Sunday, August 15, 2010

Varun Shipping: SELL

Recommendation rationale:
`The operational performance of Varun Shipping Co (Varun Shipping) has been under pressure for the last one year as all segments in which it operates i.e. LPG, crude and AHTS have witnessed a softening of freight rates. Due to the oversupply of LPG carriers combined with subdued demand, LPG freight rates are expected to remain sluggish, going forward, while crude tanker rates are expected to marginally rise impacting the company`s performance. Significantly high debt levels would also add to the pressure on the bottom-line, going ahead.`

`Varun Shipping operates a diversified fleet and has a dominating presence in the Indian LPG space combined with strong management capabilities. However, the steep correction in freight rates and high leverage has had a cascading effect on the company's operational performance. Varun Shipping is likely to need at least another couple of years to register a significant recovery and post a positive bottom-line from operations. Keeping the above factors in perspective, we have valued Varun Shipping at 0.80x FY12E P/BV to arrive at a price target of Rs 36. We maintain our SELL recommendation on the stock.`


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