Shipyards: Margin pressure

Order books are full, but higher steel prices could hurt operating margins.

Both Bharati Shipyard and ABG Shipyard, which make small dry bulk carriers, offshore support vessels and handy size bulkers have strong order books. However, higher steel prices "" up 30 per cent since the start of the year """" could dent their margins in the current year.

The impact was felt partially in FY08 with the Rs 699 crore Bharati's operating profit margin coming off by 330 basis points to 26.9 per cent.

Besides, whether the government will continue to subsidise these companies, for ships built for exports and for domestic ships of over 60-metre length, is not certain. Last year, ABG Shipyard received a subsidy of Rs 81.6 crore or 8.4 per cent of its top line of Rs 965 crore.

Both ABG and Bharati sell to shipping and oil exploration companies in Europe and in India. Their order books are reasonably strong. Bharati, for instance, has a backlog at Rs 4,635 crore though it is understood that the company hasn't received any fresh orders for about six months.

Nonetheless, the existing orders amount to almost 5.6 times FY08 sales and the firm's facilities at Ratnagiri, Goa and Kolkata are running at near full capacity.

The company may look for fresh orders after its Dabhol facility sees better capacity utilisation. It should reach peak capacity only after FY10.

ABG's outstanding order book of Rs 8,300 crore is to be executed over the next 4-5 years. The company's earnings per share, which was Rs 31.55 in FY08, should grow to Rs 56 in FY09.

At Rs 408, the stock trades at a reasonable 7.3 times forward earnings. At Rs 430, Bharati is more expensive and trades at around 11 times the estimated earnings of Rs 39 for FY09. The EPS in FY08 was Rs 33.4.