Cochin Shipyard IPO - Reasons to subscribe

About the issue
Cochin Shipyard Ltd., a public sector company in India, is planning to raise Rs 1468.11 crore through an IPO. The company will issue 3,39,84,000 equity shares with face value Rs 10. It consists of fresh issue of 2,26,56,000 equity shares and offer for sale of 1,13,28,000 equity shares. The minimum lot size is of 30 shares. The issue will remain open from August 1, 2017 till August 3, 2017 with a price band of Rs 424-432 per share. The company will get listed on both BSE and NSE.

Purpose of the issue
The company will utilize the funds raised from the IPO towards setting up of a new dry dock within existing premises of the company, setting up of an international ship repair facility at Cochin Port Trust area and other general corporate purposes.

Company Background
Cochin Shipyard Ltd. was incorporated in 1972 and is a wholly-owned company of the Government of India with a Mini Ratna status. It commenced its operations in 1975 and has become the largest public sector shipyard in India in terms of dock capacity. It caters to clients engaged in defence sector in India and in commercial sector worldwide. It is also engaged in providing marine engineering training. The company has two docks, one is used for ship repair and the other is used for shipbuilding. The ship repair dock accommodates vessels with a maximum capacity of 1,25,000 DWT and the shipbuilding dock accommodates vessels with maximum capacity of 1,10,000 DWT.
Its current shipbuilding order book includes Phase II of the IAC for the Indian Navy, two 500 passengers-cum-150 tonnes cargo vessels and two 1200 passengers-cum-1000 tonnes cargo vessels for Andaman & Nicobar Administration and a vessel for Government of India’s project. As of March 31, 2017, its shipbuilding order book was worth Rs 2936.15 crore and ship repair order book was worth Rs 369.8 crore. It’s Marine Engineering Training Institute is located at Kochi which commenced from 1993.
Indian Navy and the Indian Coast Guard are its major customers, accounting for 84.57% of the revenue if FY17. The government is divesting 10% stake in the company and would issue 20% fresh equity shares. After the IPO, the government’s stake would go down to 75% and the remaining 25% will be held by the public.
The new stepped dry dock will enable longer vessels to fill the length of the dock and rigs to be built at wider part. The International Ship Repair Facility will include setting up of a ship-lift and transfer system.

Industry Outlook
The Government of India is planning a new shipbuilding, breaking and repair policy to double the size of the industry to Rs 20,000 crore by 2022. Indian shipyards have less than 1% share in global shipbuilding and repair market, which is dominated by Singapore, China and some Middle East countries that have almost 45% share. The industry has earlier been awarded the infrastructure status, which is expected to make loans cheaper. As per industry survey, the Indian commercial shipbuilding market has the potential to grow five times over the next decade.            
Indian ships in the carriage of India’s overseas cargo has fallen sharply and the ships are also ageing. Hence, there is an urgent need to replace the ageing ships with new ones. India’s shipbuilding industry has the capacity and expertise, but is currently functioning below capacity. Many shipyards are facing problems like declining orders.

Financial Performance



The company’s revenue and PAT has grown at a CAGR of 15.33% and 112.27%, respectively, from 2015-17. FY15 was relatively weak year, but revival was seen in top-line and margins from FY16 onwards. The company has also been paying dividends on a regular basis. As on June 30, 2017, its fund-based financial indebtedness was only Rs 123 crore, with cash and bank balance of Rs 1900 crore. 

Valuation & Peer Comparison



On the upper price band of Rs 432, with EPS of Rs 27.56, the company’s P/E ratio works out to 15.67x. The listed peers for comparison could be Reliance Defence & Engineering Ltd., ABG Shipyard Ltd., and Bharti Defence & Infrastructure Ltd. The peer companies are generating losses and hence the P/E cannot be calculated. Whereas, CSL is showing consistent growth in revenue and profitability.

Our view
The prospect of shipbuilding industry is expected to remain weak in the short and medium term. Therefore, the Government of India is boosting the sector by allowing public to buy stake in such shipbuilding companies. The supply of commercial vessels has exceeded demand, which has affected the order books of private shipbuilding companies.
The company's performance has been better as compared to its peers due to exposure to resilient defence sector. It has a strong order book, which would increase the revenue realisation once the orders are executed. Debt component is relatively low and it is maintaining high liquidity. As the major requirement comes from defence sector, that is, from Indian Navy for shipbuilding, the company's operations would run smoothly with continuous strong order book. We recommend investors to SUBSCRIBE for the IPO to reap long term benefits and high divided yield. The stock can be added to give stability to the portfolio.