Mazagon Dock Shipbuilders IPO: Attractive valuation, shipbuilding dominance; should you subscribe?

The initial public offering (IPO) of state-owned defence firm Mazagon Dock Shipbuilders Ltd (MDSL) is set to open for bidding today. The company has fixed a price band of Rs 135-145 per share, with a minimum bid lot size of 103 shares and in multiples thereof. Investors will have to shell out at least Rs 13,905 to bid for this issue. The Rs 444-crore Mazagon Dock Shipbuilders issue will close for subscription on October 1. The objectives of the offer are to carry out the disinvestment of 3.05 crore equity shares by the selling shareholder constituting 15.17 per cent of MDSL’s pre-offer paid-up equity share capital and achieve the benefits of listing on the stock exchanges. According to Dipin Kwatra, Director at New Vertical Vera Advisory Pvt Ltd, last week Mazagon Dock Shipbuilders was seen trading with a premium of Rs 100 over the issue price.

Analysts at Angel Broking recommend to subscribe to Mazagon Dock Shipbuilders IPO. “In terms of valuations, the pre-issue P/E works out to 6.1x FY20 earnings (at the upper end of the issue price band), which is lower vs. peers like Garden Reach Shipbuilders and Cochin Shipyard (trading at 12.2x and 6.6x of its FY20 earnings, respectively),” said Amarjeet Maurya, AVP – Mid Caps, Angel Broking Ltd. Further, MDSL has a healthy ROE of 16% coupled with highest dividend yield (7.4%) and higher cash on balance sheet among its peers.

The book running lead managers to the issue are Yes Securities (India), Axis Capital, Edelweiss Financial Services, IDFC Securities and JM Financial. According to Nirali Shah, Senior Research Analyst, Samco Securities, Mazagon is debt-free and enjoys a few perks due to its proximity to the coasts of Mumbai. Financially, the topline has seen decent growth however the bottom line isn’t growing at the same pace. 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 Indian 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.

According to the analysts at Geojit Financial, the keys risks include over-dependence on MoD for defence orders, however actively pursuing, opportunities in the ship repair business, a decline in the defence budget, but given geopolitical importance expect defence spending to improve. The research and brokerage firm has assigned a ‘subscribe’ rating to the issue, considering strong technological and execution capabilities, healthy order book and attractive dividend yield.

Public sector shipyards dominate the shipbuilding industry in India (in terms of revenue) mainly due to their capabilities in building Defence vessels, which are complex and costlier compared to commercial vessels. Religare Broking in an IPO note said that the majority of orders of ships for clients engaged in the defence sector have been placed with the public-sector shipyards and MDSL is the largest beneficiary of such orders. Further, we believe the company is well placed as it’s the only public sector player for manufacturing defence submarines, strong and experienced management, infrastructure capabilities to fulfill requirements and lastly, MDSL is strategically located in Mumbai thus this gives a competitive advantage over its peers.