analysis:

	SCI  (Year ending 31st March 2016)	Great Eastern (Year ending 31st March 2016)
(Rs. Crore/ Rs. 10 million)
Net Cash Flows from Operating Activities as Reported	1424.99	2046.80
Less: Interest	209.53	-295.28
Exchange Difference	-0.30
CSR & Staff Welfare	0.50
Balance Cash From Operations/ Free Cash flows	1215.26	1751.52
Face Value	10.00	10.00
Number of Equity Shares	46.58	15.08
Free Cash Flows / Share	26.09	116.16
Free Cash Flows / Share as % of Market Price	40.54%	32.10%
Cash Flows from Investing Activities
Purchase of  Fixed Assets	-512.13	-675.08
Sale of Fixed Assets	12.50	234.48
Others	184.18	105.13
Total Net Cash Flows from Investing Activities	-315.45	-335.47
Cash Flows from Financing Activities:
Loans Raised/ (Repaid)	-867.65	-1025.04
Dividends Paid	-0.07	-312.49
Dividend Distribution Tax		-61.89
Total	-867.72	-1399.42

Highlights:

1.     SCI is generating decent net operating cash flows of around Rs.1,215 crores every year.

2.     SCI did not distribute cash as dividends. It is understandable as SCI is recovering from losses. On the other hand Great Eastern has distributed a decent 18% of free cash flows as dividends.

3.     Both companies had bought new ships during the year. 

4.     Both the companies have utilized major portions of their free cash for paring down debt (SCI 71% and Great Eastern 59%), in order to save interest costs and improve profit margins.

Conclusion:

SCI has utilized free cash sensibly for adding new ships (perhaps more to rebalance the fleet) and for reducing debt. Non-payment of dividends though unforgivable is quite understandable as SCI is coming out of losses. Other than dividend, SCI has managed cash properly.

Dividend Track Record

Announcement Date	Dividend Type	Dividend(%)	Remarks
31/05/2015	--	--	Missed
31/05/2014	--	--	Missed
31/05/2013	--	--	Missed
31/05/2012	--	--	Missed
31/05/2011	Final	25%	Rs.2.50 per share(25%)Final Dividend
20/01/2011	Interim	30%
31/05/2010	Final	50%
15/06/2009	Final	65%
11/06/2008	Final	40%	AGM
12/02/2008	Interim	45%
13/03/2007	Interim	85%
23/01/2006	Interim	85%
13/06/2005	Final	30%	AGM
14/10/2004	Interim	40%
10/09/2003	Interim	170%
18/02/2003	Interim	30%
15/03/2002	Interim	35%	(Revised)
17/07/2001	Final	5%	AGM
24/04/2001	Interim	25%
10/09/2000	Final	16%
06/10/1999	Final	15%	AGM & Dividend
03/10/1998	--	--	Missed
03/10/1997	Final	20%	03/10/1997

HighlighCompany’s uninterrupted dividend paying track record is blotted and un-acceptable.

Conclusion:

Uninterrupted payment track record is extremely poor.

Dividend Coverage from non-operating income

Since the company has not paid dividends this parameter cannot be measured.

On this parameter the company’s performance is not satisfactory.

B.Market Condition:

Price to Earnings Ratio:

PE Ratio is 11.11, is well below the recommended 15 but marginally above our threshold of 10.

The market condition as far is this parameter is concerned is favorable.

Price to Book Value (P2BV) per Share:

Company has negligible intangible assets and hence no need to calculate adjusted P2BV Ratio. Therfore the price to book ratio 0.44 is the real and only attraction in the share.

On this parameter the market condition is highly favorable.

Dividend Yield:

Since no dividends are paid in the last few years, the question of dividend yield does not arise.

On this parameter the market condition is highly un-favorable. Actually it is not the market condition but the company performance that is to be blamed.

Distance from 52 week high:

The 52-week low for this share is Rs.54.35. and the distance from the 52 week low is just 18.39%.   

The market condition as far is this parameter is concerned is favorable.

Five year Return:

The five-year return (return measured by change in share price) is just -7.81%. Which means that there is just a marginal advantage accruing out of market hammering of the scrip in this front.

On this parameter the market condition there is no special favorable market condition.

D. Investment Decision:

The final investment decision in Shipping Corporation of India Ltd. is very difficult to make. Company’s performance is mixed. Inconsistent profitability and lack of impeccable uninterrupted dividend paying record, poor liquidity ratios are under normal circumstances unpardonable and do not allow to be included in a value investor’s portfolio.

Extremely low P2BV Ratio of 0.44 and SCI being an integrated and dominant shipping companies in India and the company is making profits and generating decent free cash flows are the actors weighing in its favor.

Future prospects are likely to favor as shipping rates which are currently at historical lows improve on the back of global economic recovery.

Final Advice:

Buy. Limit the amount to 5% of total stock portfolio. Buy with the knowledge that SCI is not a usual candidate but a special situation investment decision based on extremely low P2BV.