The Hindu Business Line : Shipbuilding: Setting sail to favourable winds

A surging order book made up mainly of export orders, expansion plans that are on track and strategies to move up the value chain in terms of bigger vessels and offshore segments augur well for Indian shipbuilders.

Vidya Bala

The shipbuilding industry in India has just set sail and appears headed for a promising future with an order book of almost Rs 24,000 crore or $5 billion.The surging order book along with expansion plans that are on track and strategies to move up the value chain in terms of bigger vessels and offshore segments, augur well for Indian shipbuilders.

While ABG Shipyard and Bharati Shipyard are the only listed players dedicated to this business, a number of companies such as Larsen & Toubro, Mercator Lines and Adani Group have entered this lucrative segment. A few others are also likely to tap the capital market in the near future, given the need to rapidly expand capacities to meet demand.

We take a look at how the industry is suddenly in the limelight, its structure and the opportunities as well as threats facing it.

The triggers

Increase in seaborne trade and scrapping of old ships have been the primary drivers for an upsurge in demand for new ships globally. According to the International Maritime Organisation, over 95 per cent of world trade is carried by sea, resulting in increased demand for ships as trade expands.

Increase in oil and gas exploration on the back of high oil prices has also triggered demand for vessels in the offshore segment. Further, regulatory issues such as scrapping of single hull vessels by 2010 and retiring of older fleets are also driving demand.

This is, however, not backed by sufficient berths in shipyards in countries such as Korea and Japan that are established players in the sector.

These countries, apart from being fully booked in terms of capacities, have also moved to building larger vessels as high labour costs eat into the margins of smaller handy size vessels.

Hence, newer and low cost destinations such as China, India, Vietnam and Turkey have become conspicuous, specifically for their low-cost skilled labour.

The Indian story

Historically, the prominent shipyards in India were public sector companies catering to both the civil/commercial users and Defence. However the abolition of the Industrial Licensing Policy in the 1990s paved the way for private shipbuilders such as Bharati Shipyard.

Their entry, however, coincided with the Asian financial crisis, leading to a dip in demand for ships. The private players, therefore, witnessed real growth only post-2003. Unlike a number of manufacturing activities which have moved to automated assembly lines, shipbuilding remains a largely labour-intensive and customised skill-intensive job, thus providing huge business potential for emerging countries with cheap and skilled labour.

At present, of the 27 shipyards in India, eight are under the control of the Shipping and Defence ministries and the rest are private shipbuilding or repairing yards. Cochin Shipyard and Hindustan Shipyard are two of the bigger companies with the Shipping Ministry.

While the public sector companies have a balance of domestic and export orders, the private players’ order book is tilted 85 per cent in favour of overseas orders, a good number of them being repeats. The orders of private players are clearly reflective of the gargantuan demand in the overseas market.

Nevertheless, the orders in terms of dead weight tonnage (DWT) are less than 0.5 per cent of the global order book. This is due to the fact that Indian players handle smaller vessels whereas established players globally have moved to larger segments.

However, the current expansion plans, as well as the recent forays by private players, are targeted at the larger vessel segment, offshore vessels and mid-sized bulkers. This may make for an improved global share.

Current listed players

Most of the private Indian shipbuilders’ current capacities are fully booked up to 2011 with listed players ABG Shipyard and Bharati Shipyard holding orders 11-12 times their FY07 revenues. With such huge orders (see table), the companies are looking at both the organic and inorganic growth route to ensure timely deliveries.

ABG, for instance, acquired Vipul Shipyard and was also awarded Western India Shipyard (under a revival plan). This is apart from expansion of its Surat facility and setting up a new unit in Dahej. Similarly, Bharati Shipyard is also in the race to acquire State-run Alcock Ashdown and has expansions plans in Dabhol and a new unit in Orissa (Bharati-Apeejay).

Given the current gloomy picture for exports in general, an overseas exposure of 85 per cent of the order book in the case of shipyards may appear risky.

However, the shipyard companies have weathered the currency appreciation well on the back of a high import component in their production. Imported materials and components account for close to 50 per cent of the revenue for these players, naturally offsetting any dent made by declining export realisations.

With new players entering the field, the two companies have made a conscious effort to move to larger vessels. The expanded/new facilities of these builders will mostly cater to larger vessels or offshore vessels and rigs.

This will also enable them to capitalise on the orders currently being rejected by high-end players in Japan, Korea and China due to tight capacities.

New entrants

ABG and Bharti are, however, no longer the exclusive players in the listed space. The recent order boom, combined with the Government’s subsidy scheme, especially for exports, has lured a number of companies from other mainstream businesses to foray into shipbuilding. Mercator Lines and Mech Marine Engineering, Larsen & Toubro, Adani Group and Pawan Kumar Ruia Group have all lined up massive investments for shipbuilding ventures.

Other private shipyards are coming up with an initial public offer or tapping private equity. Pipavav Shipyard, for instance, has filed its draft red herring prospectus, while ICICI Ventures has a stake in Chennai-based Tebma Shipyard.

What has driven so many Indian players into the ring? Apart from the global business potential that is currently seen, the Government’s subsidy for the sector may have been a key factor that drove a number of companies to tap into the potential.

The subsidy scheme, which expired in August 2007, provided a 30 per cent incentive for ocean-going merchant vessels more than 80 meters in length that are sold domestically.

More importantly, a 30 per cent incentive is also available on all ships sold to foreign firms, irrespective of ship size.

To put it simply, a company receiving a Rs 500-crore order from a foreign company would be eligible for Rs 150 crore by way of a cash subsidy from the Government (which is received with a lag), the objective being to encourage a sector that is both labour and capital-intensive.

Representation has been made by the shipbuilders’ association to revive this subsidy.

The Ministry of Shipping has also proposed a 20 per cent subsidy scheme. Clearly, with a huge import component and orders for low-end vessels, the sector may not paint a very bright picture if the proposal is not accepted.

Another factor that may have driven companies from other streams into the sector may be the fabrication facility built in shipyards. Punj Lloyd, for instance, will be able to use the fabrication facilities of Pipavav Shipyard (in which it has a strategic stake) for its mainstream business as well.

A similar logic can be extended to Larsen & Toubro too.

For these players, better utilisation of resources, apart from entry into a booming business, may well be one of the objectives.