Indian shipyards face bleak 2010; Bharati promising

Indian shipbuilders are heading for for another bleak year in 2010 amidst weak demand and prospects of order cancellations as the global economy struggles to emerge from a slowdown, analysts said.

Bharati Shipyard remains a lone promising bet for investors on expectation its recent acquisition of Great Offshore Ltd. will boost its orderbook and cash flows.

The sector faced a tumultuous 2009 as demand for shipping commodities plummeted amid the global slowdown, prompting several shipping services firms to cut acquisition plans or buy vessels in the second-hand market, spelling doom for the shipyards.                                            "For 2010, we don't see incremental orders. Order book has been stagnant and will continue to remain so," said Kunal Lakhan, a sector analyst at KR Choksey, which has a 'buy' rating on Bharati Shipyard and an 'avoid' on Pipavav Shipyard.

Moreover, analysts also expect additional vessel supply of about 25%, from orders placed during the boom, which will worsen the situation.

While Lakhan expects some shipping firms to delay delivery to next year, others are concerned that the over-supply may lead to order cancellations for shipyards.

"...with so much of supply coming up there might be a possibility of order cancellations. I don't think the outlook will be very positive on the shipbuilding side," said Kapil Yadav, analyst with Dolat Capital.

Shares of these companies, however, aren't reflecting these concerns yet. While ABG rose nearly 59% in 2009, Bharati more than tripled, although the reasons for the gain weren't related to the sector outlook.

Bharati and ABG's shares benefited from a six-month-long takeover battle for Great Offshore ending with an acquisition by Bharati.

Pipavav, which listed on the stock exchanges in October has remained flat. Some of its orders are subject to cancellation and arbitration, analysts said, adding there was nothing euphoric about the firm for at least 12-15 months.

"In terms of valuation, Bharati is the best bet because of the Great Offshore deal," said Kejal Mehta, an analyst with Prabhudas Lilladher, which has a 'buy' rating on the stock.

The company is likely to get additional orders of Rs2.5 billion from FY13 onwards from Great Offshore, broker Emkay Share, which has a 'hold' on the stock, said in a December report.

It has a 'sell' rating on ABG Shipyard on its high leverage and poor earnings outlook from slow order execution.

Bharati Shipyard made an open offer to buy a 20% stake in Great Offshore for 590 rupees a shares, making it the majority shareholder in the latter.

"Bharati's consolidated income will rise because of Great Offshore as it enjoys much higher margins. So, despite Bharati having just two years' revenue visibility, we still have a 'buy' on it," KRC's Lakhan said.