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All you need to know before bidding


NEW DELHI: The Rs 444 crore initial public offering (IPO) of Mazagon Dock Shipbuilders, the first government-owned company to float a primary market issue in 2020, opened for bidding on Tuesday. The issue is open for subscription till Thursday.

The company has a virtual monopoly on building destroyers, frigates and submarines for Indian Navy and Indian Coast Guard in India. Besides, it has built ships and tugboats for commercial use. Analysts believe the company is a decent pick for listing gains as well as for the long term, while customer concentration and new policy to make defence equipment in India could be few risks that investors should keep in mind.

In the grey market, unlisted shares of the company traded at prices that were Rs 125-130 higher than the issue price , translating into a premium of about 90 per cent. Here are 10 things you need to know about the issue before investing:

About the company

Mazagon Dock, established in 1934 and nationalised in 1960, is the only company building destroyers and submarines for the Navy. Most of its top management is ex-Navy, including Narayan Prasad who is the chairman and managing director of the firm.

About the issue

Under the book building process, the government is selling 15.17 per cent in the defence PSU, to raise a maximum of about Rs 444 crore. The price band for the IPO has been fixed at Rs 135-145 per equity share, with lot size at 103 shares. The company will offer up to 3,05,99,017 shares through an offer for sale which includes a reservation of 3,45,517 shares for eligible employees.

Objective of the issue

All proceeds from the sale of shares will go to the government’s coffers and the company will not benefit from it. The fund raised from the issue will help the government ease some pressure on its fiscal maths.

Peers of the company
Its shipbuilding peers include Cochin Shipyard, Garden Reach Shipbuilders & Engineering, Bharati Defence & Infrastructure, Goa Shipyard, Hindustan Shipyard, L&T Shipyard, ABG Shipyard and Reliance Defence & Engineering. Its submarine and heavy engineering peer is Hindustan Shipyard.

Valuation

In terms of valuations, the pre-issue P/E works out to 6.1 times FY20 earnings (at the upper end of the issue price band), which is lower compared to peers like Garden Reach Shipbuilders and Cochin Shipyard (trading at 12.2 times and 6.6 times theirFY20 earnings, respectively). Further, Mazagon Dock has healthy returns of equity (ROE) of about 16 per cent coupled with highest dividend yield (7.4 per cent) and higher cash on balance sheet among its peers, said Angel Broking.

Order Book

Mazagon Dock order book of over Rs 54, 074 crore and a client list with reputed names like Ministry of Defence and Indian Coast Guard. The company is currently building 4 P-15 B destroyers and 4 P-17A stealth frigates and undertaking repair and refit of a ship for the MoD for use by the Indian Navy. Besides it is building/ in the process of delivering four Scorpene class submarines, under a technology transfer agreement.

Profit & Loss

The company has posted profits continuously in the last four fiscal years. The total Income was Rs 4,274.86 crore, Rs 5,027.63 crore, Rs 5,204.67 crore and Rs 5,535.31 crore for fiscals 2017, 2018, 2019 and 2020, respectively. Similarly, the reported profit was Rs 598.26 crore, Rs 496.17 crore, Rs 532.47 crore and Rs 477.06 crore for fiscals 2017, 2018, 2019 and 2020, respectively

Risk Factors

Financially, the topline has seen decent growth however the bottomline isn’t growing at the same pace. Besides, it is also heavily dependent on the government for its orders. Adding to that, it has to meet strict product conditions of its customers, failing which could mean financial penalties. “How quickly it is able to execute orders and generate cash flows will decide Mazagon’s future growth trajectory. There could also be a delay in funding from the defence budget or risks of cost and time overruns due to government dependency. Hence, this company is at a higher risk and can be looked for listing gains keeping in mind an investor’s own risk appetite,” said Nirali Shah, Senior Research Analyst, Samco Securities.

Who is managing the issue

Book running lead managers (BRLMs) of the issue are Axis Capital, Yes Securities, Edelweiss Financial, IDFC Securities, JM Financial while the registrar is Alankit Assignments.





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