rating matrix dredging corporation of india...

April 20, 2016

ICICI Securities Ltd | Retail Equity Research

Initiating Coverage

Beneficiary of government’s coastal agenda... Dredging Corporation of India (DCI) is India’s only public sector enterprise (PSE) primarily engaged in dredging activity. Being the preferred dredging company for major ports and the Indian Navy, DCI is in pole position in maintenance dredging with ~75% market share. With a fleet size of 16 dredgers, the company has a combined dredging capacity of 85 million cubic metre (mcm) and is considered the largest Indian dredger. With the central government’s biggest infrastructure projects centred on coastal development, DCI’s accessible market opportunity is pegged at | 20000 crore. Higher capital dredging activity for enhancing port capacity and capability would be followed by maintenance activity providing revenue visibility to the company. We believe DCI being the only PSU could be asked to undertake transformational projects like Sagarmala, Jal Marg Vikas, Clean Ganga that offer it very large opportunities. Push for coastal shipping; need for dredging With about 14 states and 137 rivers, India has a river length of ~28511 km. Approximately 13000 km (~45%) is navigable in nature of which India utilises only 4500 km for inland transportation. With the need to supplement the choked road and rail network, Sagar Mala has envisaged 150 projects for port augmentation, entailing an investment of | 100000 crore. Approximately 20% of port development costs relate to dredging activity resulting in a market opportunity of | 20000 crore. Given the technicalities of dredging, an experience of over two decades on the Indian coast positions DCI as the biggest beneficiary. Sustained market leadership in maintenance dredging Currently, major and minor ports (including Indian Navy) require ~110 mcm of maintenance dredging on an annual basis. On an execution basis, ~70% i.e. 80 mcm of maintenance is actually achieved. With the current fleet, DCI claims to maintain ~60 mcm, which pegs its market share at 75%. The mandate by the Ministry of Shipping to increase the port draft to a minimum of 18 metre would be followed by a global average of 23 metre. This would create higher demand for maintenance dredging, which would directly benefit DCI. Moreover, being a market leader, DCI could be appointed a nodal agency for projects like Clean Ganga for which the Budget FY17 has allocated | 2250 crore. Additional capacity; increased prospects, quality play!!! DCI has added three new dredgers over the past three years, which yields higher daily realisation rates. Further, on the back of higher visibility, it proposes to order two additional dredgers. With issues around Sethusamudram project expected to be resolved in the near term, DCI would be able to unlock investments of | 300 crore. Owing to huge opportunities around coastal development, we expect DCI to be the biggest beneficiary and assign a P/E multiple of 12x to the expected EPS of | 41.6 in FY18. We recommend BUY on DCI with a target price of | 500. Exhibit 1: Financial Performance

(Year-end March) FY14 FY15 FY16E FY17E FY18ERevenues (| crore) 770.4 735.0 672.4 780.3 925.8 EBITDA (| crore) 185.8 173.2 175.7 223.1 276.5 Net Profit (| crore) 37.5 62.4 63.0 91.4 116.6 EPS (|) 13.4 22.3 22.5 32.6 41.6 P/E (x) 30.4 18.2 18.0 12.4 9.7 Price / Book (x) 0.8 0.8 0.7 0.6 0.6 EV/EBITDA (x) 12.6 11.2 11.0 9.4 8.4 RoCE (%) 7.7 6.8 7.1 8.1 9.0 RoE (%) 2.7 4.3 4.1 5.4 6.4

Source: Company, ICICIdirect.com Research

Rating Matrix

Rating : BuyTarget : | 500Target Period : 12 monthsPotential Upside : 23%

Key Financials (| Crore) FY15 FY16E FY17E FY18ENet Sales 735.0 672.4 780.3 925.8 EBITDA 173.2 179.1 223.1 276.5 Net Profit 62.4 66.2 91.4 116.6 EPS (|) 22.3 23.6 32.6 41.6

Valuation Summary (x) FY15 FY16E FY17E FY18EP/E 18.2 17.1 12.4 9.7 EV / EBITDA 11.2 10.8 9.4 8.4 P/BV 0.8 0.7 0.6 0.6 RoNW (%) 4.3 4.3 5.4 6.4 RoCE (%) 6.8 7.2 8.1 9.0

Stock Data Particular AmountMarket Capitalization | 1134 croreTotal Debt (FY15) | 924 croreCash (FY15) | 118 croreEV | 1941 crore52 week H/L (|) 290 / 484Equity capital | 28 croreFace value | 10FII Holding (%) 0.4DII Holding (%) 13.0

Price Performance Return (%) 1M 3M 6M 12MDredging Corpn. 25.8 15.0 12.4 6.4 Mercator 22.9 23.2 6.9 38.2 GE Shipping Co 11.2 1.8 (7.8) (1.4) S C I 11.1 (3.2) (10.5) 47.2

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Research Analyst

Bharat chhoda [email protected]

Ankit Panchmatia [email protected]

Dredging Corporation of India (DRECOR)| 405


Company Background Dredging Corporation of India (DCI) was established in 1976 as a public sector unit (PSU) and conferred Category I PSU Miniratna status in 1999. DCI’s main aim is to provide dredging services to major and minor ports in India. With its head office in Visakhapatnam, DCI owns and operates a fleet of 13 trailer suction hoppers dredgers (TSHD), three cutter suction dredgers (CSD), two survey launches and one backhoe dredger. The company provides dredging services mainly to Indian ports (major, minor) and Indian Navy. DCI is the market leader in maintenance dredging with 75% market share. However, due to the presence of more efficient capital dredgers with a number of foreign players, it lags behind in capital dredging activity with an approximate market share of 10%.

The ancillary work for dredging companies also includes activities like removal of waste materials e.g. sewage sludge, agricultural and industrial waste, beach nourishment, land reclamation. DCI has been catering to dredging requirements of Haldia/Kolkata Port for almost 30 years. Consequently, ~50% of its revenues are earned from maintenance dredging at Kolkata port. Additionally, the main seaports where DCI provides dredging services include Kolkata Port (Haldia), Kandla Port, Ennore Port, Cochin Port and Visakhapatnam Port. Apart from domestic operations, the company has also executed international dredging assignments for Taichung Harbour (Taiwan) in 2002, land reclamation work in Bahrain in 2005, 2006 and capital dredging work in Belgium in 2006, post which the domestic market remained its main focus.

In keeping with the Government of India’s “Make in India” effort, there is an urgent need to develop cheaper modes of logistics. On the back of the same, the Ministry of Shipping (MoS) has embarked on the journey to promote coastal shipping, which would help reduce congestion on rail and road. Furthermore, DCI intends to play an important role in implementation of projects like “Jal Vikas Marg” and “Sagarmala”. Subsequently, the company aims to become a Navratna by 2020. With the addition of two new dredgers and on resumption of its international operations, DCI intends to expand its market share.

Exhibit 2: DCI milestone timeline….


Listing of equity shares on NSE

1976 1992 1999 2004 2010 2012 2013 2014 2015

Listing of equity shares on BSE, CSE and DSE

Additional disinvestment of 20% shareholding by GoI

Disinvestment ~1.44% shareholding by Government of India (GoI)

Conferred Category - I public sector enterprise Miniratna status by GoI

Approval to procure three new trailer suction hopper dredgers of 5500 cu metre capacity each

DCI DRXX a 5500 cu metre capacity trailer suction dredger joins fleet

DCI DRXIX a 5500 cu metre capacity trailer suction dredger joins fleet

GoI disinvests another 5% shareholding in DCI

DCI DRXXI a 5500 cu metre capacity trailer suction dredger joins fleet

Shareholding pattern (Q3FY16)

Shareholding Pattern Holdings (%)

Promoters 73.6

Institutional investors 13.4

Others 13.0

Institutional holding trend (%)

0.6 0.5 0.4 0.4

9.8 9.3

13.7 13.0

02468

10121416

Q4FY15 Q1FY16 Q2FY16 Q3FY16

(%)

Established in 1976 as a public sector undertaking (PSU)


Prerequisites of dredging Dredging is sub aqueous or underwater excavation of rocks and soil. Given the shallow natural depths of many tidal water bodies and high rates of sedimentation/shoaling, providing safe navigation conditions and maintaining vessel berthing areas becomes necessary. Dredging is the activity of excavating or removing silt, sand and other layers from the water bed. This sand/silt is deployed back in the sea or sometimes used elsewhere for coastal protection or land reclamation. Dredging involves two main activities. Firstly, it involves removal of soil/rock from the bed of sea by disturbing and loosening the same. Simultaneously, the disturbed sand is lifted to the water surface with the help of vacuum generated through dredgers. Secondly, the dredged material that was lifted has to be relocated or disposed away from the actual site. This requires identifying a suitable disposal site, which abides by environmental and regulation aspects. The prime objective of dredging is to either maintain or create the required/additional channels for wider/deeper waterways to help ports improve navigation and berthing of ships. It is also carried out for other purposes, including laying pipelines on the seabed, nourishing or replenishing beaches, producing materials for construction and to clean the material below water. Majority of dredging companies undertake capital dredging and maintenance dredging. Capital dredging is a one-off operation that is carried out at the initial stage for creating new ports, harbour or berths. Capital dredging projects are primarily port creation and expansion projects that also involve deepening and/or widening of channels to allow access by larger and deeper draught ships. They also provide land fill for building additional port facilities, thereby enhancing the port capability. Maintenance dredging is recurrent in nature. It involves restoration of designed depths of waterways and harbours by removing silt, sand and other accumulated sediments. Due to continuous creation of waves that carry mud/sediments, a natural blockage takes place that dampens existing channels. Following this, these channels require periodic maintenance dredging to maintain required drafts, thus creating a continuous source of dredging. However, apart from creation and maintenance work, dredging is also utilised in land reclamation, underwater removal of soil and rock in civil engineering projects, oil & gas exploration in delta areas and other offshore mining activities.

We believe dredging necessitates simultaneous knowledge of mechanical, electrical, marine, naval architecture, electronics and civil engineering. With the technicalities and skill sets involved, dredging as an activity becomes more specialised.

Exhibit 3: Dredging flow chart...



Demystifying dredging Understanding the dredging process involves selection of a particular dredger for a specific activity. Broadly, dredgers are specialised earth moving equipment operating in water. They rely on two basic principles for excavation, disturbing sea bed material and also grabbing the same. Selection of dredger for a project depends on multiple factors involving physical characteristics of sediments, quantities to be dredged, dredging depth, distance to disposal (placement) area, physical environment of and between areas, contamination levels of sediments, method of disposal (placement), production required and types of dredges available. Primarily, there are three types of dredging equipment, which includes mechanical dredgers, hydraulic dredgers and other specialised dredgers: Mechanical dredgers A mechanical dredger applies mechanical force with the help of knives, teeth or cutting edges to the targeted area. It uses a bucket, clamshell or other mechanical means to scoop material from the bottom. Mechanical dredging is mostly done to cohesive soils where sea bed is solid or rocky in nature. They are capable of removing hard packed sediments, debris and can work in space-restricted areas like docks or terminals. There are three basic types of mechanical dredgers: bucket-ladder, grab and backhoe. In each case, the dredger uses a bucket or a grab that excavates the material at its actual state from the seabed. The dredged material is placed by the bucket or the grab into barges for transport to designated disposal areas. The material in barges is emptied by bottom-dumping, direct pump-out or removal by a crane with a bucket. Hydraulic dredgers A hydraulic dredger generates water flow via the suction mouth over a sand bed. The flow erodes the sand bed and forms a sand-water mixture (slurry). This loosened material is removed by a suction pipe unlike mechanical dredgers where buckets or hopper are used. These dredgers work well in loose silts, sands, gravels and soft clays. For more consolidated material, heavier excavating equipment, water jets or other loosening devices at the mouth of the suction pipe are applied to break up the material. Transport methods associated with hydraulic dredgers are pipeline and hopper transport. In some cases, hydraulic dredgers may pump materials into barges for transport. The most common form of a hydraulic dredger has an onboard pump that sucks material up through a tube that is lowered to the bottom of the body of water and pumps it through a pipeline to a different location. There are several other types of hydraulic dredgers that use alternative means of initiating water movement and creating the slurry. For example, airlift dredgers, jet lift dredgers and pneumatic dredgers. However, there are broadly three basic types of hydraulic dredgers, plain suction, cutter suction and trailer suction hopper. Other dredgers Other types of specialised dredgers include low-impact environmental/restoration dredgers, water injection dredgers, side casting dredgers and dustpan dredgers. The low-impact environmental/restoration dredgers are existing dredgers that have been modified to increase precision and limit the release of contaminants in the surrounding environment. The water injection dredger involves a patented technique in which water jets are used to bring sediments into suspension along with hydrodynamic principles to move the material. Auxiliary equipment Auxiliary equipment associated with dredging includes pipelines, booster stations, barges, plough/bed levellers, rock breakers and general construction equipment such as ploughs and bulldozers.


Exhibit 4: DCI milestone timeline…. Mechanical dredgers

Bucket-ladder dredgers Grab/clamshell dredgers Backhoe dredging

Hydraulic dredgers

Plain suction dredger Cutter suction dredgers Trailer suction hopper dredgers


Exhibit 5: Snapshot of application, functionalities of dredgers

Materials/Type of dredgerBucket Dredger

Grab Dredger

Backhoe Dredger

Suction Dredger

Cutter Dredger

Trailer Dredger

Hopper Dredger

Dredging sandy materials Yes Yes Yes Yes Yes Yes Yes

Dredging clayey materials Yes Yes Yes No Yes Yes No

Dredging rocky materials Yes No Yes No Yes No No

Anchoring wires Yes Yes No Yes Yes No Yes

Maximum dredging depth (m) 30 >100 20 70 25 100 50

Accurate dredging possible Yes No Yes No Yes No No

Working under offshore conditions No Yes No Yes No Yes Yes

Transport via pipeline No No No Yes Yes No No

Dredging in situ possible Yes Yes Yes No Limited No No



Dredging – key activity for numerous reasons... Dredging is considered an important activity for various reasons. Apart from core dredging, there are a lot of associated activities, which require dredging. Some of these include supporting an increase in trade activity, land reclamation to tackle population growth, coastal and environment protection to tackle climate change and increasing sea levels, catering to growing demand for energy and promoting water-related tourism. Seaborne trade, GDP and merchandise trade are considered to be interlinked due to the fact that ~80% of global trade by volume and over 70% of global trade by value is carried by sea and handled by ports globally. The latest World Economic Outlook (July 2015) update says the growth rate in advanced economies in 2014 was 1.8% and is estimated to grow at 2.1%, 2.4% in 2015, 2016, respectively. According to recent figures from UNCTAD, waterborne trade grew at 4% CAGR from 6 billion tonnes to 8 billion tonnes between 2000 and 2008. However, due to the global slowdown, it de-grew 4.5% in 2009. Still, it resumed its uptrend and grew at a CAGR of 4.6% in 2009-14. Approximately four billion tonnes were added to the global seaborne trade between 2002 and 2014.

With this surge in economic activity, dredging remains crucial for ports in meeting this challenge. Need for deeper drafts required for achieving greater efficiencies, building new ports, hinterland infrastructure and extending berths, quay walls remain key activities for ports. Furthermore, the increasing size of container ships and need for additional berths are putting increased demand on the capacity and efficiency of ports. Though the number of ships has not grown substantially, the rise in volumes of seaborne trade can be particularly attributed to increasingly larger ships/container vessels. To expand the existing capacity and accommodate larger vessels, longer, wider quay walls and deeper access channels are crucial. Container ships are also becoming larger and placing demands on capacity and increased efficiency of ports. In 2014, some of the largest container ships (CSCL Globe, CSCL Pacific Ocean) with over 19,000 TEU capacity were added to the global fleet. To meet these requirements, 4.023 billion cubic metre dredging is necessary in the next 10 years. Following this, cumulative capital dredging is expected to be 1.611 billion cubic metre with maintenance dredging at 2.412 billion cubic metre, till 2025.

Exhibit 6: Worldwide break-up of coastal trade..

102 152 234 371 598 969 1076 1193 1249 1127 1280 1393 1464 1544 16311123 819 1031 11251928

2009 2112 2141 2173 2004 2022 2112 2150 2218 2272

608 900988 1105

12951709 1814 1953 2065 2085 2335 2486 2742 2923 3112

18711459

17552050

2163

24222698 2747 2742

26422772

2794 2841 2829 2826

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4000

5000

6000

7000

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9000

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1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mn

tons

load

ed

Container Other dry cargo Five major bulks Oil & Gas


Exhibit 7: Need for deeper drafts….



As per the United Nations Department of Economic and Social Affairs (UNDESA), the current world population is 7.3 billion. It is expected to reach 8.5 billion by 2030 and 9.7 billion by 2050. This expected growth across the globe has increased the pressure on various resources including land, housing and recreation. Given the limited availability of land, preserving and creation of additional land to accommodate growing population has become necessary. A report on world population called “World Urbanisation Prospects: 2014” says 54% of the world’s population is living in urban areas. With the overall increase in world population, another 2.5 billion people are projected to be added to the urban population by 2050, especially with close to 90% of the increase concentrated mainly in Asia and Africa. Following this, land reclamation has gained much importance. Land reclamation would take care of mass migration taking off from interior regions to coastal areas. As existing urban areas are filling fast, some cities and ports are expanding in the direction of water. Reclamation would enable the land level to be raised from sea levels to create an artificial land either just below or adjacent to coastal level. This expansion is possible by dredging sand at sea and depositing it closer to shore. The land that is reclaimed can be used for a variety of purposes: as ports, industrial estates, nature reserves or housing developments. As such, a substantial shortage of land is already apparent. The largest proportion of these new city dwellers will live in vulnerable floodplains. Estimates indicate that by 2050, half the world’s population will be living within 100 km from the coast.

Exhibit 8: In pursuit of land…urbanisation happening at more rapid pace!


Apart from land reclamation, cleaning of rivers/canals and preservation of a clean environment can be classified as separate drivers of dredging. Larger projects involve remediation of contaminated sediments at industrial sites i.e. areas where heavy industries were formerly (or still) located. Restoration of habitats is almost always part of a larger project. Thus, the turnover is based on one of the other drivers. In case of dedicated remediation projects, the dredging turnover can be a relatively small part of overall remediation costs.


As per current demographics, eight out of the 10 largest cities globally are located along a coast. The impact of flood-related events cannot be underestimated and annual economic losses can add up to staggering figures in coastal or port cities. According to a study conducted for Organisation for Economic Co-operation and Development (OECD) in 2005, an average global flood loss across 136 ports around the world could be in excess of US$1 trillion. With projected socio-economic changes, the estimated loss would be significantly higher by 2050. The report also indicated the current preparation to counter the consequences of rising sea levels, which estimates soaring losses even though there would be a moderate rise in sea level. The loss from the recent flooding in Western Europe in 2013 caused by extreme precipitation (rain, snow) is estimated at $16 billion. Furthermore, losses from hurricane Sandy (second deadliest) in 2012 caused damage of ~$75 billion affecting countries across the US, Jamaica and Cuba. Both these incidents have demonstrated the economic and social vulnerability of major calamities in urban/coastal localities.

Exhibit 9: Countries exposed to economic loss due to sea-borne calamities…


Dredging provides the knowledge, innovative solutions and capacity to address these challenges. Coastal and environment protection involves activities like shore protection and beach nourishment. Global warming has led to rising sea levels at an accelerating rate. The rate is much more rapid alongside the US East Coast and Gulf of Mexico. Following increasing sea-levels across coastal areas, there has been a surge in coastal and inland protection against flooding. Dredging plays an important role by building coastal defences and storm-surge barriers that would guard surrounding areas. Furthermore, it would also reinforce shorelines to prevent erosion. Coastal protection has grown in importance as a result of climate change and more extreme weather circumstances. The tidal nature of seas would lead to extinguishing of shoreline and beaches used for tourism and recreation. Following this, beach nourishment plays a pivotal role for preservation of the same. Dredging for beach nourishment would involve movement of sand from the seabed to shoreline locations when erosion has progressed. This would also curtail substantial threats to shoreline assets.


According to BP Energy Outlook 2035, population growth and increases in income per person are key drivers of growing demand for energy. While the search for alternative fuel sources continues, fossil fuels still dominate the global energy arena. According to the International Energy Agency (IEA), the share of fossils fuels in total global energy is expected to decline to around 75% in 2035 from the current 82%. Given that resources are increasingly being exploited offshore, the energy sector is a major driver of the dredging industry. The exploitation offshore industry is dependent on dredging, pre-sweeping, trenching and backfilling for pipelines and stabilising platforms. These techniques allow the offshore industry to explore deep waters for oil & gas in remote regions and at great depths. Dredging is required to prepare the seabed and dig trenches for pipelines. These pipelines need to be protected by backfilling with sand, gravel and rock. Globally, major dredging companies provide specialised services like trenching and backfilling, pulling and laying of shallow-water pipelines to offshore oil & gas companies. In addition to offshore requirements, oil & gas production requires port infrastructure, which generates major maritime infrastructure demand. In the sustainable segment, dredging also services offshore windmill platforms. Following the Renewable Energy Directive in Europe, contribution of renewable to total energy requirement, transport fuels is expected to be at least 20%, 10%, respectively, by 2020. A substantial part of renewable consists of wind energy, which is very relevant to the dredging industry as contractors execute seabed preparation for the foundations of windmills. As more and more wind farms are being placed at sea, demand for specialised dredging services is increasing. Beach tourism attracts a great crowd across the globe and has grown steadily in the past decade. Water-related tourism with respect to cruise ships and yacht harbours has continued to attract tourists. Attractive coastal areas offer an ever-greater variety of holiday options. Such areas are seeing investment in beach and shoreline expansion, sites for new cruise ship terminals and modern airports. Along with exotic offerings, traditional water related tourism includes tourism along coastlines and beaches. With rising concerns on global warming, many beaches are affected by weather-related events and erosion. Subsequently, replenishment of beaches by dredging is executed on a regular basis. The dredging turnover related to tourism and leisure remained stable at 3% in 2013-14. Attractive coastal areas offer an ever-greater variety of holiday options. Such areas witnessing investment in beach and shoreline expansion, sites for new cruise ship terminals and modern seaports. Dredging is necessary to ensure port expansion and maintenance, so that these ships will be able to enter a sufficient number of ports. At a global level, ~€60 billion of dredging projects are currently being carried out, which are expected to be complete by 2020. Majority of these projects are related to increasing capacity of ports. Approximately, €32 billion i.e. 53% of total dredging projects are related to port expansion and maintenance activities. Following this, projects in land reclamation and coastal protection were valued at €11 billion with total contribution of 18%. Demand from oil & gas activities was at €10 billion with 16% contribution.

Exhibit 10: Expected shift in energy consumption…

Source: International Energy Agency (IEA), ICICIdirect.com Research

Exhibit 11: Bifurcation of dredging projects worldwide

LR & CP18%

Ports53%

Oil & Gas16%

Others11%

China open market

2%

Source: ICICIdirect.com Research


International dredging market Traditionally, the international dredging market was mainly dominated by European companies. As major activities were concentrated around Netherlands, Belgium and the UK, Europe had been the traditional hub of the international dredging market. However, as dredging projects have become more complex and expertise in terms of more efficient dredgers is needed to reduce unit costs, the market in recent years has begun to open up to international players. Development of new dredging techniques and addition of larger dredgers in the fleet has paved the way for international dredging companies. Also, dredging contracts increasingly include more demanding environmental clauses that must be satisfied while undertaking work. Those contractors able to meet stringent environmental requirements are, therefore, better placed to win contracts. Till date, a considerable portion of the international dredging market is closed to foreign contractors and not freely accessible. As a result of local cartels or preferential treatment given to subsidise state-owned dredging companies, it is tough for dredging companies to test global shores. For example, the US dredging market remains closed to foreign competition by the Jones Act, restricting international companies in the form of domestic construction, sourcing requirements. China also follows a closed market dredging policy, with a few projects open to international tenders. Also, in India, the dredging policy gives state-owned Dredging Corporation (DCI) a preferred position in public tendering. However, this has been diluted on certain occasions for foreign companies and private sectors that were awarded large capital dredging contracts. Though not accurate, the total global turnover of dredging contractors in the open market (including private and state/port-owned companies) is estimated in 2014 at €6.42 billion (up 0.7% YoY) compared to €6.37 billion in 2013. The global share of the closed market is believed to be substantial, with China leading followed by the US. The open market is mainly concentrated with five leading Dutch and Belgian companies that have built up a very strong reputation, not only by protecting their own countries against the sea but also by carrying out large dredging projects worldwide. Majority of the projects include undertakings in the Middle East (Dubai), Latin America (Panama Canal), and Far East (Singapore, airport of Hong Kong).

Exhibit 13: Major dredging players worldwide... Rank at dredging

Company Country Based Working area

1 CCCC (CHEC) China China (mainly)

2 Jan De Nul Belgium Global

3 DEME Belgium Global

4 Boskalis Netherlands Global

5 Van Oord Netherlands Global

6 National Marine Dreding UAE UAE/ME

7 Great Lakes Dredge & Dock USA USA (mainly)

8 Penta Ocean Japan Asia/ME

9 Toa Corporation Japan Asia

10 Rohde Nielsen Denmark Europe


Exhibit 14: Continent-wise turnover of organised dredging companies

800

75

750

10001100

1200 1150

0

200

400

600

800

1000

1200

1400

Africa Others C+SAmerica

Europe M. East Asia Australia

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Euro

Turnover (2014)


With increasingly higher demand for dredging globally, continuous efforts are being made to increase the size of dredgers, improve technology and reduce costs. Recently, for purposes of large capital dredging and reclamation projects, jumbo trailer suction hopper dredgers (TSHGs) with hopper capacities as large as 17000 cubic metre are being deployed. Internationally, the dredging industry is experiencing changing regional patterns. Demand in Europe, which was formally concentrated in specific countries like the Netherlands, Belgium and the UK, has spread

Exhibit 12: Dredging market worldwide

Closed markets,

48%Open

markets, 45%

Other private, 7%



throughout Europe in recent years. However, overall growth for Europe has been only marginal. Singapore, Hong Kong and the Middle East have witnessed higher levels of growth in dredging operations, which is expected to continue in the coming years. Given the technicalities and large capital investment needed to construct & operate modern dredging equipment, the international dredging industry has undergone consolidation in recent years. Though a majority of the market is led by European companies, there has been a steady consolidation of companies and organisations. Given the consolidation, all top companies in the dredging industry were formed as a result of greater consolidation. Some of the reasons for this consolidation also include higher focus of ports on more revenue earning developments such as quays, container cranes and bulk terminals. This has given rise to the need for contract dredging to deepen or maintain the port.

Exhibit 15: Consolidation in dredging industry at global level


Following the consolidation, major players that have a global footprint include Boskalis, Van Oord, DEME and Jan De Nul. Increasing emphasis on globalisation and the need to synergise the existing fleet strength and competition may lead to further consolidation in the international dredging industry. In addition, new players, especially from Asia, are entering the dredging market, although they are smaller in size.


Investment Rationale Indian port scenario Maritime resources comprise a major part of India’s geography by virtue of its 7517 km long coastline around its western, eastern shores. With the extensive coverage, India is naturally surrounded by seas from three sides via Bay of Bengal, Arabian Sea & Indian Ocean. These water bodies and central location in South Asia facilitate most of its overseas trade in all directions. The strategic location midway between the Far East and Middle East favourably positions India to trade with Australia and other countries of Africa, the Middle East and Far East. Total 70% by value and 90% by volume of India’s trade is carried out through seas. Hence, ports play an important role in India's export import (Exim) trade. Nine coastal states of Gujarat, Maharashtra, Goa, Karnataka, Kerala, Tamil Nadu, Andhra Pradesh, Odisha and West Bengal are home to Indian ports.

All Indian ports are governed by the “Indian Ports Act of 1908”. Central and state governments are responsible for developing, maintaining and operating ports under their jurisdiction. Ports in India are mainly classified as 'major' and 'non-major' ports. Major ports are those that are regulated by the central government through the Ministry of Shipping. All regulatory powers in ports and other functions with regard to safety, etc, are vested in port trusts themselves. Furthermore, they are governed by the Major Ports Trust Act, 1963. The only exception is Ennore port, which is the first corporatised major port and governed by the Companies Act. Non-major ports are controlled by the respective state governments. Tariff Authority for Major Ports (TAMP) was formed in 1997, which would act as a tariff regulator for all major ports. However, TAMP would have no jurisdiction over tariff fixation of non-major or private ports.

Exhibit 16: Distribution of Indian ports across coastline…


Exhibit 17: Percentage share of ports in volumes

71.4 71.8 71.3 66 64.4 61.3 58.4 57.1 55.2 53.6

28.6 28.2 28.7 34 35.6 38.7 41.6 42.9 44.8 46.4

0

20

40

60

80

100

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY17E

%

Major Ports Minor Ports



India’s total external trade is estimated to have grown to $757 billion in FY15, which includes $310 billion of imports and $448 billion of exports. External trade has increased at a CAGR of 7.56% in 2009-15. In external trade, ports handle almost 95% of volumes. Cargo traffic at major ports grew at a CAGR of 2.9% in FY07-15 to 581.3 MMT in FY15. However, cargo traffic at non-major ports grew faster at a CAGR of 12.3% in the same period to 471.2 MMT in FY15. With a higher turnaround time and better efficiencies, non-major ports are gaining share from major ports. For FY15, the cargo handling ratio of major to non-major ports was 44.8% compared to 28.6% in FY07. Given the revival of the economy and India promoting itself as a manufacturing hub, the traffic targets for FY17 have been ambitiously set at 943.1 MMT and 815.2 MMT for major and non-major ports, respectively.

Exhibit 19: Break-up of cargo handled at major ports


Exhibit 18: Volumes handled across major & non-major ports…

464519 530 561 570 560 546 555 581 550

943

186 204 213289 315

353 388 417471 446

815

0

100

200

300

400

500

600

700

800

900

1000

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

YTDF

Y16*

FY17

E

MM

T

Major Ports Non-major ports


Given the type of cargo ferried by major ports in FY15, dry and liquid bulk comprised around 80% of total volume of port traffic, with the remaining comprising general cargo, including containerised cargo. In FY15, petroleum, oil and lubricants (POL) was the major commodity carried through major ports and contributed nearly 34% to the cargo mix during the year. Containerised cargo was the next largest commodity in the cargo mix and contributed 23% followed by other cargo and coal at 20.9% and 20.4%, respectively.


The port sector in India has witnessed significant growth in the recent past, especially in the container terminal segment. Accordingly, Indian ports have developed capacity expansion plans. Many major ports in India have adopted the build operate transfer (BOT) model to facilitate the development of additional capacity. This has resulted in the entry of international players like DP World, Maersk, PSA, etc, in the Indian ports sector. On the other hand, private sector investment in minor ports has also increased with the successful participation of ports like Mundra, Pipavav, Hazira, Gangavaram, Krishnapatnam, Dhamra, Gopalpur, etc. Leading private ports like Mundra and Pipavav have also developed ambitious expansion plans.

Exhibit 20: Capacity at major ports, utilisation rates…

504.8 532.1 574.8 616.7 670.1 689.8 744.9 800.5 871.5 892.92

95%100% 97% 95%

82% 80%75%

70%62%

0100200300400500600700800900

1000

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16(YTD)

0%

20%

40%

60%

80%

100%

120%

Capacity at major ports Utilization at major ports


Exhibit 21: Average turnaround time for major ports

3.8 4 4.24.63

5.29

4.564.29

3.84 4.01

0

1

2

3

4

5

6

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

(in d

ays)


Despite the adequate capacity and handling facilities, the average turnaround time of major Indian ports is less than four days, which is very high compared to the average turnaround time of about 10 hours in Hong Kong. Given the inefficiencies in Indian ports, owners and shippers are chasing bigger ship sizes so that larger quantities of goods can be transported at a time to save freight/time costs. This requires deepening channels and berths to accommodate bigger ships, which calls for higher need for dredging.


Indian port & trade requirements; crying need for dredging Following recent announcements regarding opening up the Indian economy and positioning it as a manufacturing hub with “Make in India” project, new opportunities have been created for the dredging industry. Demand forecasts for dredging are encouraging given the Foreign Trade Policy targets for 2015-20. Merchandise trade is set to leap following the encouragement provided to small and medium scale enterprises (SMEs). Initial estimates for exports of manufactured goods and services from India are quite encouraging. Indian ports are now waking up to reality as they rush to attract more cargo and attempt to increase revenues. Accommodating bigger ships and achieving economies of scale would form the backbone to optimise the asset. Basic infrastructure is required to manage wider, deeper channels and increase berth drafts, which would accommodate higher ships. Following this, the government had decided to create a minimum depth of 18 metre at all 12 ports it owns, where depths currently range from 9-12 metre. The current upgrade is still lower than the global average, which is in the range of 23 metre, enabling berthing of latest built up ultra-size container, tanker and dry bulk vessels.

Apart from ordinary ports, construction of various greenfield ports in India has also increased the necessity of dredging in India. Dredging is also important for local shipbuilding, which enables the same to act as an infrastructure empowerment programme in the maritime sector. Hence, numerous tax concessions by granting infrastructure status to navigational channels under Section 80-IA of Income-tax Act would benefit ports. Subsequently, a number of channel/port deepening projects are currently being undertaken by various ports. In India, many ports are incapable of berthing fully-laden large vessels. Large vessels can be berthed only by dredging, which offers significant potential for higher dredging activity in the Indian market. According to the Ministry of Shipping (MoS), in the next five years, 12 major ports have proposed to increase their capacity, which would entail a | 20000 crore dredging market. Furthermore, setting up additional berths at majority of private ports, coupled with announcement of new major ports has pegged the size of the dredging market by volume at over 1 billion cubic metres in the next five years. Given the prospects of development and maintenance of existing major ports, building new ports, onshore resources exploration, demand from navy and, more

Exhibit 22: Available drafts at channels & berth of major ports

PortDraft at Channel

(in mtrs)Available drafts at Berths

(in mtrs)Kolkata 7.9 7.1 to 13.7

Haldia 6.7 Vary with tidal variations

Paradip 12.8 11 to 13.5

Vishakhapatnam 10.7 (IH), 20 (OH) 9.75 to 17

Chennai 18.6 (IH), 19.2 (OH) 8.5 to 17.4

Tuticorin 10.4 8.6 to 10.9

Cochin 12.8 9.14 to 12.5

New Manglore 15.4 7 to 14

Mormugao 14.4 12 to 14.1

Mumbai 10.9 6.1 to 14.3

JNPT 11 12 to 13.5

Kandla 11.6, 23.5 (OOT) 9.1 to 12.5

Source: Company, ICICIdirect.com Research; IH - Inner Harbour; OH - Outer Harbour; OOT - Offshore Oil terminal Exhibit 23: Demand drivers for dredging to be | 20000 crore market!

Deeper draft at ports at least 18 metre

Increase in Exim trade and throughput capacity at ports

Land reclamation

Emerging trends, ultra mega size vessels

Consistent maintenance and capital dredging at existing ports

Inland transport & water linking projects

Tourism development beach nourishment



interestingly, projects envisaged for national waterways, the scope for dredging is potentially vast. Indian dredging market at nascent stage Dredging demand is estimated by individual ports and sent as proposals to the planning commission. New port establishment proposals can be taken up by central or state governments. The Planning Commission analyses these inputs and allocates funds in phases during each financial year. Following this, the Twelfth Planning Commission envisaged a capital dredging demand of 641 mcm and maintenance dredging demand of about 530 mcm in 2012-17.

Exhibit 24: Actual vs. expected capital dredging

91144

675 641

5515

279

491

36

129

396

150

0

100

200

300

400

500

600

700

800

9th Plan 10th Plan 11th Plan 12th Plan

mcm

Demand Achieved Shortfall


Exhibit 25: Actual vs. expected maintenance dredging

338 334

430

530

277247

291326

61 87139

204

0

100

200

300

400

500

600

9th Plan 10th Plan 11th Plan 12th Planm

cm

Demand Achieved Shortfall


During the Eleventh Five Year Plan, a quantum increase of ~100% was planned of which majority was allocated to capital dredging. Total 675 mcm and 430 mcm had been planned for capital and maintenance dredging, respectively, for all the ports in India. This quantity includes dredging to be done for fishing harbours also besides major and non major ports. Against this targeted plan, only 279 mcm and 292 mcm had been achieved under capital and maintenance dredging, respectively. This constitutes 41.31% and 67.82%, respectively vs. targeted quantity.

During the Twelfth Five Year Plan, the total dredging requirement was ~1.2 billion cubic metre compared to 1.1 billion cubic metre. Majority of the emphasis was on FY14, which was the highest execution year for the plan. Post this, though capital dredging requirements were declining, the maintenance dredging requirement continued to inch up, post creation of newer capacities.

Exhibit 26: Dredging estimates across Twelfth Five Year Plan...

87 97115 114 117

155

214

129

7863

243

311

244

192 180

0

50

100

150

200

250

300

350

FY13 FY14 FY15 FY16 FY17

mcm

Maintainence Dredging Capital Dredging Total



Promoting coastal trade – Need of the hour The merchandise trade in India as a share of GDP was 38% as on CY14, compared to other developed countries and regions like Germany (71%), European Union (66%) and China (42%). The focus of the Union Government on manufacturing and promotional activities like “Make in India” would enable the share of merchandise trade in India’s GDP to increase and approach levels achieved in developed countries. This rapid development would have a cascading effect on the movement of goods, which would result in a manifold increase in volume of goods transported across India. Over the years, the Indian economy has significantly relied on rail, road and airways, which have so far been instrumental in achieving the existing growth rate. India’s road network is in excess of 4 million km and carries about 57% of India’s domestic freight traffic. National highways that form 1.7% of the network carry ~40% of the total road freight traffic. On the other hand, development of the rail network has remained almost static while rail freight traffic has grown multi-fold. Currently, nearly 30% of the freight traffic is handled by rail. This has led the road and rail network to become highly congested resulting in inefficiency and increased cost of transportation. There is an immediate need to decongest the road and rail network to transport goods more efficiently from the point of production to point of consumption.

Source: IWAI, ICICIdirect.com Research The modal shift of cargo to inland and coastal waterways offers bright prospects for a sustainable economic prosperity. The government’s “Make in India" initiative has brought in a lot of economic interest. Majority of capital investments over the decade were towards the railways, roadways and highways. During the Fifth Five Year Plan to the Eleventh Five Year Plan, total expenditure on the transport sector was at | 7.32 lakh crore out of which ~| 3.77 lakh crore (51% of total expenditure) was spent on railways. Approximately | 2.38 lakh crore (32.5% of total expenditure) was spent on roads and highways. Investment in aviation infrastructure was at | 69290 crore (9.5% of total expenditure). Compared to these sectors, investments in shipping, ports and inland waterways was at | 47931 crore (6.5% of total expenditure). This lopsided encouragement to rail and road sectors has impacted the development of inland shipping as a substitute to the conventional mode of transport. The use of inland shipping to supplement transportation of domestic freight can reduce congestion on the road and rail networks significantly. The underutilisation of coastal shipping appears alarming considering it is economically cheaper, safer and less polluting than other modes of transportation.

Exhibit 27: Comparative modal share

Road, 57%Rail, 36%

Air, 1% Coastal, 6%

Source: NTDPC; ICICIdirect.com Research

Exhibit 28: Efficiencies across different modes of transport

1 horsepower can move what weight of cargo (kg) 4000 500 150

1 litre of fuel can move how much freight (ton-km) 105 85 24

Inter-modal comparitive operating costs (|/ton-km) 1.06 1.41 2.58

Equivalent single unit carrying capacity 1 barge 15 rail wagons 60 trucks

Air Pollution Low Medium High

Land Acquisition Low High High

Capital required Low High High

RoadParameters Coastal Rail

Exhibit 29: Comparative modal share

Railways

Roadways & Highways

Aviation

Waterways

Total

Expenditure over 5th - 11th Five year plan (| crore)

377000

238000

69290

Parameters

47931

732221



Coastal trade - A global perspective Global statistics for penetration of coastal cargo and superior operational parameters suggest a compelling case for a modal shift of freight from road and rail to coastal shipping. Channels with adequate depth and width, navigation aids for day & night, well connected (road/rail) terminals for berthing of vessels and loading & unloading of cargo, would form the basic infrastructural requirement for making a waterway viable for shipping and navigation. Given the global perspective, Russian Federation has the maximum length of navigable inland waterways with over 100000 km. However, due to the longer winter period, inland waterways account for ~2% of the country’s merchandise trade. Following this, the Netherlands has 6102 km, with the help of which it carries out 35% of goods via inland waterways. In addition, Germany has also successfully channelised its navigable length of inland waterways of 7565 km to carry 246 million tonnes annually, constituting 12% of merchandise trade. In comparison, for India it is spread across 7500 km (5400 km coastline + 2100 km shores of 1190 islands) along which a mere 7% is transported through coastal shipping. Other developing countries like China and Brazil transport 20% and 23%, respectively, through coastal shipping.

In pursuit of attaining cost efficiency and scalability on the lines of other developed nations, the Ministry of Shipping (MoS) has earmarked higher investments towards development of coastal cargo. The MoS has planned new greenfield ports at Vadhavan, near Dahanu in Maharashtra, Colachal near Kanyakumari in Tamil Nadu and Sagar Island in West Bengal. These new ports would entail an investment of ~| 20157 crore. Furthermore, the Shipping Ministry has organised “Maritime India Summit” in collaboration with South Korea. The summit is going to showcase over 200 investable projects in the maritime sector. With this summit, the ministry is aiming to attract investment of ~| 120000 crore.

Exhibit 30: Country wise comparison

7,314 7,517 14,500 29,751

23.0%

7.0%

20.0%

42.0%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Brazil India China Japan

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Length of Coastline % of Domestic cargo transported using coastal shipping

Source: Sagarmala concept note; ICICIdirect.com Research

To enhance the current capacity, three new ports have been planned. The approximate cost for the same is | 20000 crore


Government push for promoting coastal activities Sagarmala Programme: The Government of India has envisioned the Sagarmala Programme, which aims to exploit India’s 7500 km coastline and 14500 km of potentially navigable waterways. It promotes port-led development in the country by harnessing strategic locations on key international maritime trade routes. A National Perspective Plan has been developed under this programme, paving the way for 150 projects with investments of ~| 400000 crore in the next 10 years. These projects have been identified across areas of port modernisation & new port development, port connectivity enhancement, port-led industrial development and coastal community development.

Approximately 50 projects have been identified under the port modernisation & new port development activity, which would increase the port capacity from 1400 MMTPA to 2500 MMTPA by 2025. Majority of the activity would be related to capital dredging. Approximately | 100000 crore has been allocated to increase the capacity at existing ports with the development of five to six new ports also including a trans-shipment hub. The new development would also focus on improvement of the port and hinterland connectivity to provide seamless transportation from production to consumption centres. This includes construction of 10000 km of last mile port-connectivity infrastructure, 12 new freight expressways and heavy haul rail corridor to transport coal. New pipelines for transporting crude and petroleum products and development of multi-modal logistics hubs were also been considered. With 65 proposed projects, ~| 200000 crore of investment is expected. Additional infrastructure would include development of coastal economic zones (CEZs) covering all maritime states and union territories. The CEZs would be segregated on the basis of manufacturing clusters and basic input industries. The manufacturing cluster would include labour intensive sectors of electronics, apparel, leather products, furniture and food-processing. However, basic input industries would include clusters for power, refineries & petrochemicals, steel and downstream industries and cement. Setting up infrastructure for these clusters will require an investment of | 100000 crore and is expected to attract an additional | 700000 crore of industrial investment.

Exhibit 31: Sagarmala vision on coastal development…


To enhance the current capacity, three new ports have been planned. The approximate cost for the same is | 100000 crore; of which ~20% could be for dredging


Jal Marg Vikas Programme The 'Jal Marg Vikas' programme is being extensively carried out on National Waterway-1 (Ganga), which would ensure a least available depth (LAD) of 3 metre to enable commercial navigation of 2000 tonne vessels. The objective is to provide an environment friendly, fuel efficient and cost-effective alternative mode of transportation, especially for bulk goods, hazardous goods and over dimensional cargo. The project would be developed between the 1620 km stretch of Allahabad to Haldia at an estimated cost of | 4200 crore. Half the project is funded by the World Bank and the remaining by gross budgetary support (GBS). The project is expected to be completed in six years and would pave the way for continuous maintenance dredging thereafter. Currently, LAD of 2 metre round the year is being maintained between Haldia and Patna (1020 km) and LAD of 1.5 metre between Patna and Varanasi (363 km) for most of the year. However, LAD of 1.5 metre is maintained only for four to five monsoon months in a year between Varanasi and Allahabad (237 km).

Integrated National Transportation Waterway Grid Recently, Integrated National Transportation Waterway (IWAI) in association with RITES had conducted a study to interlink the five national waterways with the aim of creating an integrated transportation grid. The study included linking of • River Ganga from Haldia to Allahabad (NW- 1: 1620 km) • River Brahmaputra from Dhubri to Sadiya (NW- 2: 891 km) • West Coast Canal from Kottapuram to Kollam with Udyogamandal

and Champakara Canals (NW- 3: 205 km) • Kakinada- Puducherry stretch of canals with river Godavari and river

Krishna (NW- 4: 1078 km) • East Coast Canal with river Brahmani and river Mahanadi’s delta (NW-

5: 588 km) It further covers proposed NW-6 of river Barak between Lakhipur- Bhanga (121 km). The development further envisages connectivity of the national waterways to national/state highways, Railways (wherever feasible) and sea ports (wherever feasible) so that all these waterways become an integral part of the total transportation grid. As per the outcome of this study, an indicative investment of | 23000 crore is required to develop infrastructure such as fairway, terminals, ports, road and rail connectivity. Investments in the same are expected over two phases. The Phase I will include an initial investment of | 2700 crore in 2015-18 while Phase II will include an investment outlay of | 20300 crore in 2018-23.

Exhibit 32: Jal Marg Vikas project in pictures


Jal Marg Vikas would present an opportunity of | 4200 crore from National waterway I. Following its successful completion, the project could also be replicated across other waterways

Interlinking of waterways would result in an opportunity of | 23000 crore over 2015-23. Majority of the projects would involve inland and shallow dredging contracts


Declaration of 106 waterways as National Waterways: Coastal districts of five states on the west, four on the east coast besides the union territory of Pondicherry serve the hinterlands. Currently, a mere 4,503 km is utilised for inland transportation ranging across Ganga, Brahmaputra, Mahanadi, Buckingham Canal between Andhra Pradesh and Tamil Nadu and the West Coast Canal in Kerala. On the basis of the same, current cargo movement is managed by the following three waterways which are declared as National waterways: • Allahabad-Haldia stretch (1620 km) of Ganga-Bhagirathi-Hooghly river

system was declared National Waterway - 1 in October, 1986 • Sadiya-Dhubri stretch (891 km) of the Brahmaputra river was declared

National Waterways - II in September, 1988 • Kottapuram-Kollam stretch (168 km) of the West Coast Canal along

with Champakara canal (14 km) and Udyogamandal canal (23 km) was declared National Waterways-III in February, 1993

In addition to National waterways, Goa, Maharashtra and Bihar have developed state waterways by virtue of its extensive navigable length of 90.8%, 73.2% and 62.4%, respectively.

Exhibit 33: Extent of current national waterways and volumes carried Years 2009-10 2010-11 2011-12 2012-13 2013-14

MT 1811070 1871178 3309839 2716436 3349138

TKM 1047703720 1227702794 1454368323 1511961380 1851232081

BTKM 1.05 1.23 1.45 1.51 1.85

MT 2114895 2163745 2406448 2426804 2475349

TKM 59126385 57335351 61327453 58047828 59489247

BTKM 0.06 0.06 0.06 0.06 0.06

MT 667197 885694 1343770 1236403 1066006

TKM 9750256 14227990 13251939 13990516 11606503

BTKM 0.01 0.01 0.01 0.01 0.01

MT 4593162 4920617 7060057 6379643 6890493

TKM 1116580361 1299266135 1528947715 1583999724 1922327831

BTKM 1.12 1.30 1.53 1.58 1.92

MT 53030000 54500000 43279347 7582266 1003364

TKM 2651500000 2725000000 2163967350 379113300 50168200

BTKM 2.65 2.73 2.16 0.38 0.05

MT 11991109 14875355 19947750 9722819 10178956

TKM 647519886 803269170 1077178521 525032249 549663601

BTKM 0.65 0.80 1.08 0.53 0.55

MT 69614271 74295972 70287155 23684728 18072812

TKM 4415600247 4827535305 4770093586 2488145273 2522159631

BTKM 4.42 4.83 4.77 2.49 2.52

Grand Total

National Waterway - 1 (The Ganga)

National Waterway - 2 (The Brahmaputra)

National Waterway - 3 (West Coast Canal)

Sub-total

The Goa Waterways

Mumbai Waterways


An additional two national waterways were declared in 2008, which are Kakinada-Puducherry stretch of Godavari and Krishna river system (NW-4, 1095 km) and Talcher–Dhamra stretch of East Coast Canal with Brahmani river and Mahanadi delta rivers (NW-5, 623 km). These waterways are currently not being used for transportation cargo. The MoS has declared additional 106 waterways as national waterways. The objective is to provide a draft of 3 metre for all 101 waterways by 2020. The “National waterways” tag would enable the Centre to develop rivers for movement of cargo and promote coastal shipping. The investment opportunity for the same is expected at | 70000 crore, which would develop these river stretches into navigable transport ways.

Type of cargo moved includes: Cement, fly ash, iron ore, iron ore fines, coal, steel shed, tyres, iron fines, iron ingots, galvanised steel plain sheet, stone chips, furnace oil, HF HSD, lube oil, boulder, pulses, aluminium block, sand, clips, ship block, log, pulses, manganese ore, petroleum coke, cooking coal, rock phosphate, timber, peas, slag oil, non cooking coal, ODC & etc.

Type of cargo moved includes: Bamboo, bamboo products, cement, building material, fertiliser, foodgrains, milk & other essential commodities, etc

Type of cargo moved includes: Phosphoric acid, sulphur, zinc, furnace oil, rock phosphate, various commodities in containers, furnace oil-bunkering, POL(bunkering to ships), potable water, lime shell with clay and other impurities, liquid effluent

Developing the newly declared waterways into navigable in nature, investments of approximately | 70000 crore are earmarked


Dredging Corporation of India – Important, most favoured player DCI is one of the oldest players in the dredging industry in India. It undertakes dredging requirements of majority of ports and understands topographies of each port. It has been the port of choice via nomination at Haldia/Kolkata Port wherein it continues to carry out maintenance dredging since 2005. In addition, the company also caters to maintenance dredging requirements of the India Navy. It also undertakes capital dredging assignments depending on availability of vessels and other logistic requirements. As per the dredging policy guidelines issued by the Ministry of Shipping, all major ports invite an open competitive bidding for dredging works. However, Government of India reserves the right to assign in public interest any contract for dredging work in any of the major ports on a nomination basis. In addition to the nomination facility, any Indian company which owns an Indian flag dredger would have the right of first refusal if the rate is within 10% of the lowest valid offer. DCI along with other Indian dredging companies participates in open competitive bids for dredging issued by major ports. This would apply to both maintenance and capital dredging works. Earlier, the sole exception for maintenance dredging requirement of Kolkata Port was on a nomination basis, undertaken by DCI. However, post 2015, Kolkata Port also resorted to the bidding process. However, as the sole bidder, the contract was secured by DCI. The company proposes to have strategic alliances with major ports on terms similar to the Kolkata Port at present. The company envisages assured business with these alliances wherein ports can plan in advance the deployment of dredgers at pre-negotiated rates. Further, DCI is also in discussions with some ports to part finance the proposed new acquisitions.

With 12 trailer suction hopper dredgers (TSHDs), in FY15, DCI has carried out maintenance dredging contracts for a number of major ports including Kolkata Port, Haldia, Kandla, Cochin Port Trust, Ernakulam, RGPPL-Dabhol in FY15. With three cutter suction dredgers (CSDs), capital dredging contracts were executed at Kandla Port, Kamarajar Port and Visakhapatnam Port. Given the successful track record of carrying out dredging contracts, the company could be appointed a nodal agency to look into the requirements of specified ports.

Exhibit 34: Competitors in Indian dredging market….

TSHDs CSDs BackHoes Others Total

Dredging Corporation of India 12 3 1 2 18

Adani Ports and SEZ Ltd. 1 12 - 3 16

Boskalis Dredging India Pvt. Ltd. * 23 18 15 9 65

Chellaram Shipping Pvt. Ltd., Mumbai 2 - - - 2

Dharti Dredging and Infrastructure Ltd. - 10 2 4 16

International Seaports Dredging Pvt. Ltd.* 25 20 7 8+ 60+

Jan De Nul Dredging India Pvt. Ltd.* 28 15 6 35+ 84+

Mercator Limited, Mumbai 5 1 - - 6

Van Oord India Pvt Ltd * 21 23 5 42 91

CompanyNo. Of Dredgers (as of 2014)

Source: Company, ICICIdirect.com Research, * Foreign fleet details of Indian arms of foreign companies


Past assignments at major ports - Preference over competitors In the past two decades, DCI has carried out various maintenance and capital dredging activities at majority of the ports. As per the dredging policy guidelines, Ministry of Shipping has the authority to appoint DCI on a nomination basis for the dredging activity to be carried out at major ports. Pursuant to the nomination process, majority of the maintenance activities at Kolkata Port trust have been carried out by DCI. However, post 2014, this process has been changed. Now DCI, like other players, participates in open competitive bids. For FY15, DCI continued to secure a maintenance dredging contract in Kolkata for a year. In addition, it had secured the dredging project for Kandla port on an open tender basis. Further, as per the dredging policy, local firms owning dredgers registered in India, including DCI, get a so-called right of first refusal to match the lowest rate offered by a foreign dredging firm, provided the rate quoted by the Indian firm is within 10% of the lowest offer placed by a foreign firm.

Exhibit 35: Glimpse of past assignments carried out by DCI!

Sr. No. Name of the work PeriodQuantity Dredged (Mn.

Cubic Mtrs.)Amount | crs

1 Dredging in approach channels at Haldia & Kolkata 2005-2015 228.0 3120 137

2 Dredging of channels and basins at Kochi port 2006-07 & 2011-2015 93.8 500 53

3 Dredging in navigational channel of Kandla Port 2005-06 & 2012-2014 15.7 233 149

4 Dredging in approach channel & lagoon of New Mangalore Port 2005-2011 29.9 193 64

5 Dredging in approach channel, turning circle and sand trap of Paradip Port 2005-2010 11.4 167 147

6 Dredging in approach channel & harbour basin of Mormugao Port 2005-06 & 2008-2012 20.4 128 62

7 Dredging of naval channel at Ernakulam, SNC Kochi 2005-07, 2010-12 & 2014-15 5.5 100 183

8 Dredging of Haldia Oil jetties in vicinity of Haldia Dock Complex 2012-2015 3.6 51 142

9 Dredging in approach channel & anchorage of Jawaharlal Nehru Port 2005-2008 3.0 40 133

10Dredging at inner approach channel, turning basin, approaches and in front of GCBs of Karwar Port

2011-2012 1.8 31 171

11Dredging in approach channel, berthing pocket & turning circle of LNG terminal of RGPPL, Dabhol

2014-2015 1.2 20 164

12 Dredging of Naval Area at Visakhapatnam 2009-2010 0.7 13 182

Sr. No. Name of the work Work done during the yearsValue of work

| crsValue of work

| crs1 Deepening of channel at Paradip Port 2008-10 15.9 248 156

2 Dredging at Kamarajar Port Phase-II 2011-12 6.5 104 160

3 Dredging in navigational channel of Kandla Port 2012-14 3.0 87 290

4 Dredging at Kandla cargo berth no 13 to 16 2013-14 1.1 52 471

5 Dredging at Mooring Dolphin MD1 to MD6 of Marmugao Port 2009-10 1.3 50 384

6 Dredging for deepening of CICTPL, CB1 & 2 berths and approaches at Kamarajar Port 2014-15 1.1 46 442

7Dredging in northern arm from inner harbour turning circle to EQ-10 of Visakhapatnam Port

2014-15 1.0 35 356

8 Dredging at ICTT basin & Channel at Cochin port 2011-12 1.0 26 259

9 Dredging at sand trap and other areas of Gangavaram Port 2011-14 1.2 30 248

10 Dredging at Kanakesanthurai Harbour, Sri Lanka 2012-13 0.3 10 343

11 Dredging at general cargo berth, Vedanta’s terminal at Visakhapatnam port 2011-12 0.1 2 182

Major maintenance dredging assignments executed

Past capital dredging assignments executed

Average dredging cost per cubic metre

Average dredging cost per cubic metre


Given the past record and successful dredging activities carried out at majority of the ports, DCI has achieved proficiency with regard to Indian soil stratum and climate which varies from port to port. These capabilities make it as a preferred dredging company for the public sector ports.


Fleet profile - Well equipped to take assignments DCI’s fleet includes 12 trailer suction hopper dredgers (TSHDs), three cutter suction dredgers (CSDs) and one back hoe dredger. Apart from its core dredging fleet, the fleet also includes two survey launchers and other ancillary crafts. Given the fleet profile, it is evident that the fleet is ageing and needs replacement. Of the three CSDs, two are 39 and 37 years old, which makes them uncompetitive against other European players. Of the 12 TSHDS, six are more than 20 years old while the oldest is 40 years old as of now. The dredger wise particulars as on date are as under:

As majority of the fleet is TSHDs across different capacity, DCI has been able to select the appropriate equipment for a particular maintenance dredging job. Recent efforts are on to replace and refurbish existing aged dredgers to increase the effectiveness and enhance the economic life. Over the past three years, DCI has added three TSHDs of 5500 mcm each for | 1570 crore. Approximately 20% of the acquisition cost was funded from internal sources and 80% via external commercial borrowings from IHC Merwede (Netherlands based leading supplier of dredging equipments in India). Dredger XIX & XX has been purchased through euro denominated loan of 116 million (| 720 crore) at an interest rate of Euribor +0.825% per annum. Dredger XXI has been purchased through euro denominated loan of 53 million (| 330 crore) at an interest rate of Euribor + 2.85% per annum. Both loans are repayable in 20 semi-annual instalments. Further, it has also issued tax free 10 year bonds worth | 58.9 crore carrying a coupon rate of 6.97% per annum. The new dredger commands higher daily rates compared to older ones. In addition to the replacement, DCI follows compulsory preventive maintenance to reduce the downtime, increase profitability and enhance the vessel life. While dredgers less than 10 years old had performed nearly 300 days in a year, those more than 20 old work only for 230 to 260 days. In FY15, three of the company’s dredgers were in dry dock, out of which one had highest capacity of 7400 mcm, which led to a decline in revenue. With investments expected to be unlocked over the Sethusamudram project, reimbursement to the tune of | 300-400 crore would be utilised to acquire additional dredgers.

Exhibit 36: Fleet profile mainly concentrated in TSHDs… Name of the Craft Year of Built Hopper Capacity (cu.m) Pumping capacity (cu.m/hr)Trailer suction Hopper Dredger (TSHD)

DCI Dredge VI 1975 3770 0

DCI Dredge VIII 1977 6500 0

DCI Dredge IX 1984 4500 0

DCI Dredge XI 1986 4500 0

DCI Dredge XII 1990 4500 0

DCI Dredge XIV 1991 4500 0

DCI Dredge XV 1999 7400 0

DCI Dredge XVI 2000 7400 0

DCI Dredge XVII 2001 7400 0

DCI Dredge XIX 2012 5500 0

DCI Dredge XX 2013 5500 0

DCI Dredge XXI 2014 5500 0

Cutter suction Hopper Dredger (CSD)

DCI Dredge VII 1976 0 1000

DCI Dredge Aquarius 1977 0 2000

DCI Dredge-XVIII 2009 0 2000

Back Hoe DredgerDCI Dredge-BH1 2011 0 0



Past issues getting sorted out – Future looks bright… Sethusamudram Project Sethusamudram, the sea separating Sri Lanka from India, presents a hindrance to navigation due to its shallow waters. With a depth of less than 10 metre across, the sea is insufficient for movement of ships. Hence, the Indian coast does not have a continuous navigation channel connecting the east and west coasts. Currently, ships coming from the west coast of India and other western countries with a destination in the east coast of India and also in Bangladesh, China, etc, have to navigate around the Sri Lankan coast. The Government of India through implementation of Sethusamudram Ship Channel Project ensured continuous navigable route within India’s own territorial waters. The project involved cutting a channel to connect the Gulf of Mannar and Bay of Bengal through Tamil Nadu and Sri Lanka, which would enable direct movement of shipping vessels between the eastern and western coast of India. The project would have allowed ships sailing between the west to East coast of India to get a straight passage through India’s territorial waters instead of having to circumvent Sri Lanka. Operationally, the distance between Cape Comorin (Kanyakumari) and Chennai would be reduced to 402 nautical miles from the prevailing 755 miles. Further, by reducing the distance between the east and west coasts, travelling time would come down by 36 hours. The project was sanctioned on June 1, 2005 at an estimated cost of | 2437 crore, majority of which included capital dredging. An SPV named Sethusamudram Corporation (SCL) was formed with a contribution of | 30 crore. Following this, DCI had employed all its dredgers on the Sethusamudram project in 2006 and carried out capital dredging to the extent of 28.4 mcm. However, dredging over the bridge region of Adams Bridge was stopped in 2007 in view of litigation on religious, environmental and economical concerns. The amount payable to DCI works out to | 308.97 crore while the matter is under active consideration of the government. Although the timing is uncertain, DCI is confident of recovering the receivables, which would reflect in the trade receivables of the company. The management does not consider any diminution in value of the investment and the same has been carried at cost. Trade receivables from the project also include | 114 crore receivable from M/s Sethusamudram Corporation (SCL), which has been pending for more than three years. Out of the above, DCI has provided for doubtful debts to the extent of | 30 crore. It feels that GoI (at whose behest the contract with SCL was entered) will reimburse DCI | 308 crore to compensate for the actual expenditure incurred on this project. DCI intends to use proceeds for buying dredgers, going ahead. Optimising fuel cost & indigenising spare parts consumption Due to the ageing fleet, DCI’s efficiency with regard to fuel cost is low. Fuel cost constitutes ~39% of total revenues, which could be lowered following a compulsory dry docking schedule. Additionally, the company is also undergoing refurbishment of existing aged dredgers, which would lead to a reduction in operational costs. Approximately 93% of DCI’s spare parts are imported, resulting in higher costs for the same. The company is streamlining the spare parts procurement systems through import substitution via indigenisation. Subsequently, the company has started procuring spares from BEML compared to the earlier strategy of importing spares. Following this, the company guarded against a depreciating rupee. Moreover, it also proposes to have tie-ups with ship repair yards for continued maintenance of vessels for a period of time to make available dredgers for a guaranteed minimum number of days every year.

Exhibit 37: Snapshot of Sethusamudram project



Risks & Concerns Higher dry docking to be related to revenue loss Dry docking would impact the financials of the company in a major way. On the one hand, the asset under dry docking would be unable to generate any revenues, while, on the other, dry docking expenses would result in lower margins. As the fleet gets older, dry docking expenses and downtime could significantly impact the operational performance. Though repair and maintenance is not the biggest contributor to total expense, a variation in the same impacts margins, to an extent.

Client concentration at Kolkata port More than ~50% of total revenues are derived from dredging operations at Kolkata Port. Prior to 2014, pursuant to the MoS’ nomination process, DCI was the sole external maintenance dredging company servicing the port. The dredging operations are substantially funded by GoI. Post 2014, this nomination process ceased to exist and Kolkata Port opted for competitive bidding. DCI being the only bidder in the 2015 bidding process got the contract for dredging at Kolkata Port. Kolkata port has come out with a new tender for maintenance dredging for a period of five years for which the process is expected to conclude by March. The tender from the port remains key for DCI as it has still been unable to diversify revenues. Fuels, lubricants may have material adverse impact on performance

Fuels and lubricants form ~50% of the total expenditure. The company is exposed to volatility in crude prices as it enters into long term contracts with suppliers of these materials over a defined period. Some of the dredging contracts into which DCI has entered do not contain an escalation clause for fuel price hikes. Hence, if prices of fuels and lubricants rise, the operational profitability would be adversely affected.

Exhibit 38: Impact of repairs & maintenance charges on EBITDA margins

12%

6%

16%

14%

3%

11%

24% 24%

15%

20% 19%17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15

%

0%

5%

10%

15%

20%

25%

30%

Repairs & Maintainence (as % of total cost) EBITDA margins


Exhibit 39: Sensitivity of fuel & lubricants to EBITDA margins

-10.0% -5.0% 0% 5.0% 10.0%

FY17E 33.1 31.6 30.1 28.6 27.1 FY18E 37.6 34.8 32.0 28.9 25.8

Change in Fuel prices

EBITDA margins



Financials Revenue growth to be supported by government’s coastal agenda We expect total revenues to grow at a CAGR of 17% in 2016E-18E compared to 3% CAGR in FY09-15. We believe the flattish growth can be attributed to the government’s major focus on road development and low investments on rail and coastal. The recent shift in government’s focus to develop India as a ‘maritime’ nation gives us confidence on the revival of the company’s earnings going ahead. Following de-growth in the past two consecutive years, growth rates would optically be high. However, we believe the quantum of work undertaken by the company would increase substantially. Majority of earnings would be supported by maintenance dredging.

We believe DCI would be able to maintain its leadership in maintenance dredging. Furthermore, as newer ports have been planned, we expect the capital dredging work to also get shored up, going ahead. However, given the fleet profile, DCI’s plan to undertake capital dredging work would require the addition of a capital dredger. Addition of an inland dredger for undertaking work for inland waterways would lead growth in its capital dredging revenues. However, the need to meet the draft requirements of existing ports would lead to growth in DCI’s maintenance dredging revenues. Following which we expect contribution from maintenance dredging and capital dredging to remain at similar levels.

Exhibit 40: Revenue trend

772726

663770

916

579632

569679

787

19393 94 12992

0100200300400500600700800900

1000

FY14 FY15 FY16E FY17E FY18E

| cr

Total Revenue Maintainence Dredging Capital Dredging


Exhibit 41: Segment wise revenue composition

7587 86 88 86

2513 14 12 14

0

20

40

60

80

100

120


| cr

Maintainence Capital



Margins to gradually improve on the back of cost rationalisation The addition of new dredgers would provide higher fuel efficiencies coupled with better day rates. Further, as inland dredging derive better yield, the realisation is expected to aid the margins. Indigenisation of spares coupled with lower maintenance costs due to long term contract with local shipyard would lead to better margins. EBITDA is expected to grow at a CAGR of 24% over FY16E-18E, unlike 13% CAGR over 2010-2015. Margins continued to improve from 14.7% in FY10 to 24% in FY15. Following the lower turbine diesel cost in FY16, margins expanded 200 bps to 26% in 9MFY16. Referring to the aforesaid benefits, improvement in margins is expected to keep up the momentum ensuing EBITDA margins to reach ~30% in 2015-17.

Majority of the cost structure includes fuel and lubricants expenses, which account for ~50% of total operating expenses. For 9MFY16, fuel costs were 44% of total expenses. Following the price elasticity of crude prices, we believe fuel costs would continue to remain at 45%. Employee costs and administrative expenses would continue to gradually increase. However, following the replacement of old vessels coupled with indigenisation of spare parts, repairs and maintenance cost would tend to remain constant to a decline trend.

Exhibit 42: EBITDA and EBITDA margin trend

185.8 173.2 175.7 223.1 276.5

24.1 23.6

29.926.1 28.6

0.0

50.0

100.0

150.0

200.0

250.0

300.0


| cr

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

% to

sal

es

EBITDA EBITDA Margin %


Exhibit 43: Cost composition

16.8 17.3 21.3 22.7 22.4

7.7 6.39.6

60.1 51.1 45.5 44.7 45.0

7.0 9.1 8.1 7.0 7.1

2.3 2.83.5 3.3 3.1

9.0 9.73.3 10.6 9.8 9.8 10.0

2.8 2.7 2.7 2.8 2.9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

FY14 FY15 FY16E FY17E FY18EEmployee Expense Operating Expenses Administrative expensesRepairs & Maintainence (Vessels) Fuel & Lubricants Spares & StoresInsurance



PAT – Double whammy from revenue growth & margin expansion PAT is expected to grow at a more rapid pace compared to the operational performance. Revenue growth coupled with margin expansion would provide momentum to PAT, which is expected to grow at a CAGR of 36% in FY16-18E compared to flattish growth in 2010-15. Lower depreciation costs due to older fleet profile coupled with contained interest costs would further accelerate PAT growth. Exhibit 44: PAT & PAT margins trend

37.5 62.4 63.0 91.4 116.6

12.7

4.9

8.69.5

11.9

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0


| cr

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

PAT PAT margin (%)


Debt equity to remain moderate; return ratios to improve We expect DCI’s debt to remain at current levels at | 1000 crore in FY16E-18E, following which the debt/equity ratio would remain at 0.6x in FY15-18E. Also, we expect return ratios to improve modestly.

Exhibit 45: Debt equity trend

1256.8 924.4 970.7 1145.4 1317.1

0.9

0.6 0.60.6

0.7

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0


| cr

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Debt Debt/Equity

Exhibit 46: Return ratios

2.7

4.3 4.1

5.46.4

7.76.8 7.1

8.19.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0


ROE (%) ROCE (%)



Valuation The dredging industry at the cusp of a revival and a move to the high growth phase as the government has renewed its focus on coastal transportation. The initial targets set by the Ministry of Shipping would lead to increased work for the dredging industry. DCI continues to maintain its leadership position in the maintenance dredging market. With increased focus on operational parameters, the company’s profitability is expected to grow at a faster rate compared to its earnings.

Exhibit 47: Forward P/E

0.00200.00400.00600.00800.00

1000.001200.001400.001600.001800.002000.00

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec-

09

May

-10

Oct-1

0

Mar

-11

Aug

-11

Jan-

12

Jun-

12

Nov

-12

Apr

-13

Sep-

13

Feb-

14

Jul-1

4

Dec-

14

May

-15

Oct-1

5

Mar

-16

Close -Unit Curr 10.0 X 15.0 X 20.0 X 25.0 X 30.0 X


Historically, DCI has been trading at a 10 year average P/E of 24x compared to the current level, where it is currently trading at 10x FY18E estimated EPS of | 41.6. We believe that on the back of very large opportunities arising from the government’s coastal agenda, the best years of the company are still ahead. However, following the execution history, we remain cautious in assigning a multiple. Hence, we value the company at 12x P/E and arrive at a target price of | 500.

Exhibit 48: Forward P/BV

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

Jul-0

7N

ov-0

7M

ar-0

8Ju

l-08

Nov

-08

Mar

-09

Jul-0

9N

ov-0

9M

ar-1

0Ju

l-10

Nov

-10

Mar

-11

Jul-1

1N

ov-1

1M

ar-1

2Ju

l-12

Nov

-12

Mar

-13

Jul-1

3N

ov-1

3M

ar-1

4Ju

l-14

Nov

-14

Mar

-15

Jul-1

5N

ov-1

5M

ar-1

6

Close -Unit Curr 0.4 X 0.5 X 0.6 X 0.7 X 0.8 X


Valuing the company on a P/BV basis, DCI has been trading at a 10 year average P/BV of 0.9x compared to current 0.6x. We believe the fair P/BV for the company is approximately 0.75x. Hence, we assign the same to arrive at a target price of | 500.


Financial Summary (Consolidated) Exhibit 49: Profit & Loss (| Crore)

(Year-end March) FY 14 FY 15 FY 16E FY 17E FY 18ERevenue 770.4 735.0 672.4 780.3 925.8 Growth (%) 21.3 (4.6) (8.5) 16.0 18.6 Cost of Sales 97.9 97.4 106.0 126.5 145.6 Employee Costs 13.5 15.8 17.4 18.6 20.0 Operating Expenses 44.9 35.6 44.9 53.9 62.1 Op. Expenditure 19.4 59.3 48.8 54.6 64.8 EBITDA 185.8 173.2 175.7 223.1 276.5 Growth (%) 68.8 (6.8) 1.5 27.0 23.9 Depreciation 138.3 92.1 100.5 115.5 130.5 EBIT 47.5 81.1 75.2 107.6 146.0 Interest 11.0 25.7 19.4 22.9 36.0 Other Income 2.3 8.8 10.5 11.6 12.7 PBT 38.8 64.2 66.3 96.2 122.7 Growth (%) 79.8 65.4 3.2 45.2 27.6 Tax 1.3 3.0 3.3 4.8 6.1 Reported PAT 37.5 61.3 63.0 91.4 116.6 Exceptional Items - 1.1 - - - Reported PAT (adjusted MI) 37.5 62.4 63.0 91.4 116.6 Growth (%) 83.1 63.2 2.8 45.2 27.6 EPS 13.4 22.3 22.5 32.6 41.6


Exhibit 50: Balance Sheet (| Crore) (Year-end March) FY 14 FY 15 FY 16E FY 17E FY 18E

Source of FundsEquity Capital 28.0 28.0 28.0 28.0 28.0 Reserves & Surplus 1,395.4 1,446.3 1,578.0 1,755.7 1,852.6 Shareholder's Fund 1,423.4 1,474.3 1,606.0 1,783.7 1,880.6 Secured Loan 1,255.6 923.1 969.3 1,143.7 1,315.3 Unsecured Loan 1.3 1.3 1.5 1.6 1.8 Total Loan Funds 1,256.8 924.4 970.7 1,145.4 1,317.1 Deferred Tax Liability - - - - - Source of Funds 2680.2 2398.8 2576.7 2929.0 3197.7Application of FundsGross Block 3,274.1 3,051.2 3,351.2 3,851.2 4,351.2 Less: Acc. Depreciation 1,086.3 1,179.9 1,280.4 1,395.9 1,526.5 Net Block 2,187.7 1,871.3 2,070.8 2,455.3 2,824.7 Capital WIP - 1.0 50.0 50.0 50.0 Total Fixed Assets 2,187.7 1,872.4 2,120.8 2,505.3 2,874.7 Goodwill - - - - - Investments 30.0 30.0 30.0 30.0 30.0 Inventories 114.0 107.9 101.3 117.6 131.9 Debtors 365.5 373.1 331.6 374.1 418.5 Cash 56.0 117.9 173.2 176.2 120.6 Loan & Advance, Other CA 344.6 273.6 218.9 175.1 140.1 Total Current assets 880.1 872.5 825.0 843.0 811.1 Creditors 50.6 61.2 65.4 79.7 91.7 Other Current Liabilities 348.6 294.6 309.3 340.2 391.3 Provisions 18.4 20.4 24.4 29.3 35.2 Total CL and Provisions 417.6 376.1 399.1 449.2 518.2 Net Working Capital 462.5 496.4 425.9 393.8 292.9 Miscellaneous expense - - - - - Application of Funds 2,680.2 2,398.8 2,576.7 2,929.0 3,197.7



Exhibit 51: Cashflow (| Crore)

(Year-end March) FY 14 FY 15 FY 16E FY 17E FY 18EProfit after Tax 37.5 62.4 63.0 91.4 116.6 Less: Dividend Paid 9.8 10.1 19.7 19.7 19.7 Add: Depreciation 138.3 92.1 100.5 115.5 130.5 Cash Profit 166.0 144.4 143.8 187.2 227.4 Increase/(Decrease) in CL 68.8 (41.5) 23.0 50.1 68.9 (Increase)/Decrease in CA 552.5 69.5 102.8 (15.0) (23.7) CF from Operating Activities 808.2 208.2 308.7 265.0 328.3 (Add) / Dec in Fixed Assets (1,295.7) 223.3 (349.0) (500.0) (500.0) Goodwill - - - - - (Inc)/Dec in Investments - - - - - CF from Investing Activities (1,295.7) 223.3 (349.0) (500.0) (500.0) Inc/(Dec) in Loan Funds 535.9 (332.4) 46.3 174.6 171.7 Inc/(Dec) in Sh. Cap. - - - - - Change in Reserves & other (19.7) (21.6) 49.0 66.7 (39.4) Others 9.8 10.1 19.7 19.7 19.7 Interest Paid (11.0) (25.7) (19.4) (22.9) (36.0) CF from financing activities 515.1 (369.5) 95.6 238.1 116.1 Change in cash Eq. 27.6 61.9 55.3 3.0 (55.6) Op. Cash and cash Eq. 28.3 56.0 117.9 173.2 176.2 Cl. Cash and cash Eq. 56.0 117.9 173.2 176.2 120.6


Exhibit 52: Ratios (Year-end March) FY 14 FY 15 FY 16E FY 17E FY 18EPer share data (|)Book Value 508.4 526.5 573.6 637.0 671.6 EPS 13.4 22.3 22.5 32.6 41.6 Cash EPS 62.8 55.2 58.4 73.9 88.3 DPS 3.0 3.0 6.0 6.0 6.0 Profitability & Operating RatiosEBITDA Margin (%) 24.1 23.6 26.1 28.6 29.9 PAT Margin (%) 4.9 8.5 9.4 11.7 12.6 Fixed Asset Turnover (x) 0.3 0.3 0.3 0.3 0.3 Inventory Turnover (Days) 54.4 55.1 55.0 55.0 52.0 Debtor (Days) 198.5 183.4 180.0 175.0 165.0 Current Liabilities (Days) 261.6 209.4 225.0 230.0 230.0 Return Ratios (%)RoE 2.7 4.3 4.1 5.4 6.4 RoCE 7.7 6.8 7.1 8.1 9.0 RoIC 1.0 1.5 1.7 2.3 2.5 Valuation Ratios (x)PE 30.4 18.2 18.0 12.4 9.7 Price to Book Value 0.8 0.8 0.7 0.6 0.6 EV/EBITDA 12.6 11.2 11.0 9.4 8.4 EV/Sales 3.0 2.6 2.9 2.7 2.5 Leverage & Solvency RatiosDebt to equity (x) 0.9 0.6 0.6 0.6 0.7 Interest Coverage (x) 4.3 3.2 3.9 4.7 4.1 Debt to EBITDA (x) 6.8 5.3 5.5 5.1 4.8 Current Ratio 2.1 2.3 2.1 1.9 1.6 Quick ratio 1.8 2.0 1.8 1.6 1.3



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


Disclaimer

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