Cochin Shipyard IPO kicks off: Does it offer better value than its listed peers?

NEW DELHI: The Rs 1,468 crore Cochin Shipyard IPO kicked off on Tuesday. The issue is priced in the Rs 424-432 per share range and bids can be made for minimum 30 equity shares and in multiples of 30 shares thereafter. There will be a discount of Rs 21 per share for retail investors and employee categories.

The government would sell 33,984,000 shares worth Rs 489 crore worth through an offer for sale (OFS). The remaining amount will be raised by issuing 22,656,000 fresh shares.

The company’s order book stands over Rs 3,300 crore. The miniratna firm has bid for three major tenders of the Indian Navy. Experts believe the governments’ Make-in-India initiative and focus on defence spends may open up opportunities for the company.

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The company has three listed peers — ABG Shipyard, Bharati Defence and Infrastructure ( Bharati Shipyard) and Reliance Defence and Engineering (RDEL). None of these stocks have done well in the last one year. But Cochin Shipyard is a profit-making firm. So should you subscribe to the issue? Here's what experts say:

CENTRUM BROKING | SUBSCRIBE

The brokerage noted that this state-run company generates about 85 per cent of its revenues from Indian defence deals, while its commercial activity accounts for the rest 15 per cent revenue.

Centrum noted that at the higher price band of Rs 432, the offer is valued at 18.8 times P/E on FY17 basis (post dilution).

“CSL is the only profitable shipyard compared to peers like ABG Shipyard, Reliance Defence and Bharati Defence which are reporting losses. While there is a huge opportunity in shipbuilding (Defence, Make in India, inland waterways), it would be difficult to take a long term view on the stock as its financials seem to have shown improvement only in last 2 years,” the brokerage said.

“There could be a possibility of lumpy performance owing to the volatility in the shipping building industry. However, in the current market there is a lot of interest for IPOs. If the same happens with this issue despite growth being inconsistent, the listing could still be at a premium to the offer price,” it said.

MOTILAL OSWAL SECURITIES | SUBSCRIBE

This brokerage noted that the Miniratna firm has strong presence in both shipyard and ship repair segment.

The company’s continuous focus on high margin repair business, strong positioning in west coast of India, healthy order book, negligible debt cash and bank balance of Rs 2000 crore and decent ROEs of 16 per cent, make the issue interesting, the brokerage said.

“At higher end of price band, the issue is priced at PE of 18.8 times FY17 post issue (and 15.7x FY17 pre issue) which we believe is attractive,” it said.

GEOJIT | SUBSCRIBE

Geojit is banking upon the recent ‘Make in India’ initiative and GoI's plans to localise defence manufacturing.

“Currently, CSL has two docks; one being used for shipbuilding and the other for repairing. 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. At an upper price band, the issue is available at a reasonable valuation.” It said.

ANGEL BROKING | SUBSCRIBE

Jaikishan J Parmar, Research Analyst- Mid-Caps at Angel Broking said that the pre- issue valuations works out to 15.7 times of FY2017 EPS, which is reasonably priced.

The analyst said that sespite cyclical business it has maintained net cash positive balance sheet. The company has seen easing of working capital cycle from 195 days in FY2012 to 59 days, Parmar said.

“Considering the past financial performance of CSL and strong visibility on future growth, we rate this issue as subscribe,” he said.

DALAL & BROACHA STOCK BROKING | SUBSCRIBE

This brokerage noted that the company has submitted bids for projects worth 12,000 crore, three for the Indian Navy and one for the Ministry of Home Affairs.

The expansion also involves expanding its ship repair capacity, a high-margin business in which the firm earned 550 crore in the year ended March 2017, by undertaking repairs of some 80-100 ships, it said.

“The new ship repair facility will help Cochin Shipyard repair another 80 mid-sized ships a year. We recommends our investors to subscribe for the IPO with a long term view,” the brokerage said.

ICICIDIRECT | SUBSCRIBE

Despite turbulent times in the global shipbuilding history, the brokerage said, CSL has delivered topline and bottomline growth of 11.1 per cent and 18.7 per cent CAGR, respectively, in FY07-17.

With capital expenditure of Rs 2,800 crore over the next three years (FY18-21E) and superior return profile, the brokerage sees CSL as a quality play.

“We have a subscribe recommendation on the offering based on robust order book, strong order inflow visibility, best-inclass execution capabilities and leverage free balance sheet,” it said.