India Ratings downgrades ABG Shipyard

India Ratings and Research has downgraded ABG Shipyard from 'IND A-' to 'IND BBB', citing reasons such as delays in order execution and bond issue.

The company, however, remains positive and has said that it will raise Rs 688 crore (Rs 6.88 billion) over the next two months.

The rating agency has also downgraded ABG's Rs 200 crore (Rs 2 billion) non-convertible debenture programme to 'IND BBB'. India Ratings said, "The ratings are based on a consolidated view of ABG Shipyard and its subsidiaries.

"The downgrade reflects ABG Shipyard's continued strained liquidity position due to its delays in executing a novation agreement with a large client and an associate company."

In an emailed response, Dhananjay Datar, group CFO and executive director, ABG Shipyard, said, "Small delays are mostly on account of the financial arrangements at the client end.

"These delays are mutually agreed as all our clients are repeat customers and enjoy a carefree and cordial relationship.

"However, overall the company's liquidity position is normal."

He added that with the current economic slowdown worldwide, ABG is experiencing "a temporary cash flow mismatch".

The company has total order book of Rs 18,000 crore (Rs 180 billion), out of which the unexecuted order book is about Rs 9,500 crore (Rs 95 billion), which would take care of the execution/revenues for the next three to four years.

"Further, the company is now focusing on execution of offshore vessels out of the existing order book, which would entail the regular milestone payments to the company," said Datar.

India Ratings, too, noted this and said, "The company has traditionally manufactured small- to mid-size vessels for which the demand has been less cyclical, compared with the demand for large-size vessels."

ABG Shipyard has two manufacturing facilities in Surat and Dahej in Gujarat.

Its revenues increased from Rs 2,133 crore (Rs 21.33 billion) in FY11 to Rs 2,472 crore (Rs 24.72 billion) in FY12.

The earnings before interest, taxes, depreciation, and amortisation margins also improved marginally from 27.3 per cent to 28.3

per cent during the same period.

Despite the slowdown in the global shipping industry, ABG Shipyard has displayed revenue growth at a compounded annual growth rate of 20.5 per cent over FY09-FY12, while maintaining average Ebitda margin of 27.9 per cent, the rating agency said.

A client had placed an order for two oil rigs worth Rs 1,155 crore (Rs 11.55 billion), but failed to take the delivery earlier this year.

"As the bond issuance has been delayed, the agency expects ABG Shipyard's liquidity profile to have weakened significantly, due to large work-in-progress inventory relating to the rigs," India Ratings said.

The rating agency has also put ABG on a Ratings Watch Negative list.

This means that there is a potential of further delays in the placement of the bonds, which may lead to delays in the sale of oil rigs to the associate company.

This could cause the company's working capital position to be strained in FY14 as well, India Ratings noted.

Datar said, "We are actively working on the long-term funds raised and have received a positive feedback from investor as well.

"The financial market, especially the European markets are generally inactive in the month of December.

"However, we had the initial round of investor meetings and the proposed transaction is well received by the investors.

"We expect to update the investors with the transaction documents by mid-January 2013 and expect to conclude by end-Feb 2013."

The company is looking to raise up to Rs 688 crore (Rs 6.88 billion) from this bond issue.

"Considering the weakness observed globally and domestically in this industry, any future delays by other clients in taking deliveries could further impact the financial profile of the company," said India Ratings.