IPO note: Pipavav Shipyard

IPO note: Pipavav Shipyard
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First Published: Wed, Sep 16 2009. 11 13 AM IST
Updated: Wed, Sep 16 2009. 11 13 AM IST
Pipavav Shipyard is a shipbuilders with infrastructure facility to build commercial and defence vessels as well as fabricate and construct offshore rigs, platforms and vessels.
The company is currently completing the construction of Pipavav Shipyard located on the west coast. Upon the completion of construction, the company will be capable of ship construction and repair for a range of vessels of different sizes and types.
The company has capacity of 400,000 dead weight tonnage (DWT) and claims to be the largest dockyard in India after the full completion of the project. The company was established in 1997, whereas the commercial operations at Pipavav Shipyard commenced on 1 April.
Object of the issue
The total issue of 8.55 crore equity shares is aimed at raising Rs470 crore to Rs513 crore (depending on the price band of Rs55-60 per share). Of the total issue, the company is expected to deploy Rs179.3 crore for the construction of facilities for shipbuilding, ship repair and offshore business, Rs244 crore as margin for working capital and the remaining amount for general corporate purposes.
Key strengths
Advanced shipbuilding technology - The company manufactures vessels of different sizes and types, and provides offshore structures utilizing technologically-advanced design and production systems.
To leverage on experience and resources of co-promoter - Punj Lloyd, a co-promoter in Pipavav Shipyard, provides integrated design, engineering, procurement, construction and project management services for energy and infrastructure projects.
Volatility in raw material prices - The company currently does not have any policy as regards to fluctuation in steel and other raw material prices, and any sharp volatility could hit the margins.
Strategic geographic location - The shipyard is located along the west coast of India, approximately 150 nautical miles from Mumbai, on the sea route connecting the Persian Gulf to Asia. This is a busy international maritime route that is suitably located for the company’s ship repair business.
Competitive cost structure - Has competitive labour, land and overhead costs compared to its foreign competitors with manufacturing operations in countries such as South Korea and Japan
Confirmed orders to utilise shipbuilding capacity – They have firm orders for construction of 10 Panamax bulk carriers of 74,500DWT each along with the option to construct additional Panamax vessels. It has also received notification of award of contract for construction of 12 offshore supply vessels.
Key risks
Execution risk - The company has commenced commercial operations from only 1 April and hence has very low track record.
Risk of order cancellation - Around 45% of the current order book value is under arbitration and re-negotiation. We believe there remains a high risk of order cancellation.
Valuation
We believe Pipavav Shipyard provides very low earnings visibility in the near term. Its current order book consists only of Panamax and offshore vessels. However, the company has submitted bids for construction of five naval offshore patrol vessels and two cadet training ships to the Indian Navy and also expects order for fabrication and construction of offshore platforms, rigs, jackets and vessels.
The current enterprise value (EV) to order book (excluding orders which are under arbitration and renegotiation) of the company stands at 2x, as compared to ABG Shipyard’s 0.29x and Bharti Shipyard’s 0.32x.
On price/book value (P/BV) the stock is available at 2.7x as compared to industry average of 1.5x. It is difficult to justify the steep premium over its peers despite its technological edge and other competitive advantage.
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First Published: Wed, Sep 16 2009. 11 13 AM IST
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