Thursday, December 2, 2010

Shipping Corporation FPO - Invest or Wait?

 With the Shipping Corporation FPO overcoming the slow start, and getting subscribed 2.46 times by 11 AM, 3rd December, and with today being the last and exclusive day for retail investors, the buzz is now all around this PSU Public Issue.

The FPO of Shipping Corporation of India (SCI) (BSE: 523598, NSE: SCI) was rather overshadowed for two days by the IPO of another PSU, MOIL, which saw oversubscription of more than 50 times.

MOIL’s Public Issue being an IPO, and it being offered at attractive valuations, most investors were scrambling to get in, many for the listing gains alone, which the Issue is sure to have.

But little known, here was the Shipping Corporation FPO at much more attractive terms. At Rs. 140, the upper edge of the price band, the price-to-book-value ratio of SCI is 0.94. In other words, the offer price is around Rs. 10 lower than Shipping Corporation’s book value of Rs. 149.65.

To put this in perspective, no PSU IPOs or FPOs, past or in future are likely to be offered at such a steep discount, as most of them will come with a P/BV of 2 or 3. Private sector IPOs tend to be priced even higher, at 4 or 5 times their book value.

ALSO READ: Punjab & Sind Bank IPO - Valuation Attractive, Momentum Doubtful, Timing Problematic

Even Mercator Lines, a much smaller private sector player than Shipping Corporation is commanding a P/BV of 1.30.

To put this in even better perspective, there is almost no stock in the cross-sectoral BSE PSU Index that is available in the secondary market now, beneath its book value. Of the 56 stocks included in this collection of most-traded of PSU stocks, only one - MTNL - is available beneath its book. But then MTNL has been in deep red for sometime, and is trading on astronomical TTM price-earnings ratio that offsets its P/BV discount.

Shipping Corporation on the other hand is a profit-making entity with a TTM EPS of Rs. 15.71, which translates to an offer P/E of just 8.91. The Shipping Industry’s average P/E is around 16 now, and that leaves much room for SCI to appreciate from the offer price, even without earnings expansion.

Even comparable players like GE Shipping is trading at 14.3 P/E, while Essar Shipping is trading at a high P/E multiple of 42. But Shipping Corporation is a much bigger player in the sector, at almost double the size of GE and thrice the size of Essar.

But of course, the SCI FPO’s very attractive pricing also raises the question of why it is being offered cheap. One reason has been the doldrums facing the international shipping industry that had affected Shipping Corporation also in an equal measure. This was also reflected in the year-to-date price-performance for the scrip which was rather flat.

But with the headwinds facing the industry easing, and SCI demonstrating a decisive turnaround in the first two quarters of this fiscal, the cheap valuations should be encouraging to investors.

Shipping Corporation is also on course for a $1 billion capex within the next couple of years that will enlarge and modernise its fleet to a hitherto unseen scale and quality.

For long-term investors with 2-3 years horizon, the Shipping Corporation FPO presents a unique chance in value investing, if not for the single reason that they would have caught SCI at the absolute bottom.

In the shorter-term, crude moving up can present a good upside for this stock.

The SCI FPO is especially attractive for retail investors due to the 5% discount, as well as the fact that due to the relatively low retail interest, investors are likely to get the quantity that they apply for, unlike in MOIL or Power Grid.

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