IPO of Pipavav Shipyard – Was the investment right?

Company profile: The Pipavav shipyard project was originally conceived and implemented by SKIL Infrastructure Limited (SKIL). In September 2007, Punj Lloyd Limited (PLL) acquired a substantial interest in the company and now both SKIL and PLL are co-marketers of the company.

Pipavav Shipyard Ltd (PSL) is building India’s largest shipyard with unrivaled state-of-the-art facilities. Upon completion, PSL will be able to design, manufacture and repair a range of vessels in the commercial, offshore and defense sectors. We maintain our negative outlook for the global shipbuilding industry. However, we believe that PSL, with its world-class facilities and ability to handle large ships, is best positioned among its Indian peers to capture the tremendous opportunity (at Rs150-200bn pa) in the Indian defense sector. In addition, offshore manufacturing and ship repair also present a lucrative opportunity. However, these could experience a slow ramp-up and initial teething problems. Only 52% of PSL’s Rs 45.0 crore order book is firm with Rs 18.0 crore worth of orders being negotiated or arbitrated. Since PSL recently started operations in FY10 (Apr’09), we can rate PSL on the EV/order book. At the top end of the range (Rs60/share), PSL is expected to command an EV/orderbook multiple of 1.1X, much higher than peers ABG Shipyard (0.2X) and Bharati Shipyard (0.3X).

Some investment reasons that speak for Pipavav:

1. Strong order book position

2. SEZ approval for Pipavav subsidiary.

3. Professionally qualified and experienced management.

4. Strategic connection with Punj Lloyd Ltd.

Some of the negative weighted reasons:

1. Lack of track record in shipbuilding.

2. Project risk related to new projects.

3. The company has a history of restructuring corporate debt because some of its previous plans went awry.

4. Concentration of the order book in the main liner shipping sector.

Some facts and figures:

Opening and Closing Dates: Pipavav’s IPO will commence on September 16, 2009 and will close on September 18, 2009.

Price Range: The price range of Pipavav IPO has been set between Rs. 55 and Rs.60.

IPO Rating: The IPO was rated 3 out of 5 by CARE. This denotes average fundamentals.

Risks:

1. Pipavav has no operating history and thus it becomes difficult to judge how well it would perform in the future.

2. Pipavav has no previous experience in shipbuilding or ship repair or offshore activities.

3. There is a great dependency on the proceeds of this IPO itself to raise funds and proceed with the construction of Pipavav Shipyard, therefore general stock market conditions etc. affect the initial success of the company.

Objective of the IPO:

The main purpose of the IPO is to raise funds for the construction of the shipyard and a sum of 4,550 million rupees is earmarked for this. Another important goal of the IPO funds is to have a working capital margin and a sum of Rs. 2450 crore is earmarked for it.

BizAddict verdict: The Rs 513 crore initial public offering (IPO) of Pipavav Shipyard was fully subscribed in the very first hour of the first day of the subscription. The company has the second largest dock in the world after Hyundai with 782 acres of land, of which 498 acres have been developed, with a length of 662 meters and a width of 65 meters in dry dock with a shore length of 4.2 km. Currently, 85% of the country’s defense needs are met from countries like Russia, France, Germany, UK and Italy due to the unavailability of world-class facilities with Mazgaon Dock, Goa Shipyard and Kolkatta Dock currently serving the Indian Navy and Ministry of Defence.

So the company would focus on marine, ONGC and global jobs, which have much higher margins than the conventional ones. The total endowment and cost of the project is estimated at Rs. 2,995 crore which will be funded by the term loan of Rs. 1,312 crore, the current net worth of Rs. 1,260 crore and the proposed IPO of Rs. 500 crore. This results in a debt ratio of 0:75:1, which can be regarded as quite reasonable and in the comfort range. It would take at least 5 years to replicate the similar facilities, including obtaining all permits, which would give the company a first mover advantage. The IPO is expensive compared to the company’s domestic competitors, ABG and Bharati Shipyard, which have a diversified order book with strong revenue and operational visibility over the next two to three years and higher yield ratios. The company has a strong order book, but the majority of its sales will come in FY11. Taking this into account, we estimate the turnover for FY11 to be around Rs.35,000 million. Taking all these factors into account, we recommend a long-term subscription to the issue.