pipavav shipyard ltd PSL share ship building sector

About company
1) PSL was established in 1997. The Pipavav Shipyard was originally planned and developed by the company as a ship-dismantling facility, in order to meet anticipated demand arising from International Maritime Organization (“IMO”) regulations that were expected to be implemented in 2002 and which would have resulted in an increased rate of retirement of older tankers by ship owners.

2) When implementation of the IMO regulations was deferred, it decided to convert the ship dismantling facility then under construction into a shipyard in order to meet expected increase in demand for new vessels. Most of the existing infrastructure from the ship-dismantling facility, including two wet docks of approximately 680 meters in length and 60-65 meters in width, is being incorporated into the construction of the Pipavav Shipyard PSL is currently completing the construction of the Pipavav Shipyard, located on the west coast of India adjacent to major sea-lanes between the Persian Gulf and Asia.

3) Upon completion of construction, the Pipavav Shipyard will be capable of ship construction and repairs for a range of vessels of different sizes and types, including naval vessels and coast guard vessels, as well as the fabrication and construction of products such as offshore platforms, rigs, jackets and vessels (but excluding sub-sea pipelines) for oil and gas companies, which it intends to offer in its Offshore Business. Commercial operations at the Pipavav Shipyard commenced on April 1, 2009.

4) It is currently constructing vessels while simultaneously completing construction of the offshore yard and installation of two Goliath cranes at the Pipavav Shipyard. The remaining construction of the Pipavav Shipyard (excluding the offshore yard) is expected to be completed in October 2009. PSL has commenced construction of four vessels, the first of which is expected to be delivered in April 2010, with subsequent deliveries expected to occur at intervals ranging from one to three months thereafter.

The company’s order book
1) The company has a strong order book. It has firm order agreements with Golden Ocean Group Limited (Golden Ocean) and AVGI Maritime Group (AVGI) for the construction of 10 Panamax bulk-carriers of 74,500 DWT each, having an aggregate value of US$ 373.52 million (Rs. 17,880 million), scheduled for delivery from April 2010 to May 2012.

2) It is in discussions with Golden Ocean to amend two additional firm order agreements for Panamax bulk-carriers of 74,500 DWT each so as to grant Golden Ocean options under those agreements, exercisable by December 31, 2010, to take delivery of each vessel, having an aggregate value of US$ 71.26 million (Rs. 3,411 million) if both are exercised and an option fee of US$ 7.0 million (Rs. 335.09 million) if the options are not exercised.

3) PSL is in discussions with AVGI to amend six additional firm order agreements for Panamax bulk carriers of 74,500 DWT so as to grant AVGI unilateral rights, exercisable on or after an agreed date, to terminate its obligation to take delivery of one or more of those vessels if it is unable to arrange funding for the relevant vessel, such vessels having an aggregate value of US$ 231 million (Rs. 11,058 million).

4) PSL is also engaged in arbitration with Setaf regarding whether it has the right to cancel one or more of four firm order agreements for Panamax bulk-carriers of 74,500 DWT each, such orders having an aggregate value of US$ 144 million (Rs. 6,893 million) and recently received notification from Oil and Natural Gas Corporation Limited on June 26, 2009 of the award of contract for construction of 12 OSVs scheduled for delivery from June 2011 to December 2011, with an aggregate contract value of US$ 111.85 million (Rs. 5,354 million).

Big Plus point
Upon completion of construction, PSL will have a competitive advantage available in terms of its capability to handle large vessels at competitive cost.
Pipavav Shipyard is expected to have a dry dock facility of approximately 662 meters in aggregate length, with the capacity to accommodate vessels of up to 400,000 DWT and capable of handling merchant ships such as VLCCs and large naval vessels and coast guard vessels, such as aircraft carriers, together with facilities for fabrication / assembly of products for the offshore sector. Based on information on other shipyards’ websites as to their actual capacity and their capacity under construction and assuming no further increases in such capacity, upon completion, PSL will have the largest dockyard in India. It will have a competitive advantage available in terms of the capability to handle large vessels at competitive cost.

The Indian Shipbuilding Industry
The Indian shipbuilding industry is small by global standards, and Indian shipyards currently account for 1% of the global order book in 2009. The structure of the Indian shipbuilding industry can be divided into three distinct segments:
Public sector shipyards: India’s major shipyards have historically been public sector shipyards, which primarily build merchant class ships and naval vessels. Public sector shipyards include Hindustan Shipyard Limited, Cochin Shipyard Limited, Hooghly Dock & Port
Engineers Limited and Central Inland Water Transport Corporation Limited.
Defence shipyards: There are three naval shipyards under the purview of India’s Ministry of Defence, namely Mazagon Dock Limited, Goa Shipyard Limited, and Garden Reach Shipbuilders & Engineers Limited.
Private shipyards: The two publicly listed private shipbuilding companies are Bharati Shipyard Limited, and ABG Shipyard Limited and these companies have been expanding in recent years. In addition, there are a number of smaller private shipyards which build smaller ships and vessels including coastal vessels, barges, tugs, patrol ships and fishing ships.
Pipavav Shipyard Ltd (PSL) is belongs to private sector.

Key Growth Factors for Indian Shipbuilding Industry
Although India occupies a small percentage of the global shipbuilding market, the Indian shipbuilding industry is well positioned for growth. As growth in international trade results in increased global and domestic demand for new vessels, Indian shipyards have certain advantages over shipyards in more developed nations. Although India possesses a large pool of well-educated English speaking technical workers, its cost of labor is low compared to most other shipbuilding countries. Shipbuilding is a labor-intensive industry and thus India’s low cost of labor should provide Indian shipyards with the opportunity to increase their market share of the global shipbuilding industry. Any increased demand for new vessels and increases in ship prices would lead to attractive opportunities for new market entrants from India.

Some concerns about Pipavav Shipyard Ltd (PSL)

1) Customers have sought to cancel, renegotiate, arbitrate or otherwise modify contracts for vessels in its order book: PSL’s order book does not indicate or guarantee that future earnings will be earned relating to the performance of that work. Its order book represents business that is considered likely, but cancellations or scope or schedule adjustments may and do occur. Also, most of the contracts in its current order book are being negotiated. This could materially harm its cash flow position, financial conditions and results of operations

2) Delays in the manufacturing and delivery of vessels to customers may result in PSL being liable to pay customers damage: In the past, longer-than-normal monsoon seasons, delays in the mobilization of foreign technical workers due to visa issues, global economic conditions and design delays have caused delays in the manufacturing and delivery of the vessels and may do so in the future. PSL has already delayed in delivering two vessels whose contracted delivery date were on or prior to April 30, 2009 and one other vessel whose contracted delivery date was on or prior to June 30, 2009. It may encounter problems executing the projects as ordered, or executing them on a timely basis. Moreover, factors beyond its control may cause a project to be delayed including delays or failures to obtain necessary authorizations, permissions or permits in a timely manner, and other types of difficulties or obstructions. Any delay in the completion and delivery of the vessels that PSL is constructing under its shipbuilding contracts will result in it being liable to pay its customers damages, liquidated or otherwise.

3) Growing and new competition: PSL operates in a highly competitive environment. In addition to public sector shipyards, which the Government of India has taken an interest in developing, it also faces competition from various private sector shipyards in the Indian and international markets. In the Indian market, among other shipbuilders, it faces competition from private and public sector shipyards. Some of its competitors from India or other countries may enjoy many of the same advantages that it does and may even have lower cost structures, enabling them to compete vigorously on price. Contracts for the construction of ships as well as those relating to the Offshore Business are usually awarded on a competitive bid basis

Conclusion
The investment in this company and holding for next 2 to 3 years will provide good returns while holding for 3 to 5 years will provide excellent returns.
Current price - Rs 72
Expected returns - 50 to 70% in next 2 to 3 years - Target Achieved. Aug 2010, the stock price went above Rs 110.

Continue with investment call with this company - posted date - 04 Dec 2010
Current price - Rs 76
Expected returns - 50 to 80 % in next 2 to 3 years

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