IPO of Pipavav Shipyard – to apply or not?

The IPO of Pipavav Shipyard is priced at the price band of Rs.55 to Rs.60. The Company is promoted jointly by SKIL Infrastructure and Punj Lloyd.

Pipavav Shipyard (PSL), promoted by SKIL infrastructure and Punj Lloyd, is targeting a rapid ramp up in its order book by focusing on the defence and offshore business. PSL’s shipyard has become partly operational from April 2009 and should be fully operational by Q3FY10. Though the yard would be India’s largest in terms of capacity with the capability to build various kinds of vessels, the current order book quality does not instil confidence. The order book is highly skewed in favour of dry bulk carriers, with more than 1/3 of the order book under renegotiation/arbitration process.

Planning to focus on business from defence sector

The Indian government’s drive to go indigenous in the defence sector provides a huge opportunity for PSL. According to the company, the opportunity in the defence sector is about Rs 1,94,000 crore over the next five years. PSL has
received enquiries from defence departments to the tune of Rs 15,000 crore.

Leveraging opportunities from Punj Lloyd’s offshore business

As a co-promoter, Punj Lloyd has agreed to conduct all its offshore business (excluding the construction and fabrication of sub-sea pipelines) through PSL in India. This will enable PSL to leverage on Punj Lloyd’s present and future business opportunities and grow rapidly in the offshore segment.

Large scale capacities and flexible product mix

Pipavav Shipyard is expected to have the largest dockyard in India of approximately 662 metres. The yard is expected to have the capacity to handle a wide array of vessels ranging from very large crude carriers to offshore supply
vessels and naval defence vessels.

Out of PSL’s order book of 34 vessels, eight are under renegotiations while four are under arbitration. There are some court proceedings against PSL and its promoters, which can negatively impact the company if they are not decided in their favour.

Valuations

At the lower band of the pricing range, PSL would trade at 14.4x FY11E earnings of Rs 3.8. Indian yards like ABG Shipyard and Bharati Shipyard trade at 6.9x and 3.3x FY11E earnings, respectively. On a price/book value basis, PSL
would trade at 1.9x, whereas ABG trades at 0.9x and BSL trades at 0.6x FY11E book value. PSL has a larger yard capacity and modern equipment enabling faster execution of order book.

However, the issue is expensive considering the quality of the order book with 1/3 of the vessels to be built being under renegotiations/arbitration proceedings. At present, the risk-reward ratio for investors seems unfavourable, considering that companies in similar businesses are available at much more attractive valuations.

One may rather look to buy the existing listed companies such ABG Shipyard or Bharti Shipyard for investment and can look at investing in Pipavav post listing when the price quotes at a discount of atleast 25% of the issue price.