Improvement in Order Inflows Key for Shipbuilders

Shipbuilding companies ABG Shipyard Ltd and Bharati Shipyard Ltd missed Street estimates for the June quarter. ABG's net profit fell by 20% from the year-ago period to '38.41 crore, while that of Bharati fell 41% to '22.12 crore.

ABG's net performance was hit by higher depreciation costs and an exceptional item worth '13.75 crore relating to a one-time loss booked on sale of shares in Great Offshore Ltd.

ABG's depreciation costs increased to '13.66 crore from '4.53 crore last year on account of part capitalization of the project at its Dahej shipyard. Bharati's performance at the net level was hit mainly on account of 127% increase in interest costs to '54.68 crore.

Revenue and operating profit margins at both firms increased. ABG's revenue excluding subsidy grew at a relatively faster pace of 16.4% to '428.5 crore, against Bharati's 9.3% rise to '333.06 crore. Operating profit margins, excluding subsidy, for ABG and Bharati rose by 163 basis points and 49 basis points, respectively. One basis point is one-hundredth of a percentage point. Savings in other expenditure helped operating performance at both firms. Bharati's operating performance was also helped by savings in staff cost.

Of the two firms, ABG's order book position is better and offers good revenue visibility. ABG's unexecuted order book stands at around '8,000 crore, which translates into 4.4 times consolidated revenue of fiscal 2010. Bharati's unexecuted order book has come down sharply to '1,920 crore from '2,560 crore seen last quarter. That translates into just 1.4 times fiscal 2010 revenue.

That is a matter of concern, given that order inflows have been a challenge for shipbuilders for a while now. Shipyards across the world are bearing the brunt of global oversupply of vessels, leading to shrinking new orders.

Orders will get a boost when global sea trade improves, resulting in higher demand for ships. That may not happen any time soon, given the tepid growth in the developed world. "We continue to maintain our negative bias on the global shipbuilding industry amidst no signs of revival in demand and expected round of order cancellations and delays/postponements in scheduled deliveries owing to excessive capacity in the shipping industry," wrote analysts from Emkay Global Financial Services Ltd in a 17 August report.

Apart from concerns about higher debt levels, both firms have another reason to worry. Both stocks have under performed the Sensex and Mid-Cap index since April. The near-term outlook appears bleak.