Dredging Corp: Rebound in earnings holds key

Likely stake sale by govt is positive, but valuations remain expensive

Dredging Corporation of India's stock surged 12.7 per cent to close at Rs 502 following reports that the government may sell 51 per cent of its 73.5 per cent stake in the company. While the company, said to the exchanges, that it has no specific official communication, the street's optimism stems from the possibility of a new owner boosting the company's fortunes. 

The public sector company dredges for Indian seaports and Indian Navy besides undertaking contracts for overseas projects. Dredging involves excavating the sea or river bed to increase their depth for easier ship movements. In the December quarter, the company has secured Rs 1,119-crore contract for dredging of a shipping channel at Kolkata Port in a global bidding. In January this year, it has also won Rs 102 crore order for the Pussur Channel dredging project in Bangladesh. These only indicate the company's competitiveness in the business. 

While the order flows are positive, the government's focus on coastal development, projects on increasing inland water transportation, river linkages and cleaning of Ganga river are all potential opportunities for the company. For instance, government's biggest infrastructure project centred on coastal development alone increases the company's accessible market opportunity by over Rs 20,000 crore. As the Street sensed these opportunities, the stock continued to gain rising from closing lows of Rs 293.30 in February 2016; it made an intra-day high of Rs 518.80 on Monday. 

However, while expectations have risen, benefits on earnings are still to accrue. The company, which saw net profit grow from Rs 62.41 in FY15 top Rs 79.67 crore in FY16, has managed so with the help of Rs 11 crore of exceptional items. During the current fiscal year, the company has seen volatility in earnings with first nine months net profit at just Rs 3.67 crore. Bloomberg consensus estimates peg the company's earnings per share at Rs 9.7 for FY17, as compared to Rs 28.45 in FY16. The same is expected to rebound to only Rs 26.7 in FY18. The stock is not cheap, say experts. G Chockalingam of Equinomics Research says that if the stock is trading at near or more than 20x earnings estimates, it remains expensive. The consensus analyst target price of Rs 480 also seems to suggest limited scope for upside. 

Thus, for further upside in the stock, more initiatives from the government are needed to boost the sector. Meanwhile, any stake sale to a new investor can help expand the business, improve profitability and efficiency but only in the long run. Till further clarity on stake sale is available, investors need to be cautious.