Cochin Shipyard Ltd IPO
One of India’s leading public-sector shipyards catering to commercial and defence sector, Cochin Shipyard Ltd is coming out with an IPO  for Rs. 1468 Crores  that entails  fresh issue of 22.65 million shares and offer for sale of 11.3 million shares by the Government. Though the Cochin Shipyard IPO Government is selling a 10% stake. THis ateke sale together with fresh issue of equity the Governments holding shall come down within the 75% bracket mandated for listing. Besides from the angle of  disinvestment of  stake by GoI, Cochin Shipyard IPO  is also raising funds for setting up of Dry Dock and International Ship Repair Facility (ISRF). Cochin Shipyard  IPO does not have an anchor book.

Cochin Shipyard IPO Details:

Issue OpensTuesday, August 1, 2017
Issue ClosesThursday, August 3, 2017
Price BandRs. 424 – 432
Bid Lot30 Equity Shares and multiple thereof
Issue Size Fresh Issue of 22,656,000 Equity shares and
 Offer for sale of 11,328,000 Equity Shares.
Issue Size ( Rs.) Rs. 1,442.01 Cr (at upper Band)
Discount to Retail & EmployeesRs.21/- per Equity Share
Issue Structure : 
QIB50% of the Net Offer -16,580,000 Shares- Rs.716.26 Cr
NIB15% of the Net Offer- 4,974,000 Shares – Rs.214.88 Cr
Retail35% of the Net Offer -11,606,000 Shares – Rs.477.01 Cr
Lead  ManagersSBI Capital Markets, Edelweiss Financial, JM Financial
RegistrarLink Intime India Pvt. Ltd.
About Cochin Shipyard Ltd :
  • Cochin Shipyard Ltd. (CSL) was incorporated in 1972 as a fully-owned Government of India (GoI) company. In the last four decades, the company has emerged as a forerunner in the Indian shipbuilding & ship repair industry. Cochin Shipyard Limited is the Largest Public Sector Shipyard in India in terms of Dock Capacity as of March 31, 2015
  • Cochin Shipyard Ltd. has two docks – dock number one, primarily used for ship repair (“Ship Repair Dock”) and dock number two, primarily used for shipbuilding (“Shipbuilding Dock”). CSLs’s Ship Repair Dock is one of the largest in India and enables it  to accommodate vessels with a maximum capacity of 125,000 DWT . The Shipbuilding Dock can accommodate vessels with a maximum capacity of 110,000 DWT (Dead Weight Tonnage)
  • The company has built and repaired some of the largest ships in India. It has also undertaken complex and sophisticated repairs to ship of the Indian Navy, Indian Coast Guard and merchant navy. 
  • CSL is currently building India’s first Indigenous Aircraft Carrier (“IAC”) for the Indian Navy and this forms a significant part of its current order book.
  • The Company derives  close to 82% of its revenue from the shipbuilding segment whereas the ship repair segment contributes the rest 18%.
  • Sector wise Defence sector contributes about 80% to the Revenue with 20% coming from the commercial sector.
  • Breakdown of its revenue is as follows: 

Activity

Defence sector

Commercial Sector

Shipbuilding

69.44%

12.68%

Ship repair

10.42%

6.94%

Other operating revenue

0.48%

0.04%

  • Indian Navy and the Indian Coast Guard are the  top two customers of the company which together accounted for 82.43%, 89.92% and 84.57% of its  revenue from operations in Fiscals 2015, 2016 and 2017, respectively.
  • Cochin Shipyard Ltd is in the process of constructing a new dock, a ‘stepped’ dry dock (“Dry Dock”). This stepped dock will enable longer vessels to fill the length of the dock and wider, shorter vessels and rigs to be built or repaired at the wider part. It is in the process of setting up an International Ship Repair Facility (“ISRF”), which includes setting up a ship lift and transfer system.
Financials:
Financials  in Brief   ( Rs.  In Crores)
2017201620152014
Revenue from Operations2,059.491,990.011,583.2659.60
Revenue Growth (%)3.49%25.69%2556.48% 
Profit Before Tax480.17449.65110.443097.7
Net Profit 312.18297.7569.28
Net Profit  Margin15.48%14.77%3.44% –
Face Value1010  
Share Capital113.28113.28113.286.2
Reserves1917.741710.921440.65385.6
Net worth2031.021824.21553.93391.8
RoNW (%)15.37%15.99%4.46%10240.00%
NAV Per Equity share (Rs.)79.16658.357.6
EPS (Rs.) 27.56   
IPO Price432
PE ratio15.68
P/BV ratio(Pre IPO)5.46 (1.3 post ipo)
Post Issue Share Capital135.94
Earning on Diluted equity22.97
PE ratio (Post Issue Equity)18.81
Market Cap in Rs. Crore5872.44
Market Cap/Sales Ratio2.85
Rationale For Investment
  •  Cochin Shipyard Ltd which is a wholly-owned GoI company, was incorporated in 1972 and was conferred the ‘Miniratna’ status in 2008, by the Department of Public Enterprises, GOI.
  • Company’s shipyard is strategically located along the west coast of India, midway on the main sea route connecting Europe, West Asia and the Pacific Rim, a busy international maritime route.
  • The Company has more than four decades of proven expertise in Ship Building and  Repair
  • Besides Indian Navy and Indian Cost Guard who are company’s major customers,  Cochin Shipyard Ltd  has entered into  strategic agreements with some of its key customers such as Lakshadweep Development Corporation , Dredging Corporation of India and Directorate General of Lighthouses and Lightships for ship repair which ensures steady business to CSL on account of   routine and dry dock repairs of their ships/dredgers. 
  • CSL has a strong debt free balance sheet with cash at Rs. 1600 crore.
  • The company is in the process of expanding its  capabilities through proposed Dry Dock and International Ship Repair Facility. This will help it to build and repair a broader variety of vessels including new generation aircraft carriers and oil rigs, which are expected to be key growth drivers in the short to near long term. The process of setting up an ISRF will allow us to undertake repair of a broader range of vessels.
  • CSL plans to enter inland vessel building segment on the back of strong growth potential & government focus. The company will build small barges, passenger ferry, river-sea vessels and river cruise among other inland vessels.
Concerns: 
  • Commercial shipbuilding activity is closely linked to the growth of global economy and global economic conditions
  •  Cochin Shipyard Ltd  is focusing on the expected growth in the requirements of the Indian Navy for new ships, but it does not have any contractual arrangements with the Indian Navy or GoI to construct or repair naval ships.
  • There is risk of time and cost overruns for its  proposed Dry Dock or ISRF project. 
  • Due to recent liberalisation policies, private companies have been allowed to bid for vessels used in defence-related projects. This may lead to increased competition
  • CAG has pointed out that CSL project to build India’s first Indigenous Aircraft Carrier (“IAC”) for the Indian Navy is facing delays and will not get completed before 2023.
Assessment
  •  Renewed Focus by Government on beefing  up India’s defence preparedness bodes well for the company.
  •  Cochin Shipyard Ltd  has a robust Order book  which stands  1.6x its revenue and good order visibility. 
  •  Cochin Shipyard Ltd has presence in  shipbuilding as well as Ship Repair both for  commercial clients and clients engaged in the defence sector which provides for a good degree of stability.
  • Company has Strong Cash Flows and good profitability. 
  • At the upper band of  Rs. 432, the stock is available at  around 18X PE Multiple on equity after IPO. 
  • Most of the private shipyards in the country like Bharti shipyard, ABG Shipyard are in deep trouble and apart from financial weakness cannot match capabilities of CSL to carry out larger and more complex tasks. 
  • The only listed peer worth considering is Reliance Defence Engineering which is also not in profit and  Cochin Shipyard Ltd  scores over it on various financial parameters  including EV/EBITA  of 1.9 times   vs figure  of 183 for  Reliance Defence Engineering.
  • Given the good financial performance by the company even as shipbuilding industry has seen turbulent and cyclic business, expected ramp in defence spending in the country, strong order book, consistent financial performance, increasing focus on ship repairing which has higher margins, strong balance sheet  coupled with reasonable valuations, there is a strong case to subscribe to this IPO. 

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.