Pipavav Shipyard is coming out with an initial public offering (IPO) of 8,54,50,225 equity shares of Rs 10 each. It will raise nearly Rs 513 Cr at higher end of the price band Rs 55-60 per equity share. The issue will open for subscription on September 16 and close on September 18, 2009.
Up to 600,000 equity shares will be reserved for employees and rest of the shares for the public. The net issue will constitute 12.74% of the post-issue equity share capital of the company. Promoters (SKIL, Grevek Investments and Punj Lloyd) will hold 39.56% stake post issue.
Apart from general corporate expenses, the company intends to utilise proceeds for construction of facilities for shipbuilding, ship repair and the Offshore Business (Rs 179.27 Cr) and as a margin for working capital (Rs 244.04 Cr).
Credit Analysis and Research Limited (CARE) has assigned an IPO Grade 3 to the issue, indicating average fundamentals. Book running lead managers to the issue are Citigroup Global Markets India Pvt Ltd, Enam Securities Pvt Ltd, JM Financial Consultants Pvt Ltd, SBI Capital Markets Ltd, Kotak Mahindra Capital Company Ltd and Motilal Oswal Investment Advisors Pvt Ltd. Karvy Computershare Pvt Ltd is the registrar.
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 Cr, which is being financed by the term loan of Rs 1,312 Cr, present net worth of Rs 1,260 Cr and proposed IPO of Rs 500 Cr. 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.
In comparison to Bharati and ABG Shipyard, all the operating ratios are little bit scaled up (high). But that doesn’t take away the merit of this company because this company appears to be a good company over a period of time.
Angel Broking View:
Notwithstanding good Industry growth prospects, the IPO ALREADY factors in the company’s strong Order inflow, potential extension of the government subsidy and timely execution. Global market leader, Hyundai Heavy Industries, is trading at 1.5x CY2010E P/BV, while in case of Pipavav, even at the lower price band, it would trade at 1.8x FY2011E P/BV, which is expensive. The IPO is also 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. Thus, considering that the IPO is at premium valuations.
SPA Securities View:
The company has a strong order book, but majority of its revenue will be received in FY 11. The estimated revenue in FY 11 is to be around Rs 35,000 million. PSL is available at a P/E of 8.6x and 9.3x at lower band & upper band respectively of its FY 11 estimated EPS of Rs. Rs.6.43. Looking at the FY 11 P/E multiple, there is not much upside potential in the short term. However, the revenues from the defence sector is not factored in since the company is yet to win orders which can generate substantial revenue.
Chairman Nikhil Gandhi, in an interview to CNBC-TV18, said the company’s valuations were justified and said the company was eyeing opportunities to build assets for the defence sector. He added that It is on the contrary because we have kept the price much lower. We have done the pre-IPO at Rs 80 and company has become operational since April 2009 and for an operational company this is a very good price because we are quite conscious of the issue that this is the first IPO of the group and we want to make sure that unless investors make lots of money, like the private equity investors who are making tonnes of money – the financial institutions 600% return – if the IPO price was high, they would have sold and gone. But they have not sold. This demonstrates that the price is very attractive and there is a lot of confidence in the management and the company’s potential.
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