June 24, 2009 |Shipping, Shipbuilding

EVENT UPDATE √ Shipping/Shipbuilding

Bharat Chhoda
bharat.chhoda@icicidirect.com
The “Great” acquisition game… Prerna Jhunjhunwala
prerna.jhunjhunwala@icicidirect.com
Rahul Malhotra
India’s two major private shipyards are engaged in a tussle to acquire the
rahul.malhotra@icicidirect.com
country’s largest oilfield offshore service provider Great Offshore. The
acquisition is a strategic investment for both shipyards on account of the
following benefits:
• It enables them to forward integrate into the offshore supply vessel
segment
Price performance
• Shipyards would get revenue visibility as we expect new orders to
Returns (%)
come to them
Company 1M 3M 6M 12M
• Ship repairing, a high margin segment for shipyards, would get a
ABG Shipyard -3 160 125 -41
fillip
Bharati Shipyard 12 203 139 -57
Great Offshore 26 79 82 -29
In the eventuality of Bharati Shipyard Ltd (BSL) being able to acquire 20%
stake (total stake of 39.5%) through the open offer in Great Offshore, the
investment will be EPS accretive for BSL. For FY10E we expect the EPS to
be higher by 33-39%, assuming a debt financing ranging from 90-60%,
respectively.
For ABG, a 32.1% stake would entail EPS accretion in the range of 10-18%
assuming a debt financing ranging from 90-60%, respectively. In the event
of ABG opting for a QIP funding of Rs 450 crore, the equity would be diluted
by 40% and the EPS would fall to Rs 34.9 from Rs 36.9 in FY10E.

We believe BSL is better placed in the current scenario as compared to ABG

Shipyard, as it currently owns 19.2% stake in Great Offshore. Further, the cost
of acquisition for BSL will be lower when compared to ABG Shipyard as it has
acquired 14.9% stake at a price of Rs 315 per share. ABG Shipyard’s open
offer price of Rs 375 per share is 20% higher than the acquisition price of
Bharati Shipyard. BSL acquired 4.58% stake from GE Shipping at Rs 403 per
share. ABG Shipyard would have to revise its open offer price upwards to Rs
403 at least as the BSL management has indicated that it would revise its
open offer price above Rs 403 per share.

Exhibit 1: Key financials

ABG Shipyard Sales (Rs. Crore) EBITDA (Rs Crore) Net Profit (Rs Crore) Basic EPS (Rs)
Idirect Code ABGSHI FY09 1413.0 331.5 171.2 33.6
MCap 1089.2 FY10E 1828.2 491.4 187.9 36.9
Bharati Shipyard Sales (Rs. Crore) EBITDA (Rs Crore) Net Profit (Rs Crore) Basic EPS (Rs)
Idirect Code BHASHI FY09 1019.2 256.6 130.0 47.2
MCap 446.5 FY10E 1248.0 319.6 145.5 52.8
Great Offshore Sales (Rs. Crore) EBITDA (Rs Crore) Net Profit (Rs Crore) Basic EPS (Rs)
Idirect Code GREOFF FY09 1139.3 541.2 275.1 74.1
MCap 1524.8 FY10E 1209.8 538.9 189.6 51.0

Source: Company, ICICIdirect.com Research

ICICIdirect | Equity Research

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Story so far…

Jan 8 2009
Great Offshore promoter pledges
14.8% stake with Bharati Shipyard

May 8 2009
BSL acquires 14.89% stake in Great
offshore at Rs 315 per share

June 1 2009
BSL announces open offer to acquire
20% in Great Offshore at a price of
Rs 344

June 23 2009
ABG makes counter offer to acquire
32.1% stake in Great Offshore at a
price of Rs 375 per share

June 23 2009
BSL acquires 4.3% stake of Great
Offshore from GE Shipping

Great Offshore
Who WINS ??

Source: ICICIdirect.com Research

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Exhibit 2: Fund requirement

Details Bharati Shipyard ABG Shipyard

Existing Stake (%) 14.9 1.3
Additional stake (%) 20.0 32.1
Stake acquired from GE Shipping 4.6 -
Total Stake after open offer 39.5 33.4
Share Price* ( Rs.) 415.0 415.0
Amount required for open offer (Rs crore) 324.8 521.7
Amount for GE Shipping (Rs core) at Rs 403 per share 72.2 -
Total amount (Rs crore) 397.0 521.7
*Assuming offer price to be revised at Rs 415

Source: Company, ICICIdirect.com Research

Bharati Shipyard had earlier acquired 14.89% stake in Great Offshore at Rs 315
per share and recently acquired 4.58% (on June 23 2009) of GE Shipping in
Great Offshore at Rs 403 per share. The company further plans to acquire 20%
stake through an open offer announced at a price of Rs 344. We have assumed
the offer price will be at Rs 415, as the company says it will revise the price
upwards above 403 per share. The EPS will be in the range of Rs 70.2-73.4
assuming debt financing of 90-60%, respectively for FY10E, in case Bharati
Shipyard is able to get the entire 20% (total stake 39.5%) stake through the
open offer.
Exhibit 3: Sensitivity analysis : Bharati Shipyard

Stake acquired through open offer 5% 10% 15% 20%

No. of Shares 1956697 3913394 5870091 7826787
Share Price (Rs ) 415.0 415.0 415.0 415.0
Amount needed (Rs crore) 81 162 244 325
Debt financing
60% 48.7 97.4 146.2 194.9
70% 56.8 113.7 170.5 227.4
80% 65.0 129.9 194.9 259.8
90% 73.1 146.2 219.2 292.3
Adittional Cost at
60% debt 4.4 8.8 13.2 17.5
70% debt 5.1 10.2 15.3 20.5
80% debt 5.8 11.7 17.5 23.4
90% debt 6.6 13.2 19.7 26.3
Net Profit before additional interest cost (FY10E) 145.5 145.5 145.5 145.5
Net Profit FY10E (after additional interest cost)
60% debt 141.1 136.7 132.3 127.9
70% debt 140.4 135.2 130.1 125.0
80% debt 139.6 133.8 127.9 122.1
90% debt 138.9 132.3 125.7 119.2
Add Share of associates (Rs crore) 45.9 55.3 64.8 74.3
Net proft after acquiring Great Offshore (Rs crore)
60% debt 187.0 192.1 197.1 202.2
70% debt 186.2 190.6 195.0 199.3
80% debt 185.5 189.1 192.8 196.4
90% debt 184.8 187.7 190.6 193.5
EPS at (Rs)
60% debt 67.8 69.7 71.5 73.4
70% debt 67.6 69.2 70.7 72.3
80% debt 67.3 68.6 69.9 71.3
90% debt 67.0 68.1 69.1 70.2
Source: Company, ICICIdirect.com Research

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ABG Shipyard made a counter offer to the shareholders of Great Offshore to
acquire additional 32.1% stake aggregating to 1.25 crore shares at a offer price
of Rs 375. Currently, ABG holds 1.3% stake in Great Offshore. If the company is
able to get the full 32.1%, then it would need an amount of Rs 521.7 crore. For
funding the same amount the company will either take debt or raise equity
through QIP. In the event the company is able to raise its stake in Great
Offshore up to 32.1%, then its EPS will be in the range of Rs 40.6-43.3 per share
with debt financing of 90-60%, respectively. We believe, ABG Shipyard would
have to revise its open offer price upwards to above Rs 403 as the BSL
management has indicated that it would revise its open offer price above Rs
403 per share.

Case (a): Funding through debt

If the company funds the amount through debt, then its net profit would be
affected, as there will be a rise in the interest cost. (Refer Exhibit: 4)

Case (b): Funding through QIP

If the company funds the amount through QIP, then the EPS will be affected
negatively on account of equity dilution. (Refer Exhibit: 5)

Exhibit 4: Sensitivity analysis: ABG Shipyard

Stake acquired through open offer 5% 10% 15% 20% 25% 32%
No. of Shares 1956697 3913394 5870091 7826787 9783484 12571777
Share Price (Rs ) 415.0 415.0 415.0 415.0 415.0 415.0
Amount needed (Rs crore) 81.2 162.4 243.6 324.8 406.0 521.7
Debt financing
60% 48.7 97.4 146.2 194.9 243.6 313.0
70% 56.8 113.7 170.5 227.4 284.2 365.2
80% 65.0 129.9 194.9 259.8 324.8 417.4
90% 73.1 146.2 219.2 292.3 365.4 469.6
Adittional Cost at
60% debt 4.4 8.8 13.2 17.5 21.9 28.2
70% debt 5.1 10.2 15.3 20.5 25.6 32.9
80% debt 5.8 11.7 17.5 23.4 29.2 37.6
90% debt 6.6 13.2 19.7 26.3 32.9 42.3
Net Profit before additional interest cost (FY10E) 187.9 187.9 187.9 187.9 187.9 187.9
Net Profit FY10E (after additional interest cost)
60% debt 183.5 179.1 174.7 170.4 166.0 159.7
70% debt 182.8 177.7 172.6 167.4 162.3 155.0
80% debt 182.1 176.2 170.4 164.5 158.7 150.3
90% debt 181.3 174.7 168.2 161.6 155.0 145.6
Add Share of associates (Rs crore) 9.5 19.0 28.4 37.9 47.4 60.9
Net proft after acquiring Great Offshore (Rs crore)
60% debt 193.0 198.1 203.2 208.3 213.4 220.6
70% debt 192.3 196.6 201.0 205.4 209.7 215.9
80% debt 191.5 195.2 198.8 202.4 206.1 211.2
90% debt 190.8 193.7 196.6 199.5 202.4 206.5
EPS at (Rs)
60% debt 37.9 38.9 39.9 40.9 41.9 43.3
70% debt 37.8 38.6 39.5 40.3 41.2 42.4
80% debt 37.6 38.3 39.1 39.8 40.5 41.5
90% debt 37.5 38.1 38.6 39.2 39.8 40.6

Source: Company, ICICIdirect.com Research

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Exhibit 5: ABG: funding through QIP

Particulars
Amount (Rs. crore) 450
Share Price (Rs) 220
Existing no. of Shares (in crore) 5.1
Additional no. of Shares (in crore) 2.0
Total Shares (in crore) 7.1
Net profit FY10E (Rs crore) 248.8
Basic EPS FY10E (Rs) 36.9
Diluted EPS FY10E (Rs) 34.9
Source: Company, ICICIdirect.com Research

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 RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations.
ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current
market price and then categorises them as Outperformer, Performer, Hold, and
Underperformer. The performance horizon is two years unless specified and the notional target
price is defined as the analysts' valuation for a stock.
Outperformer (OP): 20% or more;
Performer (P): Between 10% and 20%;
Hold (H): +10% return;
Underperformer (U): -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicidirect.com

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