Steering Into Choppy Waters

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p><p align="justify"><span class='dropthecap'>I</span>ndia's ship-building industry's order book, roughly 1 per cent of the world's, is facing growth pangs with over 50 per cent of orders facing price re-negotiation, payment issues and client-related uncertainties. As the woes of the manufacturing sector distend, reflecting a 76 per cent drop in Baltic Dry Index (year-on-year up to May 2009), re-negotiations for the new rates, schedule of payment and delivery have intensified. The largest yard in terms of capacity, Pipavav has 48 per cent of its order book under review while 5-10 per cent each of ABG Shipyard and Bharati Shipyard book have already been renegotiated with much more to come. Analysts say such prolonged negotiations could affect the working capital flow as well as long-term profitability. About 78 per cent of the orders are to be delivered after 2010.</p><p align="justify"><img style="width: 150px; height: 224px" src="http://www.businessworld.in/bw/image/Business/Infrastructure/orderbook_150x224.gif" border="1" alt="Orderbook Composition" title="Orderbook Composition" width="150" height="224" align="right" />"Falling commodity prices have shrunk the value of orders while the severe liquidity crunch has certainly delayed payments," says Param Desai, analyst at Angel Broking. Pipavav Shipyard, for instance, is negotiating hard with Golden Ocean and AVGI Maritime Group to save 18 Panamax bulk carriers as the contract empowers clients to cancel the orders if they fail to arrange finances. While the shipping companies have sought a large discount in prices, Pipavav's other order from French shipping company Setaf to supply four panama bulk carriers has gone into an arbitration process on the issue of cancellation. Bhavesh Gandhi, vice-chairman of Pipavav Shipyard, admits that renegotiations have become the norm of the day for Indian shipyards. "We have no choice but to accommodate their demands, but the impact may be minimal on overall profits due to the rupee appreciation," he says. For example, while the new build price for capsize is at about $58 million (as per RS Platou monthly report), negotiations have brought it down to $36-38 million for Indian yards. Analysts such as Emkay Global's Pritesh Chheda say such strong re-negotiations are a stepping stone to cancellation or client delays beyond a specific time. Indian clients are easier to deal with, but the take-it or leave-it attitude of the foreign clients (contributing 60 per cent of the order book) has not helped. While ABG Shipyard and Bharati Shipyard declined to comment, analysts say that client-led delays have been severe since past two quarters on these players. ABG has been reporting lower operating margins for last two quarters despite a major rig order from Essar Shipping while Bharati is struggling with the completion of a large rig order from Great Offshore.</p><p align="justify"><img style="width: 250px; height: 197px" src="http://www.businessworld.in/bw/image/Business/Infrastructure/fully_birthed_250x197.gif" border="1" alt="Fully Birthed?" title="Fully Birthed?" width="250" height="197" align="left" />"Client-led delays and postponements are leading to lower execution of order backlogs. The industry may start reporting cancellation soon which could impact the visibility and consequently the revenue booking schedules for the next few quarters," says Chheda, who is quick to predict a consistent fall in profits. </p><p align="justify">Shipyards are looking towards the government to renew the 30 per cent subsidy as even its low cost of labour is not helping much. However, the uptrend in crude prices sustains the hope that offshore segment orders may not come for cancellation. </p><p align="justify">As global financial crunch continues to pinch, land is far too distant for comfort.</p> <script type="text/javascript"> var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } </script> (This story was published in Businessworld Issue Dated 28-09-2009)