Navy helps public sector shipyards beat slowdown

For a change, government-owned companies are doing better than their private sector counterparts.

In an otherwise bleak operating environment for shipbuilders, state-owned shipyards such as Mazagon Dock, Garden Reach Shipbuilders & Engineers, Cochin Shipyard and Goa Shipyard have bucked the trend, thanks to a bulging order book courtesy the Indian Navy and Coast Guard.

In FY13, five state-owned shipyards (Vishakhapatnam-based Hindustan Shipyard is the fifth) together reported net sales of Rs 6,341 crore (Rs 63.41 billion) and a net profit of Rs 689 crore (Rs 6.89 billion).

In the past five years, their combined net sales have grown at a compounded annual rate of 30 per cent, while net profit expanded at 7.1 per cent.

The growth in total revenues, which includes changes in inventory and treasury income, was lower at 10 per cent a year.

Year-on-year revenue growth is highly volatile in the industry, due to long lead times in ship-building.

Besides, a few months’ delay in commissioning (not uncommon for warships) have a big impact on revenue and profit growth for that year.

The growth has resulted in a sharp improvement in the financial health of these public-sector units.

For example, the combined debt-to-equity ratio of these five companies has declined to 0.17 in FY13 from a high of 0.88 in FY09.

Except Hindustan Shipyard, all PSU shipbuilders are now debt-free, cumulatively sitting on cash and bank balances worth Rs 8,700 crore (Rs 87 billion) at the end of March 2013, two-and-a-half times their networth.

In contrast, private-sector shipyards struggle with stagnant revenues and rising indebtness.

The combined leverage ratio for three listed ones -- Bharati Shipyard, ABG Shipyard and Pipavav Defence and Offshore Engineering (formerly Pipavav Shipyard) rose to 3.2 in FY13 from 0.53 in FY08.

Their combined borrowings during the period ballooned to Rs 14,000 crore (Rs 140 billion) in the last financial year from Rs 1,346 crore (Rs 13.46 billion) in FY08.

This has resulted in a sharp spike in interest burden that now exceeds their operating profit. Bharati and ABG have applied for corporate

debt restructuring to help in a financial turnaround.

The listed shipbuilders are facing financial headwinds despite reporting higher operating margins than their PSU counterparts.

In the past five years, the former had operating margins of 26 per cent on an average against 17 per cent reported by government-owned shipbuilders.

Mumbai-based MDL has been the biggest beneficiary of India’s naval build-up followed by GRSE.

With revenues of Rs 2,860 crore (Rs 28.6 billion) and net profit of Rs 412 crore (Rs 4.12 billion) in FY13, MDL was India’s second-largest and the most-profitable shipyard in FY13, behind Pipavav Defence. GRSE is the fastest-growing,having trebled its revenues since FY10.

Profitability didn’t keep pace with revenue and rose only 20 per during the period. Goa Shipyard has reported a more modest growth.

“Over 99 per cent of our revenues come from building ships for the Navy and only if we have spare capacity do we bid for commercial orders,” says a spokesperson at MDL, which is a defence ministry PSU.

The shipyard is currently building four warships and six Scorpene-class submarines for the Indian Navy, under project 15B. MDL, along with GRSE, is also in the fray to build seven warships under navy Project 17A.

The total project, worth Rs 45,000 crore (Rs 450 billion), is expected to split between these two defence shipyards. MDL refused to put a figure to its order book.

GRSE, is currently sitting on Rs 10,000 crore (Rs 100 billion) worth of orders from the navy and coast guard, which will more than double once the government takes a final call on Project 17A.

“We expect a further increase in the order book from the navy and have expanded capacity in anticipation. We now build four ships simultaneously,” said a GRSE spokesperson.

In the past three years, GRSE’s investment in fixed assets has nearly doubled and it has expanded its design and engineering capability.

Meanwhile, Cochin Shipyard is building India’s maiden indigenous aircraft carrier, INS Vikrant. Besides, it has a number of fast patrol boats.

The only laggard among the lot is Hindustan Shipyard, which remains a loss-making entity and its net worth has turned negative on account of accumulated losses.