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Home / Markets / Mark To Market /  Mazagon Dock’s public offer has kindled investors’ interest

The initial public offering (IPO) of Mazagon Dock Shipbuilders (MDS) Ltd is kindling more retail interest than the UTI Asset Management Co. Ltd’s IPO. So far, Mazagon Dock has seen bids 15.5 times its retail offer size, while UTI’s retail portion is currently under subscribed, data from the NSE shows.

Overall, the IPO has also garnered 7.5 times the bids against shares on offer. This interest suggests there is a demand for well-priced IPOs where there is a likelihood of listing gains, too.

It also helps that MDS is in the defence sector, which is expected to pick-up post the government’s drive for self-reliance. Analysts expect it to get a sizeable order from government’s domestic procurement plan, estimated at 2.1 trillion

“We believe MDL is well-positioned to win at least 1 trillion of new orders over the next 10 years out of a 2.1 trillion opportunity; this should help provide visibility on earnings beyond FY25," said analysts at PhillipCapital in a note.

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Compared to other companies in shipbuilding, MDS’s stock valuation on FY20 earnings of 6 times is marginally lower than that of Cochin Shipyard Ltd’s 7 times, and much lower than Garden Reach Shipbuilders Ltd’ 15 times. Further, the MDS order book of 54,070 crore, about 11 times its current revenues, adds comfort that growth would be stable for the next few years.

On the other hand, UTI AMC is an asset-light business model, but its high-cost structure is a bit of a worry. MDS’s revenue has jumped on an annualized basis at about 12%, which is a positive. But operating margins have been at about 5.2% in FY20. The firm’s sizeable cash balance is good and yield of about 7% in dividends adds comfort.

Its customer advances against order book accounts for about 21% of revenues. But with rising revenue, advances could decline, which may impact its working capital. Defence shipbuilding is a competitive industry with four government-owned defence shipyards in the country. Private sector major Larsen and Toubro Ltd is also bidding for submarine and warship projects, said analysts.

Nevertheless, the IPO’s lower valuation is comfortable. “IPO valuations are at 40% discount to theoretical fair value that this business could command. We expect MDL’s revenue, Ebitda and profit to grow at 22%, 30% and 9% CAGR over FY20-25," said analysts at PhillipCapital India in a client note.

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