Mazagon Dock Shipbuilders IPO: Strong order book, zero debt bode well

Mazagon Dock Shipbuilders (MDL) is hitting the primary market as the government offloads 15 per cent of its stake in this Mini-Ratna, wherein allocation to retail investors will not be less than 35 per cent of the offer size. Mazagon is India’s only shipyard engaged in building destroyers and conventional submarines for Indian Navy. This differentiates MDL from peers like Cochin Shipyard or Garden Reach Shipbuilders, which are also in the business of shipbuilding and supply vessels to the Indian Navy.

While a strong order book of Rs 54,074 crore as on July 31, 2020 provides almost 10 years of revenue visibility, government's focus on indigenous defence procurement looking at the prevailing geo-political tensions has only brightened MDL's prospects. That MDL has to execute current order book in about next seven years indicates accelerated execution and revenue growth. Since, the shipbuilding business follows a curve wherein revenue growth picks pace as orders near completion, expect revenue growth to be stronger.

MDL is also in process of bidding/already bid for submarines, fast patrol vessels and others, which could translate into an order pipeline of Rs 1.1-1.2 trillion materialising over next 3-5 years. A zero debt status and with most payment inflows progressing in line with the phase of execution, it provides comfort over receivables in a capital intensive business. MDL's dividend history is also good; dividend yield is about 7.5 per cent on upper price band of IPO.

MDL believes the infrastructure and facilities available at its shipyard, combined with its vast expertise gives it a significant edge over domestic peers while location of its facilities promotes closer association with its vendors and customers (like Indian Navy). Increase in indigenisation of its vessels and implementation of the “Make in India” campaign should further benefit. MDL is also exploring more export opportunities, and expanding the ship repairing business. Both of these can rub positively on growth. Ship repairing is a higher-margin and shorter-duration business.

The company’s book value stands at Rs 152 per share, translating into a price-to-book value multiple of 0.95 at upper band and 0.89 at lower price band. Price-to-earnings (P/E) valuation based on FY20 earnings is 7.1 - 7.6 times. Cochin Shipyard and Garden Reach are trading at P/E of 7.9 - 14.3 times. Analysts say, for a stable business, world class infrastructure and facilities, a healthy order book indicating strong revenue visibility, valuation is reasonable.

One factor that investors should keep in mind is that the government, to meet its divestment objectives, keeps on exploring stake sale opportunities, which becomes an overhang on stock prices of PSU companies.