My earlier article on Pipavav Shipyard IPO

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Here is information on Pipavav Shipyard dated Sep, 14 2009

Pipavav Shipyard, which is into shipbuilding and other related activities, plans to raise funds to the tune of Rs 509 crore, based on the upper price band of Rs 60 per share. The company has a diversified business model and a large scale of operations, which is amongst the best in the industry. However, this is also a reason that the issue is priced at a premium, believe analysts.

Scaling up
Since its shipbuilding facilities are under construction, it reported meagre revenues of Rs 6.17 crore and net profit of Rs 4.72 crore in 2008-09. But, its current order book of Rs 4,700 crore, with an average delivery period of about two years, provides an indication of things to come. To execute work of higher magnitude, the company is constructing a shipyard at Gujarat.

The facility has become partly operational since April 2009 and the company is currently constructing four vessels. This facility is expected to be fully operational by end-October 2009. And, upon completion it will emerge as India’s largest facility with a capacity to build 2-3 ships of about 400,000 dead weight tonne (DWT) capacity at any given time, providing the company scale to build large vessels in future.

Besides, the company will also have fabrication capacity of 1,44,000 tonne of steel, which are significantly large and complement its shipbuilding operations. For instance, the company is currently having orders for 22 Panamax vessels, wherein the average value works out to about Rs 200 crore each. Assuming that one Panamax vessel of 75,000 DWT requires 12,500 tonnes of steel, the current steel fabrication capacity is enough for constructing about 11-12 Panamax vessels.

Sea of opportunities
Large capacities also mean that the company requires more business to fully utilise its capacities. This is also a reason that the company is eying opportunities in the defence and offshore segments. It is getting inquiries from the defence sector and has already bid for orders worth Rs 7,000 crore. According to management, the opportunity in the defence sector is about $40 billion (about Rs 194,000 crore) over the next five years, given the indigenous programme of the Indian defence sector. The company can capitalise on this emerging opportunity as there are few domestic player in the country with such a large scale facility and expertise.

Pipavav Shipyard also eyeing opportunities in the domestic offshore and oil & gas segments on the back of increased capex by companies like Reliance Industries in KG Basin and ONGC. The company has already got notification (acknowledgement of bid, but order not issued yet) for construction of 12 OSVs worth Rs 535.4 crore to be delivered in the year 2011.

Pipavav is also looking to leverage its fabrication capability to undertake works relating to ship repairing of very large container carriers (VLCCs) and off-shore support vessels (OSVs) as well as naval, coast guard and others such as LNG carriers, which are largely sent for repairing outside India. The company will also explore opportunities for building equipment for thermal and nuclear power plants.

Forging alliances
To tap these opportunities, the company will leverage the experience and technical expertise of its co-promoters, Punj Lloyd, which would help it in pre-qualifying as a bidder for offshore related projects. Punj Lloyd already undertakes EPC work of the oil and gas sector, including construction of offshore platforms, and has agreed to conduct all its offshore business (excluding construction and fabrication of sub-sea pipelines) in India through Pipavav Shipyard.

Besides, the company also has agreements with Korean ship design consulting firm, KOMAC, which will help in design, drawings, procurement support, machinery and equipment. Additionally, its agreement with PILS Company of South Korea, a procurement and logistics firm, and another technical assistance agreement with SembCorp (a Punj group company), which operates shipyards and offshore construction and fabrication facilities in Singapore, should prove helpful.

HEALTHY ORDER BOOK
Customer No of
vessels		 Value
($ mn)		 Status
PANAMAX BULK CARRIERS OF 74,500 DWT EACH
Golden Ocean 4 373.5 Firm order. Delivery during
AVGI 6 - Apr 2010 and May 2012
Golden Ocean 2 71.3 Orders subject to renegotiation
AVGI 6 231
Setaf 4 144 Orders subject to arbitration
OFF-SHORE SUPPORT VESSELS (OSVS)
ONGC 12 111.85 Notification of award given. Delivery by Dec-11
Total - 931.65

Conclusion
While there are many positives, there are concerns as well which pertain to its order book. Out of orders for 22 Panamax vessels, orders for eight are subject to renegotiation while orders for another four are subject to arbitration. Any cancellation or even revision in prices should reflect on the company’s financials. Besides, analysts believe that though the company has a strong order book, most of it will only materialise into revenues in 2010-11.

Even if we assume that the company is able to execute its orders successfully and on time resulting in revenues of Rs 3,000-3,500 crore in 2010-11 (on the back of current order book and pipeline of new orders), the EPS would work out to Rs 5.4-6.3 assuming a net profit margin of 12 per cent (companies like ABG Shipyard and Bharati Shipyard have recorded net profit margins of 12-15 per cent).

Thus, the price to earnings multiple works out to 9-11.5 times. However, this does not factor in any upside if the company is able to win more orders from the defence sector for which it has already bid for. Considering that the benefits are seen to be accruing over the next 2-3 years, patient investors with an appetite for risk (in terms of price) may subscribe keeping an investment horizon of about 2-3 years.

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