SCI - Shipping Corporation - Value Analysis

INDUSTRY
1. Shipping, a global industry, carries about 90% by volume of the global trade and is the heart of the global economy. Variables affecting the freight rates include
1. Demand and supply of vessels
2. Overall Global Trade
3. Geo politics such as the present day Japan, Libya , Euro issues , Oil market
2. Shipping industry is largely segmented into three categories –
(a) Dry bulk - rates depend on trade of commodities (iron, steel, coal, Al) (qty and type)
(b) Wet bulk - Crude oil / oil derivatives related
(c) Containers. The container market is primarily influenced by global trade
STRENGTHS
1. SCI  is the largest shipping company in India and has approximately 35% share of Indian flagged tonnage as of June 30, 2010, according to the website of Directorate General of Shipping, Government of India (DG Shipping). As of September 30, 2010, it owned a fleet of 74 vessels of 5.11 million dead weight tonnage (DWT).
2.  It is a cash rich company with a strong balance sheet position & has shown  consistent profitability and dividend paying record
Moat - Really big player in an economy such as ours .. In a way a monopoly in the Indian market with the exception of GE and Varun. . Entry  is significantly capital- and time intensive
OPPORTUNITIES
1. While there may be short-term pain ( increased depreciation and interest costs) , SCI's move to become significantly larger (26 vessels ordered 2011-2013) by taking advantage of depressed asset prices currently may well pay off when the fortunes of the cyclical shipping industry turn for the better.
2. Strategic tie ups with big consumers like SAIL and COAL India
3.The robust GDP to fuel the shipping sector's growth. With the share of Indian merchant fleet in the country's overseas trade being only around 9.5 per cent (down from 31.5 per cent in 1999-2000), there seems to be good scope for effective deployment of SCI's expanded fleet.  Indian exports and imports are showing good growth
THREATS
1. Given that more than 90 per cent of SCI's income is denominated in foreign currency, sustained appreciation in the rupee could impact its performance.
2.  The company's plans to get into other businesses such as ship-building
FINANCIALS
1. Market cap - 5000 crores @ CMP 106 , debt - 2700 crores , Fixed Deposits (Cash) - 2300 cr
Enterprise value - 5400 crores. With a return of 600 crores excess ROEV is about 11%.

	2006	2007	2008	2009	2010	2011 (9M)	REMARKS
Sales	3400	3500	3700	3700	2700	2600
Profit	1400	1000	1000	800	950	570
Opm	35	28	25	20	28	23
EPS	50	36	35	29	22	12
Debt	1300	1200	1400	2400	2700
Res	4000	4800	5300	5700	5900
Div (Rs)	8.5	8.5	8.8	6.5	5.0		Abt 5 % yield

CONCLUSION
1. Like any other industry, shipping is based on the economy and its growth. US and Asia are showing signs of growth.
2.  " The World is flat" and movement of commodities and oil is but something that will continue in this world. Shipping offers the cheapest mode of transport. There is no reason why growth will not continue.. Pace may vary. It may be cyclical. But when you get a company with good management, prudent cash management at a discount to its book value, do the maths and see if it is  value buy. If so, go ahead and buy.
3. Considering the above, the best place is to invest in the largest corporation of an upbeat economy such as India. Investment is further cushioned by the regular share in profits distributed by the company in form of dividends.
4. Holdings by MFs have reduced in excess of 60%. The best time to buy a cyclical industry is when it gets beaten down and await a harvest in its uptrend.

Be greedy when others are fearful

1.  Be Greedy when others are fearful - said Warren Buffet and surely this is not something easy - we are all driven by what the " Mob " says and I am no exception. I was watching NDTV Profit live and the so called experts are fearful to give calls.. So much for experts.

2.  I am investing some cash and this is my disclosure. I am buying Sonata Software. Today I can buy this entire company for 350 crores (if I buy all the outstanding shares available in the market) . About 40 % of that i.e approximately 140 crores is cash on its books. So effectively I am buying the company for 210 crores. The company is zero debt. The 9 monthly net profit of the company is a cool 45 crores. Asuming that the company maintains the same rate and with no further improvement , the company will clock 60 crores for FY 2011. In short for an investment of 210 crores , I am getting 60 crores return after taxes ( a cool 30 % return on investment)


3.  I read through the minutes of the analysts meeting of the company post Q3 results. the company is pretty optimistic of projects. They have managed app 8 new clients in the quarter. 


4.  At 34 Rs, a dividend of 1.50 per share is also good. So if u have cash that can be invested, pick this stock. When the market starts its upward mone, this stock will definitely get rerated.

Advice for times such as today

BENEFIT FROM WISDOM OF GREAT INVESTORS

1.         Short Term Underperformance.             When faced with short-term underperformance, , investors may lose conviction and switch to another stock / investment. . Unfortunately, when evaluating stocks / investments / managers, short-term performance is not a strong indicator of long-term success. Investors who recognize and prepare for the fact that short-term under- performance is inevitable– even from the best managers –may be less likely to make unnecessary and often destructive changes to their investment plans.

Robert Kirby. Founder, Capital Guardian Trust Company

2.         Expert Analysts recommendation.                    During periods of uncertainty, investors often gravitate to the investment  media for insights into how to position their portfolios. While these forecasters and prognosticators may be compelling, they usually add no real value.  A study of  the average interest rate forecast was carried out from The Wall Street Journal Survey of Economists  from December 1982 –June 2008. This forecast was then compared to the actual direction of interest rates. Overall, the economists’ forecasts were wrong in 35 of the 52 time periods – 67% of the time!

“ The function of economic forecasting is to make astrology look respectable” – John galbraith

3.         Oil Prices, Egypt and Libya.        Do not waste time and energy focusing on variables that are unknowable and uncontrollable over the short term, like the direction of interest rates or the level of the stock market. Instead, focus your energy on things that you can control, like creating a properly diversifed portfolio, determining your true time horizon and setting realistic return expectations.

John Kenneth Galbraith. Economist and Author

4.         You make most of your money in a bear market, you just don’t realize it at the time – L Davis, a legendary investor

It is important to understand that periods of market uncertainty can create wealth-building opportunities for the patient, diligent, long-term investor. Taking advantage of these opportunities, however, requires the willingness to embrace and incorporate the wisdom and insight offered in these pages. History has taught us that investors who have adopted this mindset have met with tremendous success.

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