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S. Vaidya Nathan

AN INVESTMENT can be considered in the initial public offering of Bharati Shipyard at Rs 66, (the upper end of the price band).

The outlook for shipbuilders has improvedas shipping companies have been modernising and expanding their fleet.

The enhanced level of oil exploration activities and stress on coastal shipping is likely to ensure a steady flow of orders for Bharati Shipyard, which has a good track record.

The company's revenue and earnings have exhibited a volatile trend over the past four years. This aspect is, however, intrinsic to the cyclical nature of the industry. As the shipping industry's fortunes has been on an upswing that is likely to be sustained at least for a year, there has been an improvement in the order book as well as scale of revenues of Bharati Shipyard.

At present, the company has orders for 12 ships valued at Rs 422.6 crore.The order book is healthy and provides stability on revenues for at least two years. The expansion in operating profit margin in FY-04 is also likely to be sustained.

The company has a diversified clientele base with the likes of Great Eastern Shipping, Reliance Industries and a few customers in the Gulf countries figuring as regular buyers.

Its plans to expand its shipyards and also acquire the capability to build larger-sized ships could attract more interest from shipping companies as well as others which have a sizeable coastal transportation operation.

The maritime infrastructure project — Sagar Mala — initiated by the Government of India, the subsidy element for domestic shipbuilders and the incentives for export of ships built at Indian yards are macro level factors that should benefit Bharati Shipyard.

Bharati Shipyard plans to acquire Pinky Shipyard. The acquisition will enable Bharati to acquire a shipbuilding facility in Goa; it has now been operating out of its two yards elsewhere and also hiring facilities in Goa to complement its operations.

The acquisition will lead to savings in hiring costs; it is also likely to be attractively priced as Pinky Shipyard has not reported any operations for close to four years and is in poor financial shape.

Bharati Shipyard may, however, have to incur sizeable costs in bringing Pinky's facilities to shipshape. Any delays in this process could act as a drag on profitability. This and the high level of receivables and inventory represent risks to our recommendation.

The IPO is being offered through the book-building route. The post-IPO equity base would be Rs 22.5 crore. The investment bankers are SBI Capital Markets and Enam Financial Consultants. The offer closes on December 8.

The offer document is available on the Web site of the Securities and Exchange Board of India (www.sebi.gov.in). The company's Web site is www.bharatishipyard.com.

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