Pipavav Shipyard - IPO

The offer is open from September 16-18
(1) The company and Business-:
Pipavav Shipyard is a shipbuilder with infrastructure facility to build commercial and defence vessels as well as fabricate and construct offshore rigs, platforms and vessels with a dock capable of accommodating ships of up to 4,00,000 dead weight tonnage(DWT is the weight a ship can carry safely), the company claims to run the largest dockyard in India ( on full completion). the company commenced its commercial production only on April 1st this year and is at present building four vessels which it seeks to deliver by April 2010.
(2) uses of IPO money-:
Pipavav Shipyard raises Rs 470-512 crore from the current offer, which would expand its existing capacity by 15 percent. a good part of the proceeds would be utilised towards working capital requirement and the rest towards capital expenses.
(3) Huge order book-:
Pipavav has about Rs 3800 crore of total orders in hand ( excluding orders of Rs689 crore under arbitration), including ONGC's Oder of rs 535 crore for offshore vessels.
Risk Factors-:
(A) Industry risk-
note that shipping order are often subject to cancellations. shop orders typically rise on the back of increasing freight rates or oil prices. however, given that the time lag between receiving a contract and delivery ranges between 22 and 45 months, depending in the size of the carrier. the cycle of freight rates or oil prices may reverse, leading to order cancellation. downward revision in price of vessels and insertion of clauses by clients to opt out of the contract are common.
(B) Company's risk-:
Pipavav, too, is not devoid of these industry risks.
(1) for instance, of the Rs3800 crore of orders mentioned, the company is in discussion with a client to amend agreement for about rs 1105 crore of order. the has sought unilateral rights after a certain date to terminate its obligation to take delivery of vessels if it is unable to arrange for funding for the vessels.
(2) the company is also engaged in arbitration for some orders to determine whether the customers has the right to cancel such orders. these uncertainties leave about Rs 1800 crore of firm order in hand effectively.
(3) while all the above orders may yet sail through, revision of key commercial term, such as price of vessel, options exercisable at the customer's discretion and unilateral Rights to terminate obligation to take delivery, pose huge risks to certainty in revenue flows for the company. note that company has already delayed delivery of two vessels.
(4) depreciation, pending revenue flows would dent profits in the initial quarters.
(5) interest cost of about rs 90 crore paid in FY-09 is unlikely to reduce significantly. these factors could drag profits for the next 6-4 quarters.
Revenue sources-:
Pipavav did not have any revenues until march 2009, pending commercial production. the company would have to deliver 10 Panamax vessels totally valued at rs 1788 crore between April 2010 and may 2012. this together with the execution of the ONGC orders, would be the key sources of revenue over the next couple of years. as the company would have capitalised over rs 2000 crore of assets post march 2009.
Advantage-:
Pipavav's key advantage would be the tax free status of its SEZ fabrication facility (leased by subsidiary) and lower taxes for the shipyard.being an export-oriented undertakings, this is likely to ensure superior not profit margins for the company, even as the industry currently enjoys about 12-15%. this status may nevertheless change post the implementation of the direct tax code.
Conclusion-:
Shipyard as a sector with high cycle risks and has traditionally traded at a discount to the broad market. the offer is being made at a price band of rs 55-60, the price discounts the estimated per share earnings for FY-11 by about 18-20 times. this is at a steep premium to the listed peers ABG shipyard and Bharti shipyard. that are currently trading at single digit valuations. on Enterprise value to order book ratio too(as revenue is yet flow), Pipvav is at 1.1, stiffer then the 0.3-0.4 times ratio of its peers.earnings may however ramp up quickly post FY-11 when a good number of the vessels contracted are completed. the shipyard business of Pipava shipyard, no doubt hold long term potential,given the companies well integrated facility comprising docks, fabrication and block assembly as well as facilities for offshore products. business opportunity following from the co-promoter Punj Lioyd may also prove to be an added benefit.
Personal View-:
currently IPO market is not performing well. investors are not getting good return on listed date. so investors who wants to take listing advantage and short term investors should avoid this IPO.Long term investors can apply for Pipavav IPO. this is good bet for long term.