Among India's leading shipbuilding and repair companies, Cochin Shipyard (CSL) should see a good response from investors and command higher valuations, too, when it hits the market with an initial public offer (IPO) of equity.
Sector experts say, in contrast to most other public sector units, the PSU tag should work for CSL. Being one, it sees no dearth of orders. So, a fat order book, even as the sector is faced with a bleak outlook. Defence and offshore are the only business segments where growth is visible, since the overall ship building industry is not in good shape even globally, say the analysts.
“Government defence orders, as well as those from state-owned Shipping Corporation of India (SCI), will flow to Cochin Shipyard, which is like business flowing from one government department to another,” said M P Patwardhan, former managing director of Goa-based Chowgule Steamships.
Equally important, the company has proven its operational capabilities as much as its private counterparts, and a better financial record. “In the past five to seven years, CSL has improved operationally and its technical knowhow and operational capabilities are very much in line with its domestic peers like Pipavav Defence,” adds Patwardhan.
Future opportunities are also large. The government has already announced plans to place defence orders worth $247 billion (Rs 16.5 lakh crore) with Indian companies, to encourage local production. Even if it only places orders worth a fraction of that with shipbuilders, the gains for entities like CSL could be disproportionate. For one, it has negligible debt. Second, the funds being raised by it through the IPO will be used to part-finance its expansion plans, including setting up of an international ship repair facility at the port trust area, as well as a large dry dock for construction of larger ships.
The government recently approved the IPO proposal. About 34 million equity shares are expected to be offloaded, comprising a fresh issue of 22.6 mn equity shares and sale of 11.3 mn more as an offer-for-sale by the government. The government plans to sell 10 per cent of its stake in the company, which is planning to raise Rs 600-700 crore through the IPO. “Since government usually prefers giving its defence and offshore orders to PSUs, Cochin Shipyard will never fall short of orders (from this segment) and this is one strong point which will help draw higher valuations, despite the weak business environment,” said an analyst with a local brokerage.
Debt-burdened ABG Shipyard, Pipavav Defence & Offshore, and Bharati Shipyard are among the large listed shipyard companies in the private sector. When even the world's largest shipyards are into losses due to overcapacity, 43-year old CSL has been profitable for the past ten years and has paid dividends without interruption for the past seven years. As on end-March, the net profit was Rs 235 crore and it reported its highest earnings per share in seven years, at Rs 20.56.
Importantly, the debt to equity ratio was low at 0.08 in FY15; that for Pipavav Defence was 2.67 and ABG Shipyard at 5.87. The private entities are currently having an enterprise value (equity plus debt) of Rs 6,000-11,600 crore, compared to CSL's Rs 6,350-7,350 crore (assuming an IPO size of Rs 600-700 crore).
Early this year, Pipavav Defence brought in Reliance Infrastructure as a strategic investor. ABG Shipyard has been in talks with global naval player Privinvest Holding for a similar investment. Bharati Shipyard in August announced its net worth had completely eroded and it had turned into a sick enterprise. Even so, some believe this might not be the right time for an IPO. “Given the overcapacity in the global market, it makes no sense to have an IPO at this point,” said an investment banker with a leading global financial company, on condition of anonymity.
Ship building is a risky business at a time when there is surplus capacity globally. So, it is difficult to draw investor interest in such a market, agrees Patwardhan.
However, S Hajara, ex-chairman and managing director of SCI, says participation in state-owned IPOs is usually very high from government financial institutions, like Life Insurance Corporation. Due to this, despite the not-so-right timing for an IPO, there could be enough takers for the stake on offer. And, as the business fundamentals are in place, the IPO should sail through.