Cochin Shipyard IPO valuation attractive, good proxy play for defence sector: analysts
Mumbai: As the initial public offering (IPO) of Cochin Shipyard opens for subscription on Tuesday, analysts said the government-run company is a good proxy play for the Indian defence sector.
With a price band of Rs424-432 per share, it aims to raise up to Rs1,468 crore through its share sale offer and will close for subscription on 3 August. The issue will see 10% divestment by the government and a 20% fresh issue. Post the issue, government’s share in Cochin Shipyard will fall to 75%.
Most analysts find the issue to be attractive. IIFL Wealth Management Ltd said in a 28 July report that the IPO provides good retail exposure to the promising domestic defence sector and available at attractive valuations of 18.1 times FY17 price to earnings (PE). “With average margins of 18% over last five years and return on equity (RoE) of around 15 over the same period, it has consistently delivered the goods, even during the slowdown phase in shipbuilding industry,” it added.
Continuous focus on high margin repair business, strong positioning in west coast of India, healthy order book and negligible debt with cash and bank balance of Rs2,000 crore and decent ROEs and return on capital employed (ROCE) are key strengths of Cochin Shipyard, according to Motilal Oswal Securities Ltd (MOSL). “At higher end of price band, the issue is attractive,” MOSL said.
Prabhudas Lilladher Pvt. Ltd also said that its strong net cash balance sheet, strong order pipeline and option value of bagging further air craft carriers could provide multi-year visibility of earnings. At the upper end of the issue price, market capitalization works out to be Rs5,880 crore.
In FY17 its order book stood at Rs3,339 crore including shipbuilding orders worth Rs2,936 crore and ship repair orders worth Rs403 crore.
Angel Broking said that the issue is reasonably priced on the back of healthy order book with execution capability and experienced management. “Despite cyclical business it has maintained net cash positive balance sheet and eased working capital cycle from over 195 days in FY2012 to current 59 days,” it said in 31 July report.
The company plans to utilise the IPO proceeds to double their capacity by setting up a stepped dry dock and an international ship repair facility (ISRF) which will enable them to handle broader variety of vessels including new generation aircraft carriers and oil rigs.
Cochin Shipyard derives 74% of its revenue from the shipbuilding whereas the rest 26% comes from the ship repairs. Client-wise, defence sector contributes 85% to the topline while the rest 15% comes from commercial segment. The company delivered strong revenue, earnings before interest, taxes, depreciation, and amortization (Ebitda) and net profit growth of 14%, 106% and 112% respectively in FY15-17.
Currently, it is the largest public sector shipyard in India in terms of dock capacity. It operates a shipyard that provides shipbuilding and ships repair services in both defence and non-defence spaces.