Bharati Shipyard wins Great battle

ABG Shipyard and its subsidiaries reduced their shareholding in Great Offshore to a negligible amount. ABG Shipyard and its subsidiary Eleventh Land Developers sold their combined shares, equivalent to 8.27% of the total shares of Great Offshore today, in the open market.

ABG and Bharati Shipyard were locked in a takeover battle. Bharati Shipyard increased its open offer price to Rs. 590 per share from Rs. 560 per share. ABG had already started selling its stake in Great Offshore since morning today- when initially, the stock of Great Offshore were up by almost 4%. Finally, when the dust settled after the news came, Great Offshore ended up getting hammered, and closed down 6%. Bharati has bid for 20% stake @ Rs. 590 per share now. The acceptance ratio of the offer would also go down. Great Offshore would be seen to underperform consequently in the coming weeks, until Bharati completes the open offer process.

The stocks of ABG Shipyard and Bharati Shipyard were up by almost 10% at closing, however, delivery ratios were low. This is the trigger we had been talking about for over two months now, and it's finally happened. The next trigger for the stock would be defense orders, speculation is rife in the markets.

Bharati Shipyard has won the battle for Great Offshore for now. The good news for Bharati Shipyard shareholders is that this strategic investment in Great Offshore would allow Bharati Shipyard to maintain its order book, which comprises of a lot of orders from Great Offshore. The bad news for Bharati Shipyard shareholders is the large debt the company has accumulated in order to acquire Great Offshore. Of course, Great Offshore is a much larger company than Bharati Shipyard in terms of Market Capitalization (Great Offshore is 4 times as big as Bharati Shipyard). While Bharati trades at a low P/E of less than 4, there is a chance for an upward correction.

So, what could be the next things to look out for? May be, may be, Bharati Shipyard and Great Offshore get merged- that's a very distant possibility for the moment, but it cannot be ruled out. Before that, Bharati would have to gain management control of Great Offshore- which it cannot have at the moment, according to a SEBI advice on the Open Offer.

We would also have to see who bought ABG's stake in the market today. There is a high chance that Bharati would have bought it. If that has happened, its current stake would go up to 32%. And finally, after the offer, it would climb to 52%- which would make Great Offshore Bharati's subsidiary.

There are a lot of possibilities, but for now, Bharati Shipyard would have to start debt management, and do that without diluting its equity. There were news that it would do a rights issue- that's fine. But a QIP on increased share capital or something of that sort would dilute its equity, and consequently reduce the EPS. If the reduction in EPS due to dilution gets offset by the increased earnings out of this investment, it would again be fine. These are just our views, of course, the Bharati Shipyard management would have thought of it all already.

Also, Bharati Shipyard was our first investment suggestion. Check out what we had to say about it some months ago: (click here for our previous analysis). We maintain our price target of Rs. 900 in 4 years time frame.