Cochin Shipyard IPO opens today: Analysts give thumbs-up?

Key Highlights

• Cochin Shipyard has planned to raise around Rs 1400-1500 crore through this IPO.
• Price band of IPO is Rs. 424 to Rs. 432 per share
• Lead managers of IPO are SBI Capital Markets, Edelweiss Financial Services and JM Financial

India's largest public sector shipyard in terms of dock capacity, Cochin Shipyard's three day initial public offer (IPO) opens today. The subscription will close on August 3. 

The company has planned to raise around Rs 1400-1500 crore through this IPO. With a fresh issue of 2.27 crore equity shares of Rs. 10 each and an offer for sale (OFS) of 1.13 crore equity shares by the the government of India, the company has set a price band of Rs. 424 to Rs. 432 per share. 

Among the lead managers are SBI Capital Markets, Edelweiss Financial Services and JM Financial. 

What drew attention on this IPO was that the company is discount of Rs. 21 per share to retail investors, which is quite attractive, at around 5% of issue price.

About the company

According to research reports, 99.99% subsidiary of the government, Cochin Shipyard, a ‘Mini Ratna’ company, is India’s largest public sector shipyard, with one of country’s largest ship repair docks of 1,25,000 DWT capacity and a ship building dock capable to accommodate vessels upto 11,00 DWT capacity, on India’s western coast at Kochi, Kerala. 

The company undertakes both defence and commercial orders, with former accounting for ~80% of revenues, the most recent feat being building India’s first indigenous aircraft carrier (IAC) for the Indian Navy. 

Looking at the financial numbers, FY17 revenue grew 3% YoY to Rs 2,059 crore, with healthy EBITDA margin of 25.7% being earned, entailing an EBITDA of Rs 529 crore, up 6% YoY. Profit before tax of Rs. 480 crore was clocked in FY17, resulting in a PBT 23% margin. Company has cash and equivalents of Rs.1,991 crore (as on March 31, 2017), on mearge debt of Rs. 123 crore. 

Pointing out three important object of this issue, Motilal Oswal in its research report said, "1) Setting up of a new dry dock (Total Est. Cost Rs 18 billion), 2) Setting up of an international ship repair facility at Cochin Port Trust area (Est. Investment of Rs 97 billion) which includes setting up a ship lift and transfer system and 3) for general corporate purposes.

Should you subscribe?

After it get listed, the company's peers will be Reliance Defence, ABG Shipyard, Bharati Shipyard who are all reeling under heavy losses.

Giving it a thumbs up, the experts view says it a "subscribe". According to report by Sptulsian, healthy order book, cash surplus balance sheet position, healthy margins and consistent financial performance are key positives for the issue. Enterprise value of Rs. 4,000 crore is making the pricing very attractive, which may invoke huge investor participation. Rs. 21 discount for retail investors is an added sweetener.

"IPO of Cochin Shipyard is a safe and sound bet, capable to deliver steady returns, making it a subscribe," the report said.

Having similar view, Kunal Sheth, Prabhudhas Lilladher, said, "We believe CSL is a good proxy play on the Indian defence sector. Strong net cash balance sheet (Rs18bn at end of FY17), strong order pipeline and option value of bagging further Air craft carriers could provide multiyear visibility of earnings. We recommend Subscribe with a Medium/Long term perspective."

Analysts at Quant believes, the company has submitted bids for the projects worth Rs120 billion. We believe CSL is a quality play on Indian defence sector with cash of Rs 20 billion and ROE of 15%. At the higher band of IPO price of Rs432, the stock is valued at 18x FY17 P/E (post dilution). 

Tarang Bhanushali and Rahul Jain of IIFL said, "The company has submitted bids for the projects worth Rs120 bn. We believe CSL is a quality play on Indian defence sector with cash of Rs 20 billion and ROE of 15%. At the higher band of IPO price of Rs432, the stock is valued at 18x FY17 P/E (post dilution). We Recommend SUBSCRIBE to the IPO.