Sunday, January 10, 2016

Dredging Corporation of India - Buy

Currently, only 0.15 per cent of domestic cargo is transported by inland water transport in India, compared with 43 per cent in China. Ports and inland waterways are however, expected to get a boost with the recent Cabinet approval to increase the number of national waterways from five to 111 in the National Waterways Bill.

Investors who want to bet on the growth in water-based transport in India can consider buying shares of Dredging Corporation of India (DCI), a public sector unit. DCI is the only government provider of dredging services, with 80 per cent market share in maintenance dredging.

The Plan target for maintenance dredging has been increasing — from 430 million cubic metres (mcm) in the 11th Plan to 529 mcm for 2012-17. About 70 per cent of this target is being achieved each year. DCI added three new dredgers since 2012 to capitalise on the demand.

DCI has clocked average revenue and operating profit growth of 16 and 30 per cent respectively, in the last three years. The stock price jumped 200 per cent in the election rally (February 2014 to June 2014); it has since corrected from its highs.

The current price of Rs.398 discounts DCI’s trailing 12-month earnings by 14 times — lower than its three-year average multiple of about 17 times. This is an attractive entry point, given the company’s growth potential.

Revenue boost

DCI earns revenue through capital dredging (creating/deepening channels) and maintenance dredging operations with its fleet of 16 equipment. Haldia, Ennore, Kochi and Visakhapatnam ports are among its main customers, with Haldia accounting for half its revenue. The company plans to work for Andaman & Nicobar, Daman & Diu, Karwar and Ratnagiri ports.

Revenue fell 6 per cent in 2014-15 to Rs.725 crore due to repair work on the company’s dredgers. The management’s revenue target for 2015-16 is Rs.850 crore from domestic and Rs.100 crore from international operations, but it has achieved only Rs.327 crore in the first half of 2015-16.

But revenue growth should get a leg-up in the next few years with new expansion plans.

One, DCI is also venturing into overseas markets through collaboration with Abu Dhabi-based National Marine Dredging Company. It plans to rent out four of its dredgers and a tug for two years in the Gulf region.

Next, the company plans to work at the Andaman & Nicobar, Daman & Diu, Karwar and Ratnagiri ports. Also, it has been invited by the Andhra Pradesh government for sand mining in the Krishna river.

Besides, it is working with the Inland Waterways Authority of India to be the nodal agency for developing the Ganga, Yamuna and Godavari projects as well as the Buckingham Canal project.

Finally, increased dredging targets, deepening ports, new port development and initiatives, such as the Sagarmala and Ganga projects, can boost demand. DCI is the only government agency that has specialization to execute dredging along the entire project stretch of the Ganga project.

Better margins

DCI’s profit margin has been increasing, helped by a few factors. One, fuel accounts for about half its expenses and the fall in oil prices will continue to aid earnings. In the first half of 2015-16, fuel expenses decreased 30 per cent year-on-year. This boosted operating margins to 28 per cent in the first half of 2015-16 from 18 per cent a year ago.

Two, the company plans to reduce its operational costs by refurbishing its existing dredgers that are old. It also plans to reduce import of parts through local manufacturing. The utilisation ratios for the new equipment are better than for the older ones and new fleet additions should help the operating margin.

Depreciation expenses fell 33 per cent in 2014-15 as the life of the dredgers was increased from 14 to 25 years, keeping with Company’s Act, 2013 requirements. This helped boost earnings in 2014-15 Y-o-Y by 166 per cent to Rs.62 crore.

Also, the company does not pay the corporate tax rate, but a tonnage tax that is not based on actual profits. Tax is calculated by applying a notional annual income to its registered capacity and works out to about 4-5 per cent of profit.

The company’s total debt reduced to Rs.1,342 crore in September 2015 from Rs.1,512 crore a year ago. The debt-to-equity ratio stands at 0.9 times. DCI is likely to receive Rs.309 crore of past dues from the government for its work on the Sethusamudram project.

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