ABG Shipyard gets good rating from CRISIL

ABG Shipyard, the largest private sector shipyard in India, has received a good rating from CRISIl Equities. It has conferred CRISIL IER Fundamental Grade "3/5" whcih indicates that the fundamentals of the company are 'good' relative to other securities in India. With respect to valuations, CRISIL Equities has assigned a valuation grade of “4/5” indicating that the stock has potential ‘Upside’ (Fundamental value of Rs 242, from the current market price of Rs 202). The grades are not a recommendation to buy/sell or hold the graded instrument, or a comment on the graded instrument’s future market price or its suitability for a particular investor.
The assigned fundamental grading reflects ABG’s status as the largest private sector shipyard in India and a strong revenue visibility for next 3-4 years despite the current downturn in the shipping industry. The company has established relationship with major clients and gets healthy repetitive orders. The company has
also entered into the new area of rig building and has bagged two rig orders from Essar Oilfiled Services P
Ltd.
The grading is, however, tempered by the cyclical nature of the shipping industry. The grading also takes into account the concentration of order book and uncertainty over the acquisition of Great Offshore. CRISIL Equities expects ABG to display robust revenue growth of 26.4% CAGR over the next 3 years to touch Rs 31.4 billion by FY12 on the back of strong order and commissioning of the expanded capacity at Dahej.
With the capital subsidy scheme applicable for significant portion of the current order book,operating margins are expected to remain at the current level of 28-29%. The current order book is expected to be executed by FY12. Driven by higher profitability, CRISIL Equities expects Earnings per share (EPS) to jump to Rs 42.9 in FY12 from Rs 32.5 in FY09. However, the ROE is expected to fall from 21% in FY09to 16.8% in FY12.
On the valuation grading, CRISIL Equities has used Sum of the Parts (SOTP) approach to arrive at the fundamental value for ABG. Based on the SOTP method, the fundamental value for ABG is estimated at Rs 242 which translates into a valuation grade of “4/5” indicating that the stock has potential ‘Upside’ from the
market price of Rs 202 (as on November 23, 2009).
ABG Shipyard has manufacturing and service facilities in Magdala, Surat and Dahej. The company can manufacture vessels of length up to 250 metres and capacity
upto 120,000 dead weight tonnes (DWT). ABG has delivered 111 vessels since 1989, including bulk carriers, cement carriers, offshore support vehicles, interceptor boats, multi-support vessels and barges. Over the past two decades, the company has grown significantly, establishing a niche position in the Indian shipbuilding
industry. It has customers in Europe, the Middle East and India.