Indian shipyards set for smooth sail

The Indian shipbuilding industry could witness good times once again following a significant rise in offshore activities and favourable policy changes.

While the boom in the offshore segment is expected to pump up order-books, certain favourable policy changes could help the Indian players compete with global players more effectively.

“Globally favourable demand drivers - rise in oil prices, pick-up in demand from the US and Europe, rising upstream E&P expenditures and age profile of the fleet - are manifesting for the offshore segment, which is the core strength of most Indian shipyards,” Sanket Maheshwari, research analyst, ICICI Securities, wrote in a research note.

Kejal Mehta, research analyst at Prabhudas Lilladher, said some revival has already been witnessed in the global offshore order-book in the last couple of months.

“However, the Indian shipyard companies are yet to see this kind of revival, though they have been talking about increase in the number of enquiries. There may not be a major revival in the short term, but we could see something on those lines in the next few months,” said Mehta.

The offshore segment contributes 50% to 60% to the total business of Indian shipyards. Out of these, ABG Shipyard and Bharati Shipyard are the ones ideally positioned for such orders.

“We recently received orders worth Rs2,500 crore in the offshore segment. In the
next two years we expect orders to double to around Rs5,000 crore from the offshore segment alone,” said Dhananjay Datar, CFO, ABG Shipyard.

The company’s current order-book is at around Rs14,300 crore, with 60% of this from the offshore segment.

Vijay Kumar, managing director, Bharati Shipyard, is also positive on expected orders from the offshore segment.

“This would be speculative, but we are expecting orders in the range of around Rs1,000 crore to Rs1,500 crore from the offshore segment in the next two years.” The company’s total exposure in the offshore segment is around 65%, with an overall current order-book of above Rs5,000 crore. Both company officials believe defence and offshore would drive demand for Indian shipyards in the next couple of years.

The ICICI Securities research note points out that shipyards may also witness some immediate triggers such as orders from Shipping Corporation of India, continued subsidy, new defence contracts and rig & tanker orders. Hence, pent-up demand, especially in offshore, is set to translate into new orders.

SCI has a financial outlay for every year over the next three years of close to $1 billion. With the recent government decision to relax the pre-qualification clause for Indian shipyards, the local players are keen on these orders.
While the clause relaxation would help, the companies have to be price competitive
to bag these orders. “Even with the relaxation on the pre-qualification clause, it would be difficult for Indian shipyards to match prices with the global players like China. To match up to that price level, these companies will have to reduce margins,” said Mehta.

If the central government decides to revive its subsidy policy for shipyards, that could further help companies to become cost competitive. However, there is still less clarity on whether the subsidy would be revived and if it is will it apply to domestic orders as well.

Amid these positive changes, merchant shipbuilding may continue to remain under pressure. Merchant shipbuilding will take time to recover from the excesses in ‘07-08. This is especially true for dry bulk, wherein current order-books are expected to be less than 45% of the fleet, said the ICICI securities research note.