India’s largest public sector shipyard, will open for subscription on Tuesday and close on August 3rd. The company intends to raise about Rs. 1,400-1,500 crore through an initial public offering (IPO).
Equity shares are proposed to be listed on BSE and National Stock Exchange. The book running lead managers to the issue are SBI Capital Markets, Edelweiss Financial Services and JM Financial Institutional Securities.
Most domestic brokerage firms have recommended investors to subscribe to the issue on account of attractive valuations, healthy order book, and low debt on books as well as quality management.
The company intends to raise Rs.1,415 crore-1,442 crore (post discount to retail investors and employees). The company plans to use the net proceeds for setting up of dry dock within the existing premise of the company (Rs.443 crore), setting up of an international ship repair facility at Cochin Port Trust area (Rs.229.5 crore) and general corporate purposes.
The company has paid dividends to its shareholders at rates of 15%, 15%, 15% and 76.5% in FY2013, FY2014, FY2015 and FY2016, respectively, and has declared dividend of 89.7% for FY2017.
As of June 30, 2017, its total cash and bank balance stood at Rs.2,003 crore, while it had fund-based indebtedness in the form of tax-free infrastructure bonds amounting to Rs.123 crore.
The listed private sector shipyard companies such as Reliance Defence and Engineering, ABG Shipyard and Bharati Defence and Infrastructure have been under financial stress, showing consolidated net loss during FY2016-FY2017.
Further, ABG Shipyard and Bharati Defence reported negative net worth in FY2016, while financials for FY2017 have not been publicly available.
“Consequently, CSL is not comparable with listed private sector shipyard companies. CSL is expected to be available at 18.8x P/E multiple (EPS calculated on post issue number of shares) and 2.9x P/B on FY2017 financials at the upper price band of Rs.432,” Sharekhan said in a note.
We have collated a list of top 10 brokerage houses which have given their views on Cochin Shipyard IPO:
Reliance Securities: Subscribe
The domestic brokerage firm said that it admires Cochin Shipyard Ltd (CSL’s) ability to stay afloat in the turbulent period without compromising on margins.
Going forward, government’s endeavor to improve its defence strength in sea route and several initiatives under flagship “Make in India” programme will result in healthy orders for CSL, which will drive growth.
“At the upper price band, CSL trades at 18.8x FY17 EPS post dilution. Though it is difficult to compare it with peers as most of the listed peers are loss making, we believe the current valuations are not expensive given healthy return ratios and bright prospects,” it said.
Further, price to book ratio after dilution stands at 1.9x, which is attractive in our view. Hence, Reliance Securities recommend ‘subscribe’ to the issue.
Centrum Capital: Listing gains possible
Cochin Shipyard Ltd (CSL) is a wholly-owned government company which caters to the Indian defence (85% of FY17 sales) and commercial (15%) worldwide segments in the shipping industry.
As of Mar’17, CSL’s order book stood at Rs3,306 crore and has bid for three major tenders of the Indian Navy. In addition, the governments’ Make in India initiative and focus on defence spends is likely to open many opportunities for CSL.
Over FY15-17, CSL reported revenue and PAT CAGR of 14 percent and 112 percent, respectively. EBITDA margins expanded from 5.6 percent in FY15 to 18.5 percent in FY17, benefitting from lower raw material cost.
IIFL Wealth Management: Subscribe
Cochin Shipyard Ltd (CSL), the largest public-sector shipyard in India in dock capacity, perfectly poised to capitalize on the government’s focus on ‘Make in India’ campaign in the domestic defence sector.
Having delivered benchmark projects for the Indian Navy in the past, CSL is currently developing India’s first Indigenous Aircraft Carrier (IAC). Order book of Rs.30bn and bid pipeline of Rs.120bn provide strong revenue visibility over the next three years.
A sector veteran of over five decades, CSL has a strong foothold (39% market share) in India’s ship repair segment. With average margins of 18 percent over the last five years and RoEs of 15 percent over the same period, CSL has consistently delivered the goods, even during the slowdown phase in the shipbuilding industry.
The IPO provides good retail exposure to the promising domestic defence sector, and available at attractive valuations of 18.1x FY17 P/E (upper band of Rs.432). We recommend Subscribe.
HEM Securities: Subscribe
Cochin Shipyard top customers include the Indian Navy and the Indian Coast Guard. These top two customers together accounted for a majority share of company’s revenue from operations in Fiscals 2015, 2016 and 2017, respectively.
As of March 31, 2017, co’s shipbuilding order book position in terms of revenue to be recognised in future is Rs 2,936 crores. At price of Rs 424-432/share, co is bringing the issue at P/E multiple of 18.88 on post issue FY17 EPS of Rs 22.89.
With decent fundamentals, company’s valuation looks reasonable at cur-rent level. Hence we recommend “Subscribe” on the issue.
ICICI Direct: Subscribe
Despite turbulent times in the global shipbuilding history, CSL has delivered topline and bottom line growth of 11.1 percent and 18.7 percent CAGR, respectively, in FY07-17.
CSL has a strong balance sheet with debt at Rs123 crore and cash at Rs1,600 crore. With the moderate capital expenditure of Rs2,800 crore over the next three years (FY18-21E) and superior return profile (average RoEs, RoCEs of 15.5%, 16.5%, respectively, in FY12-17), ICICI Direct believes CSL is a quality play and is on a strong footing.
ICICI Direct has a subscribe recommendation on the offering based on robust order book (Rs3,000 crore), strong order inflow visibility, best-in-class execution capabilities and leverage free balance sheet.
Asit C. Mehta: Subscribe
Cochin Shipyard is the largest dock in the country with expertise in ship building and repairing. Moving further, it is planning to foray into heavy engineering vehicles, and on expanding its ship building and repairing capabilities, which will enhance its order book, helping it compete well with international peers.
At the upper price band, asking price is at a P/E of 16X at FY17 EPS of Rs. 27.56. The domestic brokerage firm recommends subscribing the issue for listing gains and for a long-term prospective as well.
Angel Broking: Subscribe
Cochin Shipyard (CSL) is the largest Indian public sector shipyard and it received “Miniratna” status in 2008. CSL operates a shipyard that provides shipbuilding and ships repair services in both defence and non-defence spaces.
CSL generates 74 percent from shipbuilding and 26 percent from ship repair. Healthy order book indicates strong revenue visibility. In terms of valuation, pre- issue works out to 15.7x of FY2017 EPS (at the upper end of the issue price band), which is reasonably priced.
Arihant Capital Markets: 4-star rating
The issue has been offered in a price band of Rs 424 to 432 per equity share. At present total equity share is 11.33 crore and EPS is Rs 27 per share and with fresh issue of 2.26 crore total number of equity share will be 13.60 crore and adjusted EPS is Rs 23 per share at the upper price band of Rs 432 the stock is available at Adjusted P/E of 19 (x) based on FY17 annualized EPS. Arihant has given a “4-star” rating for the issue.
Choice Broking: Subscribe
On the financial front, CSL over the past 3 fiscal years has reported strong numbers with topline witnessing a CAGR of 14 percent. The company has negligible debt on books with a debt to equity ratio of 0.06x as on FY17.
The company has maintained a strong cash position of Rs 1991.20 crores as of FY17. Furthermore, CSL is the only company compared to its listed peers which are profitable with strong track record and dividend paying. Considering the long term growth prospects the domestic brokerage firm feels that investors can subscribe for the issue.
Geojit Financial Services: Subscribe
Cochin Shipyard Ltd (CSL), is the largest public sector shipyard in India in terms of dock capacity and fully-owned by Government of India. CSL has emerged as the frontrunner in the Indian ship building & repair industry.
The recent ‘Make in India’ initiative and GoI’s plans to localise defence manufacturing are promising for CSL. Over the last 5yrs, Revenue and EBITDA have grown at a CAGR of 8 percent and 14 percent respectively.
During the same period, EBITDA margin has increased from 14% to 18% while PAT has grown at a CAGR of 15%. At an upper price band of Rs432, CSL is available at a reasonable valuation of 19x on FY17 EPS. We recommend ‘Subscribe’ to the issue, with a medium-to-long term perspective.
Brokerage houses listed out some risks that one has to consider before subscribing the issue:-
> The shipyard business is highly dependent on global economic conditions
> The entire business operations of the company is based out of a single shipyard at Kochi
> Business is subject to extensive government regulation
> The company is dependent on the Cochin Port Trust for certain basic services required for daily operations.
> Nature of fixed price contracts
> Loss of any of the company’s major customers or a reduction in their orders
> Failure to succeed in tendering for shipbuilding or ship repair projects for the Indian Navy in the future
> Weak tendering activity for ship building/repairs (from the Indian Navy and the Indian Coast Guard who account for 85 percent of revenue) could impact the business
> Delay in commercial operations of Dry Dock project or project completions could result in cost overruns
> Volatility in raw material prices like steel could hamper operating margins
> Commercial shipbuilding industry is highly cyclical in nature