IPO Analysis: Mazagon Dock Shipbuilders

IPO Rating - Invest with limited exposure

About the issue

Mazagon Dock Shipbuilders (MDS), a 'Miniratna category-1' status company is a defence public sector undertaking shipyard under the Department of Defence Production, which is hitting the primary capital market with its initial public offer (IPO) of equity shares of the face value of Rs 10 each. 

The price band has been fixed between Rs 135 and Rs 145 and the minimum bid lot is 103 equity shares, in the multiples of 103 equity shares thereafter. The size of IPO is Rs 444 crore at the upper price band and the entire issue is an offer for sale of 30,599,017 equity shares by the selling shareholder.

The objects of the offer are primarily to carry out the disinvestment of 3,05,99,017 equity shares by Government of India, constituting 15.17 per cent of the company’s equity share capital and also, to achieve the benefits of listing the equity shares on the Stock Exchanges.

The IPO will open for public subscription on September 29 and close on October 01, 2020. The equity shares are to be listed on BSE and NSE.

About the company

Incorporated on February 26, 1934, MDS is a defence public sector undertaking shipyard under the Department of Defence Production, Ministry of Defence (MoD) with a maximum shipbuilding and submarine capacity of 40,000 DWT. The company is engaged in the construction and repair of warships & submarines for the MoD for use by the Indian Navy and other vessels for commercial clients. The shipyard builds warship and other conventional submarines at its facilities in Mumbai and Nhava (Maharashtra). The major customers for the shipyard include Indian Navy and Coast Guard. The company is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy. It is also one of the initial shipyards to manufacture Corvettes (Veer and Khukri Class) in India.

Since 1960, MDS has built a total of 795 vessels, including 25 warships, from advanced destroyers to missile boats and 3 submarines. They have also delivered cargo ships, passenger ships, supply vessels, multipurpose support vessels, water tankers, tugs, dredgers, fishing travellers, barges and border outposts for various customers in India as well as abroad.

Number of orders for vessels received and delivered by the company in the last 18 years

As of July 31, 2020, the company’s order book for shipbuilding & submarines and heavy engineering was Rs 54,074 crore, comprising of three major shipbuilding projects and two submarine projects.

MDS’s shipbuilding and submarine contracts have a long gestation period and its revenues under these contracts are dependent on the achievement of certain milestones. In order to diversify its revenue streams, the company intend to increase its ship repair activities in the future as such activities are for a shorter period of time and result in the early booking of revenues. The company has undertaken ship repairs in the past for its clients in the defence and commercial sectors. This will help generate more revenues, increase the company’s client base and reduce its dependency on the MoD for future orders.

Besides, MDS is also in the process of reviving the exports of their defence and commercial products to Latin America, Africa, South East Asia, Middle East and Scandinavian regions and also, identified defence and civil sectors in such regions. The company has, in the past, exported products to Mexico, France, Bahamas and Yemen.

Financial

Mazagon Dock Shipbuilders' revenue from operation increased at a CAGR of 12.25 per cent between FY17 and FY20. It increased from Rs 3,519 crore in FY17 to Rs 4,977.6 crore at the end of FY20. Nonetheless, profit after tax during the same period declined by seven per cent annually to Rs 477 crore at the end of FY20. The reason for the decline in the net profit can be attributed to an increase in depreciation charges, which increased by 18.1 per cent CAGR in the same period (FY17-20). Besides, there was even a decline in other income by 9.6 per cent annually.

Financials (In Rs crore)

Over the last four fiscal years, the revenue from shipbuilding division has increased by 44 per cent annually while the revenue from submarine & heavy engineering division has remained volatile and has gone down by 14 per cent annually. Revenue contribution from shipbuilding to the total revenue expanded from 32.8 per cent in FY17 to 69.8 per cent in FY20, whereas the contribution from submarine & heavy engineering contracted from 67.1 per cent in FY17 to 30 per cent in FY20.

The company is a consistent dividend-paying company with an average payout ratio of over 36.8 per cent over FY17-20.

Valuation and Recommendation

At the higher end of the price band of Rs 145, the issue is valued at 6.8 times of its FY20 earnings per share of Rs 21.36, which seems to be cheap as compared to the other listed player that is available at around 8 times its FY20 earnings.

Comparative Valuation Matrix

*PE is calculated based on the closing market price as on August 27, 2020

Looking at the strong order book, the central government’s Atmanirbhar Bharat policy decision, which boosts the indigenous defence manufacturing and a reasonable valuation, readers can subscribe to the issue with limited exposure.