Pipavav Shipyard IPO – Was it Right to Invest?

Company Profile: Pipavav Shipyard project was originally conceived and implemented by SKIL Infrastructure Limited (SKIL).In September 2007, Punj Lloyd Limited (PLL) acquired a substantial stake in the Company, and now, both SKIL and PLL are co-promoters of the company.

Pipavav Shipyard Ltd (PSL) is setting up India’s largest shipyard with unmatched state-of-the art facilities. On completion, PSL will be able to construct, fabricate and repair a range of vessels in the merchant, offshore and defence sectors. We maintain a negative outlook on the global shipbuilding industry. However, we believe that PSL, with its world-class facilities and capability to handle large sized vessels, is best placed amongst its Indian counterparts to tap the huge opportunity (at Rs150-200 bn pa) in the Indian defence sector. Further, offshore fabrication and ship repair also present a lucrative opportunity. However, these could witness slow ramp up and initial teething troubles. Only 52% of PSL’s Rs45.0 bn order book is firm, with orders worth Rs18.0 bn under negotiation or arbitration. Since PSL has recently commenced operations in FY10 (Apr’09), we can value PSL on EV/Order book. At the higher end of the band (Rs60/Share), PSL shall command an EV/Order book multiple of 1.1X, much higher than peers ABG Shipyard (0.2X) and Bharati Shipyard (0.3X).

Some reasons to invest which are in favour of Pipavav:
1. Strong Order book position
2. SEZ approval to the subsidiary of Pipavav.
3. Professionally qualified and experienced management.
4. Strategic tie up with Punj Lloyd Ltd.

Some of the negatively weighing reasons:
1. Absence of track record in shipbuilding.
2. Project risk associated with new projects.
3. The company has a history of corporate debt restructuring because some of its earlier plans had gone awry.
4. Concentration of order book to the main line shipping sector.

Some facts and figures:
Open and Close Dates: Pipavav IPO opens on 16th September 2009 and closes on 18th September 2009.
Price Band: The price band of Pipavav IPO has been fixed between Rs. 55 and Rs.60.
IPO Grading: The IPO has been graded 3 out of 5 by CARE. This denotes average fundamentals.

Risks involved:
1. Pipavav has no operating history and it becomes hard therefore to judge how well it would do in the future.
2. Pipavav has no prior experience in ship building or repair or offshore activities.
3. There is a large dependence on the proceeds of this IPO itself to mobilize funds and proceed with the construction of the Pipavav Shipyard therefore the general stock market conditions etc. influence the initial success of the company.

Objective of the IPO:
The primary purpose of the IPO is to mobilize funds for construction of the shipyard and a sum of Rs.4,550 million has been earmarked for the same. Another important objective of the IPO funds are to generate margin for working capital and a sum of Rs. 2450 million has been earmarked for the same.

BizAddict verdict: Pipavav Shipyard’s Rs 513 crore initial public offering (IPO) was fully subscribed in the very first hour of its first day of subscription. The company has second largest dock in the world, after Hyundai, with the company having 782 acres of land, of which 498 acres have been developed, with 662 meters in length and 65 meters in the width of dry dock, with waterfront length of 4.2 kms. Presently, 85% of the country’s Defence needs are met from countries like Russia, France, Germany, UK and Italy, as world class facilities are not available, with Mazgaon Dock, Goa Shipyard and Kolkatta Dock, presently catering to Indian Navy and Ministry of Defence.

So, the company would be focusing on Navy, ONGC and global jobs, which has much higher margins, then the conventional ones. The total facilities and cost of the project is estimated at Rs 2,995 crore, which is being financed by the term loan of Rs 1,312 crore, present net worth of Rs 1,260 crore and proposed IPO of Rs 500 crore. This results in a debt equity ratio of 0:75:1 which can be considered quite reasonable and within the comfort levels. To replicate the similar facilities, it would take at least 5 years, including obtaining all permissions, which would give a first mover advantage to the company. The IPO is expensive compared to the company’s domestic peers, ABG and Bharati Shipyard, which have a diversified Order Book with strong Revenue and Operating visibility over the next two-three years and higher Return Ratios. The company has a strong order book, but majority of its revenue will be received in FY 11. Taking that into consideration, we estimate revenue in FY 11 to be around Rs 35,000 million. Taking all these factors into concern we recommend to ‘Subscribe’ for long term to the issue.