Cochin Shipyard IPO: Apply or Ignore?

Background:

Cochin Shipyard is a Government owned shipbuilding and ship repair company which was established in 1972. It enjoys  the Miniratna status and as its name suggests, is based out of Kochi in Kerala. It is the largest public sector shipyard in India.

Business & Clients:

• The company undertakes both defence and commercial orders
• Defence accounts for nearly 80% of the revenues
• Shipbuilding makes up ~ 80% of the revenues and the balance 20% comes from ship repairs
• Indian Navy and Indian Coast Guards make up 85% of the revenues
• The company is building India’s first IAC (Indigenous Aircraft Carrier)

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There is a high client concentration risk and the defence sector is totally at the mercy of the Government

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Future Prospects:

The company is enroute to build another IAC and also diversify into LNG Carriers (License obtained). Since most of the business comes from the defence sector, the company’s fortunes are tied up to the defence sector policies of the Government. We, as a firm policy, don’t predict and forecast Government policies.

The company currently has a healthy order book of ~ Rs 3,070 Crores which is nearly 1.4x of its FY17 revenues. The company’s CMD said that they turn down 20-30 vessels for repairs in a year due to lack of capacity. IPO proceeds will be utilized for capacity expansion by building a new dry dock and also by setting up a new ship repair facility.

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The company is cash rich (Rs 1,600 crores of cash). It is further raising funds amounting to Rs 1,443 crores by the IPO route. The planned capex is Rs 2,800 crores which spreads over to FY23.

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Financials:

• The company has grown its revenues at a CAGR of 7.95% between FY12 and FY17
• The company has grown its PAT at a CAGR of 15.75% between FY12 and FY17
• The company has demonstrated pricing power by expanding margins
• Other income makes up nearly 1/3rd of the EPS

Valuations:

At Rs 432, the market capitalization works out to ~ Rs 5,900 crores and the PE multiple 18.32x FY17 reported PAT. The company operates in a sector which has seen most companies crumble to debt (ABG Shipyard, Reliance, Bharti, etc.). However, Cochin Shipyard has stayed away from taking debt in its balance sheet and has remained profitable.

The company is well poised to benefit from its strong execution skills and steady order flow from the Government. It is operating in a cyclical business and there will be rough times in between.

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The allotment price for retail shareholders will be ~ Rs 411 (Rs 432 with a 5% discount). The company has a book value of Rs 179 per share and a cash per share value of Rs 165 which offers a decent margin of safety.

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Apply or Ignore:

Apply for the IPO with only 1 lot under one name as the issue will be oversubscribed and allotment at the most will be for a single lot. IPO market is generating a lot of buzz and one can expect a around 25% listing day gain from this IPO.


Disclaimer : Source - www.raghavbehani.com