Pipavav Shipyard is making its initial public offer (IPO) in the price band of Rs55-60 a share. The issue proceeds would be utilised for construction of facilities for shipbuilding, ship repair and offshore structures and to meet working capital requirements.
Pipavav is strategically located adjacent to the major sea lanes of the Persian Gulf and Asia. Once fully operational, it would be the largest shipyard in India which can handle vessels up to 400,000DWT.
Pipavav has two distinct units viz. Block making and Dry Dock. The company plans to have a diversified product mix with major focus on the defence and naval sectors.
The Indian Shipbuilding industry is well-poised to register robust growth aided by the following factors:
- Expected surge in seaborne trade.
- Availability of cheap labour in India.
- Strong capex lined up in offshore and defence sectors.
Further, India’s share in shipbuilding is set to increase from 1.0% to 15% by 2020 (Source: i-maritime Consultancy Pvt. Ltd), which coupled with likely extension of government subsidy (on new orders beyond August 2007) will help shipbuilders sustain profitable growth going ahead.
Notwithstanding good Industry growth prospects, we believe that the Pipavav IPO is priced at a premium v/s its peers.
Consider: Global leader, Hyundai Heavy Industries (HHI), is trading at 1.5x CY2010E P/BV while as per our estimates, even at the lower price band, Pipavav would trade at 1.8x FY2011E P/BV, which is expensive.
The IPO is also expensive compared to its domestic peers, ABG and Bharati Shipyard, who have a diversified order book with strong revenue and operating visibility over next two-three years and higher Return Ratios. Thus, considering that the IPO is at premium valuations, we recommend an AVOID.