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Sowmya Sundar

Port development plans to drive revenue and earnings.

INVESTORS can consider fresh exposures in Dredging Corporation of India (DCIL), a leading PSU engaged in dredging services for ports. The Government's thrust on port development enhances the scope for growth in the dredging sector. DCI being the market leader would benefit from the investments in the port sector.

At Rs 348, the stock trades at six times its trailing 12 months per share earnings. Given the strong fundamentals, leadership position and growth prospects, it could seek higher levels.

Business

DCI is a leading player in the dredging business with a market share of close to 80 per cent. It derives 95 per cent of its revenues from "maintenance dredging'' projects and the rest from "capital dredging'' projects.

It has a market share of 60-80 per cent in maintenance dredging and 30 per cent in capital dredging. Margins are higher in the latter. Traditionally, DCI concentrated on maintenance contracts due to lack of adequate capital dredging projects in the country.

Growth drivers

The primary growth driver for dredging services in the country is the Government's thrust on port development. It is estimated that an investment of Rs 7,500 crore would be required for dredging and modernisation projects for ports.

According to the Tenth Plan, the required maintenance dredging capacity would be 8.6 crore cubic meters. After the recent expansion, DCI's fleet capacity stands at 7.3 crore cubic meters per annum.

With an expanded fleet, DCI is in a position to meet the domestic demand for dredging services. It has finalised contracts with Kandla, JNPT, Mangalore, Paradip, Goa, Vizag ports and a five-year contract with the Kolkata port for maintenance dredging.

After securing these contracts, DCI's market share increased to over 80 per cent. It has also leased out its cutter suction dredger, which was lying idle, to an international dredger under a three-year contract, which would fetch it close to Rs 13 crore per annum.

Apart from maintenance dredging in the pipeline are, several capital dredging projects, worth Rs 1,000 crore, where multinationals have a strong presence. DCI's success would depend on its ability to compete aggressively on the pricing front.

It has armed itself with two cutter section dredgers for capital dredging projects. Even if DCI bags a fraction of the contracts on the anvil, it would boost earnings growth as margins are higher in capital dredging projects.

Competition from multinationals

Due to an ageing fleet and higher operational costs it is difficult for DCI to compete with the MNCs on the price front. However, being a government company, it has the first right of refusal for tenders. This gives it an edge over foreign companies.

Moreover, a couple of contracts awarded to foreign contractors were terminated abruptly and the port authorities had to pay a heavy price. Due to such bitter experiences with the MNCs in the past the port authorities are more comfortable with DCI.

The better prospects are reflected in the improving financials of the company. For the quarter ended June 2003, income from dredging activity grew 14 per cent to Rs 100.23 crore. Net profit rose 22 per cent to Rs 24.3 crore. However, operating margins dropped from 63 per cent to 56 per cent due to higher wage and fuel costs.

Depreciation costs too increased due to the higher depreciation charged on the new dredgers. Only a substantial decline in deferred tax provision boosted profitability. Going forward, given the improved demand picture, double-digit growth in revenues and earnings are likely, making the stock an attractive investment proposition.

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