Microreviews

Update 1: Issue Price fixed at Rs 58

Pipavav Shipyard, the shipbuilding and repair company is coming out with it’s IPO on 16^th September.

The issue will be open for subscription from 16-18 September. The company will be offering 854,50,225 equity share at the price band of Rs 55-60 thereby raising Rs 510 crores.

Details of the PIPAVAV issue:

Issue Period	Sep 16, 2009 to Sep 18, 2009
Issue Size	854,50,225 equity shares [including Anchor investor portion upto 15,273,040 equity shares]
Issue Type	100% Book Building
Face Value	Rs. 10/-
Price Range	Rs. 55 To Rs. 60.
Market Lot	110 Equity Shares
Minimum Order Quantity	110 Equity Shares
Maximum Subscription Amount for Retail Investor	Rs.100000
IPO Grading	CARE IPO Grade 3
Rating Agency	CARE

About the Company:

Pipavav Shipyard limited (PSL), was a wholly owned subsidiary of SKIL, was incorporated as Pipavav Ship Dismantling and Engineering Limited on October 17, 1997 under the Companies Act.

In April 2005, IL&FS, one of the leading infrastructure finance companies in India, became a shareholder, and the name of the Company was changed to Pipavav Shipyard Limited. Government of India controlled banking institutions EXIM Bank and IDBI also took stakes in PSL as well as private fund UTI.

In 2007, in addition to Punj Lloyd’s investment in the Company, several other major financial players became shareholders in the form of foreign equity investors.

Punj Llyod is an engineering and construction major which is already listed in the indian bourses.

PSL is currently completing the setting up of an integrated shipbuilding facility which, upon completion, will be the largest in India and among the largest in Asia.

Earnings Estimates:

“The company has a strong order book, but majority of its revenue will be received in FY 11. Taking that into consideration, we estimate revenue in FY 11 to be around Rs.35,000 mn. PSL is available at a P/E of 8.6x and 9.3x at lower band & upper band respectively of its FY 11 estimated EPS of Rs. Rs.6.43. Looking at the FY 11 P/E multiple, there is not much upside potential in the short term. However, we have not factored in the revenues from the defence sector in our estimates since the company is yet to win orders which can generate substantial revenue to the company. Hence, we recommend ‘Subscribe’ for long term to the issue.”                                                                                               Source: SPA Securities on Moneycontrol

Comparison with its Peers:

Unlike other companies in the shipping sector, Pipavav is a diversified company which does ship building, ship repair and has defence projects in it’s portfolio, it is not right to compare it with it’s peers like ABG Shipyard, Bharti Shipyard, Mercator lines and others.

However on simple PE comparison, the stock looks overpriced considering the fact that most of it’s revenue will start flowing from FY11. It has a PE of 9X it’s FY11 earning compared to it’s peers which are trading at a PE of (4-7)X.

The Chairman of Enam Securities, Vallabh Bhansali says that the company would see an upsurge in revenues by FY 11 or FY12  as it would have a range of possibilities in customers and contracts “this yard started getting orders while it was being built”.

Should you subscribe?

Below are two different views on whether to subscribe to the Pipavav IPO from two brokerage firms.

SPA Securities: Subscribe (Long term)

Looking at the FY 11 P/E multiple, there is not much upside potential in the short term. However, we have not factored in the revenues from the defence sector in our estimates since the company is yet to win orders which can generate substantial revenue to the company. Hence, we recommend ‘Subscribe’ for long term to the issue.

Angel Broking: Avoid

The IPO is also expensive compared to the company’s domestic peers, ABG and Bharati Shipyard, which have a diversified Order Book with strong Revenue and Operating visibility over the next two-three years and higher Return Ratios. Thus, considering that the IPO is at premium valuations, we recommend an Avoid.

Notwithstanding good Industry growth prospects, we believe that the IPO factors in the company’s strong Order inflow, potential extension of the government subsidy and timely execution. Furthemore, global market leader, Hyundai Heavy Industries, is trading at 1.5x CY2010E P/BV, while in case of Pipavav, even at the lower price band, it would trade at 1.8x FY2011E P/BV, which is expensive.

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Tags: ABG Shipyard, Angel Broking, Bharti, Mercator, PE, Pipavav shipyard IPO, ship building, should you subscribe, SPA