Pipavav Shipyard IPO Analysis - Avoid

The Pipavav Shipyard, jointly promoted by SKIL and Punj Lloyd, has set-up an integrated shipbuilding and fabrication facility. Once the fabrication facility is completely operational, Pipavav Shipyard would be the largest shipbuilding site in India capable of manufacturing ships up to 400,000 DWT (dead tonne weight) and fabricate and construct offshore supply vessels (OSVs). Pipavav Shipyard comprises two sites. The SEZ unit is located on ~95 hectares of land and an EOU located on ~103.92 hectares of land (benefits of which are available till FY12). The construction of the shipyard (excluding the offshore yard) is expected to be completed in Oct-09. Key Data Opening Date 16 Sept 2009 Closing Date 18 Sept 2009 Price Band Rs55-Rs60 No of Shares on Offer (mn) 85.45 Total Post-Issue O/s Shares (mn) 665.80 Market Capitalisation (Rs Bn) Rs36.62-Rs39.95 Project Costs (Rs Mn) Purpose Total Cost Invested (till 15 July 2009) Investment from IPO Proceeds Construction of Shipbuilding & Ship Repair facilities & Offshore Business 25,661 19,844 1,793 Working Capital Margin 4,290 1,016 2,440 Total Project Cost 29,952 20,860 4,233 Order Book Pipavav Shipyard has a current order book of Rs44,596 mn (USD931.63 mn). This order book requires the company to deliver a total of 34 vessels, including 12 OSV's for ONGC. Of the below detailed order book only Rs23,234 mn are firm orders. These firm orders are for 10 panamax size vessles and 12 OSVs. Of the balance Rs21,362 mn, orders for 8 panamax vessels worth Rs14,469 mn are under re-negotiation and an order worth Rs6,893 mn (4 panamax size vessels) is under arbitration. Customer Order Value No of Vessels Vessel Type Status Remarks Rs Mn USD Mn Golden Ocean 17,880 373.52 4 Panamax Firm Order Agreement AVGI 6 Panamax Firm Order Agreement Golden Ocean 3,411 71.26 2 Panamax Firm Order Agreement Under renegotiation to grant option to delivery of vessel, option exercisable until 31-Dec-10 AVGI 11,058 231.00 6 Panamax Firm Order Agreement Under renegotiation to grant unilateral right to customer to terminate the contract if it is unable to arrange funding Setaf 6,893 144.00 4 Panamax Firm Order Agreement Under arbitration SUB-TOTAL 39,242 819.78 22 ONGC 5,354 111.85 12 Offshore Supply Vessel (OSV) Fixed price contract TOTAL 44,596 931.63 34 Subsidy on Shipbuilding The Government of India had instituted a shipbuilding subsidy scheme wherein shipbuilders could avail a 30% subsidy on the cost of the ship being built from the government. The caveat is that the shipbuilding order should have been placed before 14-Aug-07. Based on this criteria, all of the present order book of Pipavav Shipyard qualifies for this subsidy. This subsidy is available only on vessels ordered through the ICB (International Competitive Bidding) route, and hence the government has assurance of the subsidy demanded being within reasonable parameters. Further, the benefits are capped at 30% of the order value, thus benefits accruing on account of the SEZ / EOU status would decrease the actual cash subsidy that the company is eligible to receive. The cost advantage that India offered, along with the subsidy provided by the Government (up to August 2007) helped improve the order inflow in the past 2-3 years. In addition, the Indian shipbuilding industry benefitted from orders being passed on from the traditional shipbuilding countries - Korea, Japan and China - as these were fully booked. In the near future, the capacities at these shipyards is likely to be freed up, resulting in increased competition. But most importantly the 30% subsidy incentive will not be available, and hence force the Indian shipyards to compete on a purely cost advantage basis, if any. Comparative Valuations Pipavav Shipyard ABG Shipyard Bharati Shipyard Lower End Upper End Order Backlog Rs Mn 44,596 44,596 124,700 33,000 EV / Order Book (FY11) x 1.1 1.2 0.3 0.4 P / E (FY11) x 4.6 5.0 5.2 3.5 On a comparative basis, though Pipavav Shipyard's superior dockyard, product facilities as well as business potential from Punj Lloyd - a co-promoter - do deserve some premium to the peer-set, we believe that the inherent nature of the business continues to be cyclical, and the lack of proven execution (vessel delivery) track record correspondingly requires a discount to the same peer-set. We thus, believe that the premium demanded is unjustified, and the stock would be available at more reasonable valuations in due course.