Cochin Shipyard - IPO Coverage- Well-managed PSU with Bright Prospects-SUBSCRIBE

Cochin Shipyard - IPO Note - Well-managed PSU with Bright Prospects

Cochin Shipyard Ltd. (CSL) – a Miniratna company – is one of the largest PSU shipyard companies in India. Currently, it has two docks located adjacent to Cochin Port in West Coast of India: (1) Ship Repair Dock (1.25 lakh DWT) and (2) Shipbuilding Dock (1.10 lakh DWT). Further, it is in the process of setting up a new Dry Dock and an International Ship Repair Facility (ISRF), which will enable CSL to secure more projects in ensuing period. The Company gets many government orders on nomination basis like NBCC Ltd. Notably, CSL’s current order book stands at Rs33bn (1.6x FY17 revenue), which we believe will expand further in coming years owing to government’s strong endeavour to increase its defence production under “Make in India” initiative. Unlike other PSU shipyard companies, CSL has been profitable, as it has delivered a consistent performance with over 4% CAGR in earnings in last four years, which is commendable, in our view as the shipping industry witnessed multiple headwinds during this period.

CSL is coming up with an Initial Public Offering (IPO) with a fresh issue of 22.7mn shares and OFS of 11.3mn shares to mop-up Rs14.7bn at upper price band. Proceeds will be utilized towards proposed expansion of Dry Dock and ISRF. 

Key Positives

• Healthy Performance Track Record amid Challenging Environment
• Leadership in Ship Repair Segment Bodes Well
• Healthy Order Book; More to Flow in
• Location Advantage Offers an Edge
• Dry Dock and ISRF to Provide Scale to its Business
• Healthy Financial Track Record and Dividend Payout  

Key Risks

• Any Deterioration in Global Economic Conditions
• Delay in Obtaining Approvals for Dry Dock and ISRF and Cost Escalation for the Same
• Nature of Fixed Price Contracts
• Single Location Plant
• Litigations Pertaining to Legal and Tax Proceedings against CSL

Outlook & Valuation

We admire CSL’s ability to stay afloat in the turbulent period without compromising on margins. Going forward, government’s endeavour 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. Further, price to book ratio after dilution stands at 1.9x, which is attractive in our view. Hence, we recommend SUBSCRIBE to the issue.