Brickwork Independent Research

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1 Brickwork Independent Research As on February 23, 2011 Key Data SMALL CAP BSE Code BSE ID WESTE Issued Shares mn Face Value `2.00 Market Cap. `3.15 bn (US$ mn) CMP `10.69 BSE Sensex 18, week High/Low 18.90/9.39 3M Avg Vol (No of Shares) 92,591 Valuation Ratios Yr to 31 Mar FY 08 FY09 FY10 Adj.EPS (`) EPS Growth (%) N.A PER (x) N.M N.M 4.67 BVPS PBV (x) N.M N.M N.M Dividend/Yield (%) EV (` bn) EV/Sales (x) EV/EBITDA (x) N.M Shareholding Pattern (%) SEP 10 DEC 10 Promoters FIIs MFs Public & Others Stock Chart (Relative to SENSEX) Feb Aug Feb-11 Western Shipyard SENSEX Western India Shipyard Limited Business Operations: Western India Shipyard Ltd. (WISL) is primarily engaged in providing ship and rig repair facilities and industrial services and caters to repair of older vessels, which require periodical dry docking and wet repairs at Mormugao Harbour, Goa. Incurred continuous losses since inception Company has been incurring continuous losses since inception in 1996 due to poor utilization of infrastructure, low volume of operations and working capital constraints. Net operating income of the company grew by mere 2.50% during the year from `62.89 Cr in FY09 to `64.46 Cr in FY10. EBIDTA increased from `7.79 Cr in FY09 to `16.82 Cr in FY10. However, company registered net operating loss of `0.21 Cr in FY10 as against loss of `27.76 Cr in FY09. High Court Sanctions Scheme of Arrangement and Compromise with its secured lenders Due to high accumulated losses since inception, WISL, by order of court dated , adopted scheme of Arrangement and Compromise with its secured creditors with ABG Shipyard Ltd. as a confirming party and reduced its secured liabilities of `228 Cr to about `152 Cr. ABG Shipyard ups its stake in WISL to 60.26% Post debt restructuring, ABG Shipyard Ltd. acquired million shares from ICICI Bank in October 2010, and thereby increased its stake in WISL from 19.69% to present 60.26%. By acquiring controlling stake, WISL is now a subsidiary company of ABG Shipyard Ltd. Deepak Jain deepak.j@brickworkratings.com Sameer Singhvi sameer.s@brickworkratings.com Analyst Declaration: This report is without a management meet. We, Deepak Jain & Sameer Singhvi, hereby certify that the views expressed in this report accurately reflect our personal views about the subject securities and issuers. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific view expressed in this report. This report is not a buy/sell/hold recommendation on the stock.

2 COMPANY OVERVIEW: Directors Name Cdr. SK Mutreja Mr. RS Nakra Mr. T Asokraj Mr. Ashwani Kumar Mr. Ashok Chitnis Designation Whole Time Director & CEO Independent Non Executive Director Independent Non Executive Director Independent Non Executive Director Independent Non Executive Director Background: Western India Shipyard Ltd. (WISL) was established in 1992 by setting up ship building and ship breaking facilities and ship repair facilities for ocean going vessels. It signed 25 year license agreement with Mormugao Port Trust (MPT) in 1993 for about 85,000 Sq. Meters of land and breakwater area at Mormugao Harbor, Goa. It also signed foreign collaboration agreement with Lisnave S.A. of Portugal for provision of technical assistance and technical documentation through their subsidiary, Navelink S.A of Switzerland for the ship repair project at Goa. It was registered as a Ship Repair Unit in 1993 with Director General of Shipping, Ministry of Shipping and Surface Transport and government of India by virtue of which the company was entitled to the use of duty free imported and indigenous capital goods, material handling equipment, raw materials, spares and consumables for the project. Due to high accumulated losses since inception, WISL, by order of court dated , adopted scheme of Arrangement and Compromise with its secured creditors with ABG Shipyard Ltd. as confirming party. Later in October, 2010, by acquiring 60.26% stake, WISL has become subsidiary company of ABG Shipyard Ltd. WISL is primarily engaged in providing ship and rig repair facilities WISL is headed by Cdr. SK Mutreja who has over 42 years of experience in the Indian Navy and in the shipbuilding, rig repair and ship repair industry in the public and private sectors in India. The board comprises of other four independent non executive directors having diversified industry experience. Business Operations: WISL is primarily engaged in providing ship and rig repair facilities and industrial services and caters to repair of older vessels, which require periodical dry docking and wet repairs at Mormugao Harbour, Goa. Its services include routine maintenance and repairs, cargo hold/tank/hull blasting and coating, main engine overhauls and tailshaft repairs, cargo gear overhaul and repairs, major conversion and modification, damage repairs, spud can repairs, steel and pipe renewal etc. BRICKWORK INDEPENDENT RESEARCH 1

3 Company has floating dry dock of 60,000 deadweight capacity, 4 wet repair jetties, portal rail cranes and multi-purpose shops. It has a floating dry dock, Westerner (of 60,000 deadweight capacity which can accommodate ship upto 225m in length and 32.5m in breadth), Repair oil exploration rigs (upto 60m x 80m platform), 4 wet repair jetties, portal rail cranes (of 35 ton and 50 ton capacity) and multipurpose shops. As of March 31, 2010, WISL had repaired over 475 vessels of all types and 9 deep water oil rigs at its facilities and completed dredging of the dock pit area for taking on larger vessels. : Grant of various concessions and exemptions for developing India s ship repair capacity. NMDP of the central government released in 2005 identified 228 projects to be implemented in India s major ports over the next 10 years involving `6110 billion. Industry Outlook Ship repair industry in India is highly regulated by the Central Government through the D.G Shipping with regard to trade, operational safety, etc. Various measures taken by the central government for sustained growth of ship repair industry are as under. Grant of various concessions and exemptions for developing India s ship repair capacity in view of the huge potentialities of the ship repair sector. Draft Maritime Policy of central government highlights the policy initiatives such as dry docking policy to encourage modernization and mechanization for repairs of most of the vessels at Indian Ports, dry docks to be given EOU (Export Oriented Units) status, 100% FDI in ship repair and ship building, long term subsidy for constructions of all kind of vessels (20-30 years), creation of ship repair units adjacent to the ports to repair/dry dock large vessels, etc. The policy also highlights proposed financial and fiscal initiatives such as taxation of ship building and ship repair units including customs and central excise duty to be brought on par with EOU units, ship repair and ship building to be kept out of the ambit of service tax, sales tax and VAT, investments to be made eligible for tax exemption for long period (20Years), creation of separate funding agency for ship building & ship repair activities, etc. The national Maritime Development Program (NMDP) of the central government released in 2005 identified 228 projects to be implemented in India s major ports over the next 10 years involving `6110 billion. As per NMDP projections, total cargo traffic at the Indian ports is expected to grow at a CAGR of 13.58% up to FY12. BRICKWORK INDEPENDENT RESEARCH 2

4 According to the planning commission, the strength of India s shipping fleet will increase upto 15m GRT by the end of FY11. Shipping industry handles 95% by volume and 70% by value of India s International trade. The ministry intends to double capacity at major and non-major ports in the country to 1,590 mt by 2012 from the present 795 mt through private sector participation which will lead to higher port traffic, ship repair volumes and increased earnings for the companies in the sector. Shipping industry handles 95% by volume and 70% by value of India s International trade. However, the shipping market is highly cyclical in nature and is closely tied to the level of economic activity in the country. Thus, high growth rate in GDP, increase in economic activity and trade and commerce along with measures taken by the government helps for the sustained growth and development of the ship repair industry. Shipping market is closely tied to the level of economic activity in the country. Industry Competitiveness: The five forces model helps to determine the competitive intensity and therefore the industry attractiveness. The existence of many players, highly cyclical and capital intensive nature and unpredictable cash flows makes the industry less attractive. The ship repair industry framework has been analyzed on the basis of buyer and supplier bargaining power, threat of new entrants, threat of substitutes that determines the degree of rivalry among existing players. Supplier Power: Less Duty free import Intense global competition Threat of New Entrants: Less Highly regulated Cyclical & Capital Intensive in nature The existence of many players, highly cyclical and capital intensive nature and unpredictable cash Degree Of Rivalry: High Existence of many players Price based competition. flows makes the industry less attractive. Buyer Power: High Highly competitive industry Threat of Substitutes: Low No easy substitutes High replacement cost BRICKWORK INDEPENDENT RESEARCH 3

5 Incurred continuous losses since inception The standard Lor During FY10, WISL repaired 38 vessels as compared to 33 vessels in FY09. Net operating income of the company grew by mere 2.50% during the year from `62.89 Cr in FY09 to `64.46 Cr in FY10. Company registered net operating loss of `0.21 Cr in FY10 as against loss of `27.76 Cr in FY Net Operating Income (In ` Cr) EBIDTA (In ` Cr) PAT (In ` Cr) Capital Structure: Tangible Networth (In ` Cr) Borrowings (In ` Cr) Debt/Equity (x) N.M N.M N.M Profitability: Operating Profit Margin -9.05% 12.39% 26.09% Net Profit Margin % % -0.33% ROCE % -6.81% 6.41% ROE 31.01% 20.45% 0.29% Coverage Ratio: Interest Coverage (x) Liquidity Ratio: Quick Ratio Current Ratio (x) Source: CMIE, Brickwork Research Company has been incurring continuous losses since inception in 1996 due to poor utilization of infrastructure, low volume of operations and working capital constraints. During the year, WISL repaired 38 vessels as compared to 33 vessels in FY09, of which 32 vessels are of Indian flag and 6 vessels are of foreign flag. The company also repaired one foreign deep water jack up oil rig of 300 meters during the year. Net operating income of the company grew by mere 2.50% during the year from `62.89 Cr in FY09 to `64.46 Cr in FY10. EBIDTA margins increased from `7.79 Cr in FY09 to `16.82 Cr in FY10 i.e. growth of %. However, company registered net operating loss of `0.21 Cr in FY10 as against loss of `27.76 Cr in FY09. The reduction in losses during the year was mainly due to reversal of interest of `51.60 Cr provided in earlier years. Operating profit and net profit margin during the year was 26.09% and -0.33% as compared to 12.39% and % in FY09 respectively. Due to high accumulated losses over the year, tangible Networth of the company has been negative but has improved substantially from - ` in FY09 to - `0.21 Cr in FY10 since it adopted scheme of Arrangement and Compromise with its secured creditors. BRICKWORK INDEPENDENT RESEARCH 4

6 Value today for every `100 invested Western Shipyard Sensex 3 Months Months Year Year Year During Q3FY11, net operating income of the company increased by 59.36% on YoY basis from `19.12 Cr in Q3FY10 to `30.47 Cr. The borrowings of the company during the year decreased from ` Cr in FY09 to ` Cr in FY10. Interest coverage ratio improved from 0.32x in FY09 to 2.69x in FY10. Current ratio and quick ratio of the company during the year was 2.78x and 2.11x respectively. Quarterly Performance: Q3 FY10 Q3 FY11 Q2 FY11 ` In Cr Growth Growth Net Operating Revenue % % EBIDTA % % 7.77 PBT % % 1.84 PAT % % 1.84 Source: CMIE, Brickwork Research During Q3FY11, net operating income of the company increased by 59.36% on YoY basis from `19.12 Cr in Q3FY10 to `30.47 Cr in Q3FY11. On QoQ basis, it increased by 38.75%. EBIDTA income, during Q3FY11, increased by 41.26% on YoY basis and 26.90% on QoQ basis. Net profit margins improved significantly and grew by % and % on YoY and QoQ basis respectively. Peer Analysis: Net profit margins improved significantly and grew by % and % on YoY and QoQ basis respectively. Market Cap. (In ` Cr) ROCE (%) RONW (%) P/E (x) P/B (x) Western India Shipyard Ltd % 0.29% 4.67 N.M. Bharati Shipyard Ltd % 16.58% Pipavav Shipyard Ltd % -3.16% Mercator Lines Ltd % 3.11% N.M 0.85 Source: CMIE, Brickwork Research As compared to its peers, WISL has generated ROCE and RONW of 6.41% and 0.29% respectively and was trading at P/E multiple of 4.67x. BRICKWORK INDEPENDENT RESEARCH 5

7 By adopting scheme of Arrangement and Compromise company reduced its secured liabilities of `228 Cr to about `152 Cr. High Court Sanctions Scheme of Arrangement and Compromise with its secured lenders Due to high accumulated losses since inception, WISL, by order of court dated , adopted scheme of Arrangement and Compromise with its secured creditors with ABG Shipyard Ltd. as a confirming party and reduced its secured liabilities of `228 Cr to about `152 Cr. As per the terms of the scheme lenders were given two options i.e. Restructuring option and One Time Settlement (OTS). Majority of the lenders opted for OTS. Accordingly, WISL has settled approx. `130 Cr of secured liabilities by paying `55 Cr of the outstanding liabilities) to the lenders who opted for OTS after entering into a borrowing arrangement with IFCI. ABG Shipyard Ltd. increased its stake in WISL from 19.69% to present 60.26%. The major secured lender, ICICI Bank Ltd., opted for the restructuring option for its recovery of debt of approx. `98 Cr. As per the restructuring option exercised by the bank: 42% of the debt owed to ICICI Bank Ltd has been converted into 0% interest bearing loan which will have to be converted into equity shares as per SEBI preferential issue pricing after March, % of the debt owed has been converted into million equity shares of WISL. 22% of the debt owed has been converted into 11% interest bearing long term loan repayable in 28 quarterly installments. ABG Shipyard ups its stake in WISL to 60.26% Post debt restructuring, ABG Shipyard Ltd. acquired million shares from ICICI Bank in October 2010, and thereby increased its stake in WISL from 19.69% to present 60.26%. ABG Shipyard Ltd., the flagship company of ABG group is the largest private sector shipbuilder in India. By acquiring controlling stake, WISL is now a subsidiary company of ABG Shipyard Ltd which will provide the company all the technical assistance, marketing efforts and experienced management personnel. BRICKWORK INDEPENDENT RESEARCH 6

8 The Road Ahead The profitability of the company has improved with the reduction of the heavy cost of debt and by carrying out maintenance of the shipyard infrastructure and dredging. It has also taken up machine shop jobs for Mazagon Docks Ltd. and fabrication of pontoon for the first time. It will continue shipbuilding and other profitable activities in the near future with the technical and marketing assistance provided by ABG Shipyard Ltd. The other plans proposed by the company are: Company proposes to aggressively enter into supply of ships spares to its clients. Its small ship building facility is proposed to be converted into a graving dock. Once it completes its graving dock, the company will also take up shipbuilding jobs to fully utilize the ship building facilities and workshops. BRICKWORK INDEPENDENT RESEARCH 7

9 Annexure: P&L and Balance Sheet Profit & Loss Statement: ` In Cr SALES Less: Indirect Taxes INCOME FROM OPERATIONS: COST OF PRODUCTION: Raw material expenses Packaging expenses Purchase of finished goods Power, fuel & water charges Compensation to employees Royalties, technical know-how fees, etc Lease rent & other rent Repairs & maintenance Insurance premium paid Outsourced mfg. jobs (incl. job works, etc.) TOTAL COST OF PRODUCTION: Change in stock GROSS PROFIT Selling, General & Admin. Exp EBIDTA Depreciation / Amortization EBIT Interest paid PROFIT BEFORE TAX, OTHER INCOME & EXTRAORDINARY ITEMS Other Income PROFIT BEFORE TAX & EXTRAORDINARY ITEMS Provision for direct taxes PAT BEFORE EXTRAORDINARY ITEMS Prior period & extraordinary expenses PAT Source: CMIE, Brickwork Research BRICKWORK INDEPENDENT RESEARCH 8

10 Balance Sheet: Liabilities SHARE CAPITAL, RESERVES & SURPLUS ` In Cr Issued equity capital Paid up preference capital Reserves & surplus Less: Expenses not written off TOTAL NETWORTH MINORITY INTEREST: BORROWINGS: Secured borrowings Unsecured borrowings NET DEFFERED TAX LIABLITY TOTAL LIABLITIES Assets NET FIXED ASSETS INTANGIBLE ASSETS INVESTMENTS CURRENT ASSETS, LOANS & ADVANCES (A): Cash & bank balance Other Current Assets Loans & advances CURRENT LIABLITIES & PROVISIONS (B): NET WORKING CAPITAL (A-B) TOTAL ASSETS Contingent liabilities Source: CMIE, Brickwork Research BRICKWORK INDEPENDENT RESEARCH 9

11 Contact Details: Jatin Vyas Brickwork Ratings, Phone: Disclaimer This is a full report without management meet. All information contained in this document has been obtained by Brickwork Ratings from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and Brickwork Ratings in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and Brickwork Ratings shall not be liable for any losses incurred by users from any use of this document or its contents in any manner. Opinions expressed in this document should not be construed as any indication of credit rating or grading of Brickwork Ratings for any instruments that have been issued or are to be issued by any entity. Published on behalf of The Stock Exchange Investors' Protection Fund Bombay Stock Exchange Ltd. P J Towers, Dalal Street, Mumbai. Tel: /34 BRICKWORK INDEPENDENT RESEARCH 10