Troubled Waters: ABG Shipyard faces tough times despite large order book

ABG Shipyard faces tough times despite large order book

The shipbuilding industry is facing challenging times the world over, and this has impacted the business of Indian shipyards as well. ABG Shipyard Limited is one such company which has been facing turbulent times in recent years and the company has been in the midst of a corporate debt restructuring (CDR) programme since March 2014.

Performance

ABG Shipyard Limited, the flagship company of the ABG Group, was incorporated in 1985. The shipyard is strategically situated and lies on international maritime routes. Over the years, ABG has evolved into a builder of large-size vessels for the Indian Navy. It is one of the three private shipyards that have been approved by the Indian Navy to build various types of naval vessels.

The company manufactures ships and rigs at facilities located at Surat and Dahej, Gujarat. Since its inception in 1985 till September 2016, ABG Shipyard has built 169 vessels. Over the years, the type of vessels built by the company has seen a significant change with the focus shifting to defence vessels. This is a result of the fact that both the Dahej and Surat facilities were granted a manufacturing licence by the Department of Industrial Policy and Promotion in May 2011 to design and construct ships for the Indian Navy. As of September 2016, the company has an order book of 48 vessels. Of these, there are 15 bulk vessels, 13 tugs, six platform supply vessels, 10 rigs, three defence vessels and one other vessel.

CDR programme

ABG Shipyard’s total income and net profit have fallen drastically in the past five years. With the company facing a severe financial crisis, its board approved a CDR package in March 2014. Under the package, lenders agreed to recast loans of Rs 110 billion, offered the firm a two-year hold on interest payment, reduced the borrowing cost and extended the repayment period. In October 2016, as part of the debt restructuring process, ABG Shipyard’s lenders commenced the conversion of compulsorily convertible preference shares (CCPSs) into equity. By exercising its option to convert CCPSs into eq-uity, the lead lender, ICICI Bank, acquired an 11.08 per cent equity stake in the company. With this exercise, the interest portion of the total debt was converted to equity and the principal amount remained  the company’s only li-ability. After the equity conversion, the lenders have a 51 per cent stake in the company.

In November 2016, the lenders and promoters of ABG Shipyard started the process to sell a majority stake in the company. Anticipating opportunities in the defence sector, it is expected that many big entities will attempt to foray into the sector by acquiring stakes in the company. Further, given the requirement of a large number of ships for the Indian Navy, the defence sector is an attractive market for many Indian shipbuilding companies. “Expanding our naval prowess to counter territorial disputes and replace an ageing fleet are the main growth drivers that will lead to increased capital procurement over the next decade. Sensing these opportunities, the private sector has responded to the call of Make in India by showcasing greater commitment to take on a larger role within the defence shipbuilding arena. With the government’s continued support to ease regulatory and other policy issues, the private sector is poised to emerge as a strong component of the Indian shipbuilding industry. With these steps, we will see considerable progress being made by private shipyards and their financial woes will also head south,” says  Ankit Tyagi, associate, aerospace and defence, EY India.

Going forward, with ABG Shipyard currently struggling with its weak financial position, the decision to sell a majority stake could lead to infusion of fresh capital in the company. This will enable it able to leverage the expertise of the private investor. Moreover, the financial assistance policy for Indian shipyards is likely to offer ample opportunities to the company.