Fitch rates India's ABG Shipyards 'A(ind)'; outlook stable

Fitch Ratings has today assigned India's ABG Shipyard Ltd (ABGS.BO: Quote, Profile, Research) (ABG) a National Long-term rating of 'A(ind)'. The Outlook is Stable. The agency has also assigned an 'A(ind)' rating to ABG's INR2,000m long term NCD programme.
The rating reflects ABG's industry leadership position, its proven track record of ship building and its presence in diversified segments like jackup rigs, handysize, handymax and other vessel category. The company has a strong order book position of INR125.5bn (8.8x FY09 revenues) which provides robust revenue visibility, though Fitch notes that 50% of its order book comprises bulk carriers, and with its two main customers accounting for about 47% of the order book. However, ABG did not face any material order book cancellations or re-negotiations during the downturn.
The agency notes that demand for bulk carriers in the handymax and handysize categories - categories that form 50% of ABG's order book - is still firm, despite a global shipping industry oversupply.
The rating is constrained by high leverage from capex for ABG's Dahej shipyard (which caters to larger ships and rigs), and by increased working capital requirements. The Dahej facility has started operations and the company does not expect any further major capex in the medium-term. Timely payments from major customers will be imperative as any delay would lead to increased working capital demand and cashflow mismatches, putting further pressure on the leverage. With larger vessels under construction Fitch expects increased working capital pressure owing to more chunky cash flows.
Fitch notes that the current leverage is at a higher level given the Dahej facility, and the company is expected to de-lever as the new operations in the Dahej facility stabilise.
Positive ratings triggers would include a track record of efficient working capital in the Dahej yard over the next two years, which would lead to net leverage below 3.0x. However, large debt-led capex or acquisition and/or increased working capital demand leading to a net leverage above 5.0x on a sustained basis would be negative for the rating.
According to unaudited 9M10 results, ABG's revenues grew 24% yoy to INR12,875.1m, while EBITDA margins rose to 28.1% (9M09: 21.3%). The EBITDA margin improvement was due to softening of raw material prices compared to 9M10. Interest coverage however declined to 3.2x in 9M10 (9M09: 5.1x) on the back of higher interest expense from increased debt levels.