Bangalore / Mumbai: Shipbuilder Pipavav Shipyard Ltd will sell 85.5 million equity shares in an initial public offering (IPO) starting on Wednesday. Analysts are concerned about the order book and steep valuations.

Equity offer: (L to R) Pipavav’s Nikhil Gandhi, Atul Punj and; Jai Prakash Rai with Citigroup Financial’s Ravi Kapoor in Mumbai on 10 September. PTI

At a price band of Rs55-60 a share, Pipavav stands to raise Rs470-510 crore, but faces order cancellations and price renegotiations on about 48% or Rs2,136.2 crore of its total order book valued at Rs4,459.6 crore, according to the prospectus filed last week with the Securities and Exchange Board of India.

“The lack of any track record, confusion over the ‘real’ order book and non-existent revenues pose significant risks for investors in this IPO," wrote Nitin Bhasin, UK-based research house Noble Group Ltd’s infrastructure analyst in a 15 September note.

In the draft prospectus filed in January 2008, Pipavav Shipyard said it had shipbuilding orders of approximately $1,063.12 million (Rs5,166.76 crore) for the construction of 26 Panamax bulk carriers (including options for four ships which have been exercised) for delivery from 2009 to May 2012. Panamax carriers are the biggest ships that can sail through the Panama Canal fully laden.

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Pipavav was helped by the ordering frenzy seen till 2007 when global shipping peaked. However, since then, the shipping sector underwent a major upheaval in the wake of the financial crisis and the downturn led to a crash in freight rates and clipped ship prices globally. As a result, shipbuilding contracts have been cancelled or are being re-negotiated.

“The world’s shipbuilders undoubtedly face difficult times between the delivery of the current inflated order book and a return to more normal ordering patterns," Nigel Gardiner, managing director of London-based maritime consultancy Drewry Shipping Consultants Ltd wrote in a recent report World Shipbuilding Market Review and Forecast 2009/10.

Pipavav is no exception. It now says its order book includes 34 ships valued at Rs4,459.6 crore consisting of 22 Panamax bulk carriers and 12 offshore supply vessels from Oil and Natural Gas Corp. Ltd. Out of this, orders for 12 ships worth Rs2,136.2 crore are either being renegotiated or are subject to arbitration.

Besides, Pipavav has also revealed that a condition imposed by the Union government on paying subsidy on all shipbuilding contracts signed before 14 August 2007, when a subsidy scheme ended after a five-year run, would adversely affect operations.

Twenty-two of the 34 ships currently on order at Pipavav are eligible for the subsidy because they were contracted prior to 14 August 2007.

A March government notification has capped the subsidy for Pipavav at 30% of the value of orders, reducing the benefit which it otherwise would have enjoyed because of its location at a special economic zone, thus crimping its profitability.

Apart from the order book, analysts are concerned about the company’s lack of experience in the shipbuilding business.

This “makes us apprehensive of its ability to win new orders against highly experienced incumbents", wrote Kejal Mehta, an analyst at brokerage Prabhudas Lilladher Pvt. Ltd in a 14 September note. Although Pipavav’s promoters, SKIL Infrastructure Ltd and Punj Lloyd Ltd, do have long experience in the infrastructure sector, this is their first venture in the shipbuilding space, pitting them against experienced Chinese and Korean companies which control about 85% of this market.

The asking price of the shares also works against the company. The order book of Pipavav is 0.98 times its enterprise value, which is a measure of the firm’s value and is roughly calculated by summing up market capitalization and debt.

This compares unfavourably with peers such as ABG Shipyard Ltd at 4.4 times and Bharati Shipyard at 2.3 times enterprise value.

Anagram Stock Broking Ltd said the “shares are offered at a much higher valuation to peer group. There are criminal charges and manipulation of stock price charges against some of the directors and promoters".

On Tuesday, Pipavav’s chairman Nikhil Gandhi told Mint that the company raised around Rs100 crore from a clutch of anchor investors that included Batterymarch Financial Management Inc., Galleon Group and the Diversified India Fund. These anchor investors bought shares at Rs60 a share, or at the upper band, Gandhi added. Boston-based Batterymarch is one of the oldest foreign institutional investors in India while New York-based Galleon is already an investor in Pipavav.