Ship Builders of India's IPO - Should you apply?

With the raining season of IPO's, another company joining the list of companies launching an IPO this year is Mazagon Dock Shipbuilders Limited. With the announcement of IPO, a lot of buzz has been seen in the market. Will it contribute to the raining season of listing gains or will be a complete dry? Let's start with our analysis and find out!

Company Overview

The Mazagon Dock Shipbuilders Limited, the “Ship Builders of India”, is a defense public sector undertaking shipyard under the Ministry od Defence. Mazagon Dock Limited has maximum shipbuilding and submarine capacity of 40,000 DWT.

The company is engaged in the construction and repairing of warships and submarines for the Ministry of Defence for the use of Indian Navy & other commercial clients. It is a wholly-owned GoI company, conferred with the 'Mini-ratna-I' status in 2006, by the Department of Public Enterprises. It is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy. They are also one of the initial shipyards to manufacture Corvettes (Veer and Khukri Class) in India.

The business divisions in which they operate are (i) shipbuilding and (ii) submarine and heavy engineering. Shipbuilding division includes the building and repair of naval ships. They are currently building four P-15 B destroyers and four P-17A stealth frigates and undertaking repair and refitment of a ship for the MoD for use by the Indian Navy. Their submarine and heavy engineering division includes building, repair and refitment of diesel electric submarines. Since 1960, they have built a total of 795 vessels including 25 warships, from advanced destroyers to missile boats and three submarines. They have also delivered cargo ships, passenger ships, supply vessels, multipurpose support vessels, water tankers, tugs, dredgers, fishing trawlers, barges and border outposts for various customers in India as well as abroad.

Their shipyard is strategically located on the west coast of India, on the sea route connecting Europe, West Asia and the Pacific Rim, a busy international maritime route. Company is headquartered in Mumbai which is also the headquarters of the Western Naval Command of the Indian Navy. They are also exploring the possibilities of developing a greenfield shipyard at Nhava, Navi Mumbai with a shiplift, wet basin, workshops, stores and buildings and a ship repair facility spread over an area of 37 acres.

Objectives of Issue

• To carry out the disinvestment plan of 30,599,017 equity shares by selling shareholders constitutes 15.17% of pre-offer equity share capital
• To achieve the benefits of share listing on the stock exchanges.

Strengths

• Only public sector defence shipyard constructing conventional submarines
• World Class infrastructure and facilities available at their shipyard combined with vast expertise give them a significant edge over other domestic peers.
• Shipyard is strategically located in Mumbai on the west coast of India, on the sea route connecting Europe, West Asia and the Pacific Rim, a busy international maritime route. provides them a strategic competitive advantage over peers.
• Increased quantum of indigenised components for their warships and submarines in order to give an impetus to the GoI’s “Make in India” campaign.
• Have a diversified Board with directors having several years of experience in the shipbuilding as well as submarine division and each of their senior management team is experienced in the industry and have been with the Company for an average of more than two decades.

Game of Numbers

• Total assets are increasing on year on year basis.
• Revenue of the company seems to be having a strong growth year over years.
• Net profit saw a decline in FY 20 but the industry prospects signals a strong growth in the coming fiscal years.
• Company is currently having an order of Rs. 54,282.7 crores which is for the next 6 years.

Promoter Holdings 

Government of India holds the majority of stake in the company which is positive attribute for the company.

Comparison with Peers

In comparison with peers, in terms of Earning Per Share (EPS) & Net Asset Value (NAV) of Mazagon Dock Limited stands on the 2nd position. In terms of Net Worth, Mazagon is having highest return on net worth.

Industry’s average PE ratio comes out to be 11.47 and if we assume the cut off price to be the listing price (Rs.145 per share), the PE ratio of Mazagon stands at 6.07 which is below the industry average.

Risk Factors

• The continuing effect of the COVID-19 pandemic on the company’s business and operations is highly uncertain and cannot be predicted.
• Mazagon Docks is primarily dependent on the MoD for defense orders and have mostly been awarded such orders on a nomination basis by the MoD for use by the Indian Navy. There is no assurance that future defense orders will be awarded to it by the MoD. Further, recent changes in the policy framework governing defense procurement and manufacturing in India may result in the company no longer being given such orders which may have an adverse effect on its business growth, financial condition, and results of operations.
• The imposition of liquidated damages and invocation of performance bank guarantees/indemnity bonds by the company’s customers could impact its results of operations and it may face potential liabilities from lawsuits and claims by customers in the future.
• Any decline, delay, or reprioritization of funding under the Indian defense budget or that of customers including the MoD for use by the Indian Navy could adversely affect the company’s ability to grow or maintain its sales, earnings, and cash flow.
• Any delays in procurement, nomination, or any other decision made by the company’s customers and collaborators may result in time and cost overruns in the completion of its shipbuilding and submarine projects. This can have an adverse effect on its business, financial condition, and results of operations.
• The company’s earnings and margins may vary based on the mix of its contracts and programs, performance, and ability to control costs. It may incur losses as a result of cost overruns, time overruns, lack of clarity in standards and specifications, and stringent defense procurement procedures which may have an adverse effect on its business, financial condition, and results of operations.

Grey Market

Mazagon Dock Shipbuilders Ltd. is currently trading at a premium of Rs. 110-135 per share which means we can expect a impressive listing gains.

IPO Details

Important Dates

Lot Size

Summary

Based on my analysis of red herring prospectus, Mazagon Dock Shipbuilders Ltd. holds strong stance in terms of financials and being the only public sector defense shipyard constructing conventional submarines gives them an edge over the peers. However, looking at the current market scenario, I would say one can go for listing gains for sure. For long term perspective the company looks good on numbers but personally I would be going for listing gains only. 

Hope I was able to provide you with some insights and will help you in making decision about same. Would love to hear your feedback on the same!