SHIPPING CORPORATION OF INDIA

The Shipping Corporation of India (SCI) is entering the capital market on 30^th November 2010, with a follow-on public issue (FPO) of 8.47 crore equity shares of Rs. 10 each, comprising of fresh issue of 4.23 crore equity shares and an equal number of shares as offer for sale, by the Governments of India. The issue, priced in the band of Rs. 135 to Rs. 140 per share, constitutes 18.18% of post-issue paid-up equity share capital of the company. Retail investors and employees will get a 5% discount, resulting in an effective price of Rs. 133, calculated at upper band. The issue will close on 2^nd December for QIBs and on 3^rd December 2010 for retail and HNI investors.

Shipping Corporation is India's largest shipping company by tonnage, owning a fleet of 77 vessels of 5.37 million dead weight tonnage (DWT). For FY10, the company's sales stood at Rs. 3,463 crore with net profit of Rs. 377 crore and EPS of Rs. 8.90. In H1FY11, sales increased to Rs. 1,783 crore, on the backdrop of revival in the shipping sector (increased global trade) as well as hike in charter rates, resulting in exceptionally higher PAT at Rs. 442 crore, with EPS for the half-year of Rs. 10.44. This includes profit (pre-tax) on sale of ships to the tune of Rs. 143 crore.  

SCI's networth, as on 30-09-10, stood at Rs. 6,787 crore, while it had net debt of Rs. 1,458 crore. Through the FPO, company expects to raise Rs. 582 crore at the upper end of the price band, while an equal amount will go into the Government's kitty, as part of its divestment plan. Funds raised by SCI will be used to part-finance the acquisition of 24 vessels.

The upper end of the price band of Rs. 140 per share is a mere 2.50% discount to current price of Rs. 143.50. Compare this with Power Grid FPO's 8% discount to then prevailing market price. If market sentiments have changed over the last few days, the government should have factored that in, while pricing this FPO. Moreover, stock price of Power Grid has now corrected to 94 against its issue price of Rs. 90 to non- retail investors, post new shares having come in the market. Thus, Power Grid FPO has not given too much to cheer about, in the immediate future (read listing gains) especially for HNI investors. This will dissuade QIB and HNI investors from showing too much interest in this FPO.

The success of Coal India IPO and Power Grid FPO may have tempted the government to be a little stingy, this time around. Nevertheless, since the issue size (in terms of fund mobilisation) is not too large at Rs. 1,165 crore, it may have got a little aggressive on the pricing front. Maybe, LIC and SBI can always be relied upon in case of lukewarm response to FPO.

The markets would have cheered, had the party continued and if the issue had been priced atleast at a 10% discount (say, upper end at Rs. 130), leaving healthy gains on the table for prospective investors, even if, SCI share price corrects later, post more shares getting added to its free float.

This time around, retail will make an assured gain, given the 5% discount. However, QIBs and HNIs may not make a killing, as seen in Coal India (and expected in MOIL). Moreover, since overall cautious sentiments have made the secondary market valuations more attractive, HNI investors may not participate with full support.  

Retail investors may apply at the upper band, and expect to get shares at Rs. 133 a piece, while others can give this one a miss and look at options in the secondary market!