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

Avenue Supermart (D-Mart) IPO Analysis

D-Mart IPO- King of Retail

Since the days of Harshad Mehta, RadhaKrishna Damani is known to be the man of Midas touch. He is the big Bull Rakesh Jhunjhunwala’s Guru and a Ace Investor.

RadhaKrishna Damani started his own venture D-mart Retail 17 years back in 2000 and D-Mart is expected to be listed at 18,000 Crores of Valuation next month. The Current Grey Market Premium on this issue is 50% or 150 per share,In next 3 mins, you will definitely learn what makes D-mart so special.

Introduction to D-Mart – D Mart is third largest in the sector after Reliance Retail and Kishore Biyani’s Future Group. D Mart is one of the few profit making grocery retailers, known for low-priced products and a low-cost business model. 53% of D-Marts revenue comes from Food, 21% from FMCG and 26% General Merchandise and Apparel. Business model is easy i.e. to retail quality goods at competitive prices. The majority of products stocked by them are everyday products forming part of basic rather than discretionary spending. D-Mart had 112 Stores at End of FY2016 with presence in 8 States and 41 cities, Maharashtra contributed 63% of revenue whereas Gujarat contributes 19%.

Why is D-Mart so Successful? (Moat Around the Business)

#Factor 1- Ownership of all Properties – Avenue Supermarts currently owns all its properties which eliminates rental cost. Rental costs typically account ~ 3 % – 8% for peers.  It operates predominantly on an ownership model (including long-term lease arrangements, where lease period is more than 30 years and the building is owned by it) rather than on a rental model.

#Factor 2- Revenue Per Square Feet –  This is the real big difference between a great business and a mediocre one. A Great business sweats its assets a lot more than the mediocre one. D-mart, Reliance Retail and Future Retail (Big Bazaar) have broadly the same product portfolio but D-mart does sales of 28,136 per Sq. feet whereas Reliance and Future do half of that at 13,901 Per Sq Feet and 12,914 Respectively.

#Factor 3 – Inventory Turnover – If there was one Ratio that we could have looked at and judged a Retail franchise, that would be Inventory Turnover. D-mart kills competition here, its like the Zara of FMCG Retail.  D-mart Inventory Turnover is 14.18 (26 days) v/s 4.9x (75 Days) for Future Retail.

#Factor 4 – Shift from Unorganized to Organized – We expect a very large shift from unorganized sector to organized sector, Organized retail is expected to grow at 21% whereas unorganized retail is expected to grow at 11.7%. We believe post GST, the pace of shift from unorganized to organized will be faster which will benefit D-Mart.

#Factor 5 – Growth led by Same Store Growth Plus Expansion – D-Mart’s Same store growth in last 3 years has been an astonishing with 26%, 22% and 21% for FY 2014,2015, and 2016. They plan to add 2.1 Million Square feet or about 70 new stores by 2020 (Assuming every story is 30-35k Sq Feet). D-mart has been the fastest growing retailer and increased revenues from 2200 Crores in 2012 to 8,600 crores in 2016

#Factor 6 – Gross Margins – D-mart has the lowest Gross margin among all Players and still has the highest operating margin, making it a Moat. In a commodity business, the most efficient player wins, D-mart has show how selling its goods with economies of scale makes a it superb business model. D-Marts Gross margins are only 52% whereas Future Group its 65%, showing D-mart is passing the cost benefit to its customers and selling it cheaper than peers which ensures higher revenue per sq. feet.

#Factor 7 – Employee Cost – D-Mart has the Least number of Employees per square foot i.e. 1 employee for 800 Square feet whereas competitors have 1 employee for every 400-500 Sq. Feet (you don’t need someone to help you buy Maggi, do you?).  This makes D-mart far more efficient compared to competition.

#Factor 8 – Return on Equity – By now i am sure you understood D-mart’s business model,You might be thinking that D-mart is a asset heavy business as it doesn’t rent properties rather it buys them, but D-mart has shown that even after having a very heavy asset base it has managed to deliver 20%+ Return on equity.

#Factor 9 – Comparison with Global Peers – D-Marts model is similar to that of Walmart, with a lot of owned stores, very high inventory turnover and low debt on balance sheet.Costco a members only wholesaler which has created immense value in last decade also a model of Economies of Scale. Zara and Walmart have proven that the only way to great value in retail is sell cheap and increase your Inventory turnover.

Stallion’s View – D-Mart is a Consumer facing business who has cost leadership as it pays all his suppliers within 15 days against a cash discount, passes this cost benefit to customers with lowest gross margins in the Industry at 52%. D-Mart has been Smart with its cost management compared to its peers, and even after being a asset heavy business model its ROE is more than 20%+ .D- Mart is Expected to come with a Valuation of 18,000 or about 40x FY2017 PE. D-mart has a strong Business model, Longevity and Growth on its side. The organized Retail is expected to grow at 21% for next 10 years, which ensures D-Mart won’t trade at cheap valuations for a long long time.

We Recommend a Subscribe on Avenue Supermart IPO (D-mart) and Believe it will list at 400/Share plus atleast.

Report by Stallion Asset on D-Mart