Varun Shipping: Below Average

Score: Below Average

S. Vaidya Nathan

Shareholders of Varun Shipping can consider giving the rights offer of fully convertible debentures a go-by as the prospects for a sustained improvement in value looks remote.

This is evident from the price performance of the stock in the last five years.

The stock has been on a steady decline and most of the time has been close to Rs 10 per share level. For shareholders who got in at around Rs 10, the dividend yield has been attractive over the years though capital appreciation has been muted if at all any.

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Though the company is offering the FCDs and their conversion at a price of Rs 10 per share, the expansion in the equity base is going to be sizeable. The equity base would double to Rs 72 crore. The company may be hard pressed to maintain the 14 per cent level of dividend on a higher base.

As it is the dividend payment has been on a decline from 28 per cent five years ago. With the fleet acquisition likely to take time and contribute to revenues only from 2002-03 if everything goes on schedule, the improvement in the bottomline may have to wait.

The company's revenue stream despite a diversified base has been more or less stagnant since 1997-98. Whether the growth in revenues and earnings would move up sharply enough to offer sustainable capital appreciation is subject to some doubt. The cyclicality of the shipping industry may also be factor that could impart volatility to the earnings stream as in recent years. In this backdrop, the scope for capital appreciation appears limited. The 14 per cent interest rate does look attractive in the present structure of interest rates on offer.

But to invest based on this factor alone may involve the risk of possible capital losses when the FCDs are converted into equity. This could affect the overall level of returns. In this backdrop, shareholders, barring those who have a penchant for high risk, can stay clear of the rights offer.

Suitability: Only for investors with a high appetite for risk, the Varun Shipping FCD could be considered. The interest rate on offer at 14 per cent is fairly attractive. However, this could also be due to the risk profile of the company and its constraints in raising more resources elsewhere. The company's stock is largely a dividend play and sustained capital appreciation has been virtually non-existent. In this backdrop, only shareholders with a high risk profile willing to be satisfied with some dividend, and the ability to cut exposures as and when the market price improves, can consider exposures in the stock.

What the company says: According to the offer document, the company has indicated that:

*Varun Shipping is offering 14 per cent fully convertible debentures of Rs 10 each. The debentures are unsecured. They are offered on the basis of one debenture for every equity share held. Each debenture shall be converted into one equity share at the end of 12 months from the date of the FCD's allotment. The market lot of the FCDs in physical form shall be 100 FCDs.

*The object of the rights offer is to finance the acquisition of new and/or second-hand ships and augment the company's long-term resources.

*The purchase of ships to be completed within 12 months from the date of allotment.

*At present the company operates in four sectors -- LPG, oil products, dry bulk and offshore sector.

*A large portion of the freight earnings of the company are dollar denominated (71.46 per cent) and the value of ships in the international market are dollar-based.

*The company has a large LPG fleet accounting for around 54 per cent of the fleet in this category.

*Around 50 per cent of the fleet is placed on long-term time charter which acts as a cushion against market cyclicality.

*The company earnings card shows a volatile trend with the last three years not as good as the preceding three. Between 1995-96 and 1997-98, the company had profits of Rs 74.38 crore, while in subsequent periods, the profits were almost half this level.

*There has been a steady growth in revenues from Rs 143.28 crore in 1995-96 to Rs 184.75 crore in 1999-2000.

*For the year ended March 2001, the company forecast profits of Rs 13.50 crore and revenues of Rs 176.05 crore.

*The dividend paid out in the last two financial years -- 1998-99 and 1999-2000 -- has been 14 per cent as against levels in excess of 20 per cent earlier.

Issue highlights

Industry class: Shipping

Issue type: Fully convertible debenture

Offer size: Rs 36.26 crore

Offer price: Rs 10 each

Project cost: Rs 102.74 crore

Equity base: Rs 72.52 crore

Offer opened: March 5

Offer closes: April 18

Lead manager: SBI Capital Markets

Promoter: Mr Dilip D. Khatau

Listing: Mumbai, Ahmedabad, Kolkata, Delhi