High demand for offshore vessels and a healthy order book bring Bharati Shipyard on the investment radar. After a steep correction in March 2007, the stock price of the Bharati Shipyard has recently moved up from Rs 316 to a high of Rs 518 on the back of new orders worth Rs 1,124 crore and healthy financial results for FY07. Going forward, the stock is backed by positive industry outlook, which continues to bring in more ship building contracts. Its strong order book at about 8.8 times FY07 revenues promises sustainable growth of about 50 per cent over the next two-three years. Also, the company is expanding its present capacity to grab more orders and turn around more ships for booking higher revenues and bring in operating leverage. Considering the long-term positive prospects, the stock is trading at reasonably attractive valuations. The shipbuilder
Bharati Shipyard is a leading private sector shipyard company engaged in design and construction of sea-going, coastal, harbour, inland crafts and other support vessels required for the offshore industry. The company has more than 12 clients including some of the well known companies in the domestic and international market such as Reliance Industries, GE Shipping, Bombay Port Trust, MK Shipping from Germany and Qatar Shipping. It has over 41 ships to be delivered over the next two-three years. About 60 per cent of its current order book of Rs 3,723 crore comes from the offshore business. The company is a focussed player in building offshore supply vessels (OSV).

Opportunity
The key demand drivers for the offshore supply vessels (OSV) includes strong exploration and production (E&P) spending, high crude oil prices, increasing requirements of vessels per rig and an ageing fleet. Generally, offshore exploration of oil is considered to be very expensive due to transportation, technology and costly manpower. However, in a rising oil price scenario, it becomes viable for the companies to go offshore to deploy resources. This also requires deploying different kinds of offshore supply and anchor handling tug supply vessels to support exploration activities. According to analysts’ estimates only a decline in oil prices below the $42 levels will have a significant impact on the global E&P budgets and consequently a fall in demand for offshore vessels. However, as oil prices are trading much above the discomfort level, the expenditure on E&P is growing at about 22-25 per cent per annum, thus causing a significant demand for the support vessels. Besides, OSVs typically have a life span of about 20 years. As per industry estimates, about 73 per cent of the anchor handling tug supply vessel (AHTS) fleet and 62 per cent of the platform supply vessels (PSV) is over 20 years old making a positive case for replacement demand, which is very low, as current order book is just about 8-10 per cent of the existing fleet. The Indian shipyard industry has competitive labour advantage in terms of cost and technical expertise making it one of the fastest growing sourcing bases. The Indian labour cost is estimated to be $1,192 per year, which is just 11 per cent of the labour cost of Korea (the biggest shipbuilding country) and 6 per cent of Singapore. Due to this advantage, the order book of Indian shipbuilding companies has grown nine-fold in the last four years. The Indian shipbuilding industry is about $0.8-0.9 billion in size, which is expected to grow at 25-26 per cent per annum to $22 billion by the year 2020. Though there are enough opportunities for the Indian shipbuilding companies, there are also concerns of rising rupee eroding competitiveness of the Indian companies. “I do not think a 7 to 8 per cent of appreciation in the rupee will have a major impact, because it’s not just the cost advantage. Factors like technical expertise and designing capability of Indian shipbuilders is equally important. Moreover, most of these companies are importing machinery and other equipments, which is enough to negate the impact on revenues,” says Umesh Karne, analyst, Emkay Share and Stock Brokers. Repairing business
Though Bharati believes the core focus will be on shipbuilding as there is enough demand in the international market, about 20 per cent of the total income can be expected from repairing business over the longer term. At present, this is marginal. The company will use some of its new capacities for this purpose. The demand for the repairing business is mainly driven by a large fleet of old ships in the international and domestic market as well as scheduled repairing. Expansion
To take advantage of the growing demand and increasing share of Indian shipbuilding industry in the global market, Bharati has expanded its capacity at Ratnagiri by 2.5 times and is embarking on a greenfield project at Mangalore. The Ratnagiri yard, which was manufacturing vessels up to 9,000 deadweight tonne (DWT), is capable of handling vessels of 15,000 DWT. After the expansion at its Mangalore yard, the company will be in a position to build vessels up to 60,000 DWT. The yard is expected to be operational by December 2008.

Valuations
Factoring the strong order book and quick turnaround with the ongoing capacity coming on stream, the company is expected to grow at about 45-50 per cent over the next three years. At the current market price of Rs 490, the stock is trading at 11 times its fully diluted FY08 estimated earnings and 6.7 times FY09 earnings, which appears reasonable.