Cochin Shipyard Limited (CSL) - IPO Note

Source: DRHP

Source: DRHP

Company Background

Cochin Shipyard Ltd (CSL) is the largest public sector shipyard in India in terms of dock capacity. The company has two docks – Dock 1 (Ship Repair Dock) and Dock 2 (Ship Building Dock) with a maximum capacity of 125,000 DWT and 110,000 DWT in FY17. CSL caters to clients engaged in the defence sector in India and in the commercial sector worldwide. In addition to shipbuilding and ship repairing, they also offer marine engineering training.

Object of the Issue

The offer consists of fresh issue of ~962 cr shares and an Offer for Sale (OFS) of up to 1.13 cr shares; out of which employee reservation is up to 8.24 lakh shares. At an upper price band, there is a discount of Rs 21 per share for employees and retail investors.

Investment Rationale

CSL has the largest ship repair capacity in the public sector while Reliance Defence being the largest repairer by capacity in private sector and in overall Indian ship repairing industry. However, CSL has the highest market share of 39% in revenue terms in the overall Indian repair industry as it has the necessary infrastructure and competencies that is reflected in its timely deliveries in the past decade.

CSL being a public sector shipyard is a likely beneficiary of gaining orders like Indigenous Aircraft Carrier (IAC) on nomination basis and benefiting from favorable working capital cycle as against other private shipyards. Reliance Defence has average working capital days for ~300 days, whereas for CSL it is ~100 days. In addition, CSL is debt free while private shipyards are posting losses owing to high interest obligations.

Currently, ship repair accounts for 26.4% of CSL’s overall revenue. Post expansion of building stepped’ dry dock, the company will be able to increase its number of ship repair vessels by 60-70% from current 80-100 vessels repaired in a year. The increase in capacity will improve the EBITDA margin as ship repair margin are almost twice of ship building.

CSL has a current order book of Rs 3000 cr in Ship building and Rs 370 cr in ship repair in FY17. As per media reports, the Indian Navy and Indian Coast Guard have plans to induce 60 and 80 ship/vessels each to reach a fleet of 200 from 140 and 120 ships /vessel at present. Continuous orders from the said clients and potential repair orders are expected to support the order book growth.

Key risk

The company derives ~85% of its revenue from top two customers namely the Indian Navy and the Indian Coast Guard. The customer’s decision to procure/repair vessels from other public/private sector shipyards can pose as a threat to the growth of the company. Further IAC forms significant portion of the company’s order book, any delay in delivery of the carriers will have an impact on reputation as well as revenues of the company.

Conclusion

At upper end of the price band of Rs 432, the issue is attractively priced at PE multiple of 18.8x its FY17 EPS on post IPO outstanding shares. Thus, we recommend SUBSCRIBING the issue.

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