Mazagon Dock Shipbuilders IPO Review: Should you invest?

Mazagon Dock Shipbuilders IPO opens tomorrow as part of the government’s divestment drive. The offer is priced in the range of INR135 – 145 per share, aiming to raise up to INR433.69 crore. Investors can place bids for 103 shares and in multiples thereafter. Through this detailed Mazagon Dock Shipbuilders IPO review, we try to find out what makes it special for investors.

Mazagon Dock IPO details

Subscription Dates	29 September – 1 October 2020
Price Band	INR135 – 145 per share
Fresh issue	Nil
Offer For Sale	30,599,017 shares (INR413.09 – 433.69 crore)
Total IPO size	30,599,017 shares (INR413.09 – 433.69 crore)
Minimum bid (lot size)	103 shares
Face Value	INR10 per share
Retail Allocation	35%
Listing On	NSE, BSE

Mazagon Dock Shipbuilders IPO: No fresh shares, all OFS

There are no fresh shares being issued in the IPO. Since the company is entirely owned by the government as of now, all the shares to be sold are offered by the government under the Offer For Sale (OFS) route.

Mazagon Dock Shipbuilders IPO Review: Shipbuilding miniratna

The Miniratna company is a defence public sector undertaking shipyard with a maximum shipbuilding and submarine capacity of 40,000 DWT (Dead Weight Tonnage), engaged in the construction and repair of warships and submarines for the MoD for use by the Indian Navy and other vessels for commercial clients. The company is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy.

The company’s business divisions include (i) shipbuilding and (ii) submarine and heavy engineering. The shipbuilding division includes the building and repair of naval ships. It is currently building four P-15 B destroyers and four P-17A stealth frigates and undertaking repair and refit of a ship for the MoD for use by the Indian Navy. The submarine and heavy engineering division includes building, repair and refits of diesel electric submarines. It is currently in the process of delivering five Scorpene class submarines under a technology transfer agreement with Naval Group as well as one medium refit and life certification of a submarine for the MoD for use by the Indian Navy. Since 1960, the company has built a total of 795 vessels including 25 warships, from advanced destroyers to missile boats and three submarines. Mazagon Dock has 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.

Mazagon Dock Shipbuilders IPO Review: Financial performance

The company’s financial performance in the recent years is a mixed bag. While its revenues have registered growth in these years, net income has treaded down. This has been due to lower other income and higher effective tax expenses. Another important factor behind the low net income in FY2020 has been higher sub-contracting costs. These were primarily on account of completion of major outsourced activities and thus, are unlikely to be repeated.

Mazagon Dock Shipbuilders’ financial performance (in INR crore)

	FY2017	FY2018	FY2019	FY2020
Revenue	4,274.9	5,027.6	5,204.7	5,535.3
Expenses	3,444.3	4,377.2	4,426.6	4,787.6
Net income	597.7	456.2	513.1	458.0
Net margin (%)	14.0	9.1	9.9	8.3

Mazagon Dock Shipbuilders IPO Review: Should you invest?

Shipbuilding is a capital and labor extensive exercise and involves long gestation periods. As a result, order book is of paramount importance in this business. Thankfully, the company has a strong order book of INR54,074 crore which is nearly 11 times of its FY2020 revenues. This way, the company has revenue visibility for a fairly long time. Being a miniratna company, its execution capabilities are already established.

Going forward, the company has identified ship repair activities as a focus area in order to reduce dependence on shipbuilding operations. Ship repair activities usually involve faster turnaround time and early booking of revenues. In this regard, the government’s emphasis on indigenization through programs like ‘Make in India’ holds key for players like Mazagon Dock Shipbuilders. The government has already brought 101 defence items under import embargo giving domestic manufacturers a huge boost.

Given the current state of pandemic, the economy is in slow mode and it is quite likely that the company’s operations may get impacted in the short term.

In terms of valuations, the price band of INR135 – 145 per share and Earnings Per Share (EPS) of INR21.36 per share (FY2020) mean the company is offering its shares at the PE ratio range of 6.3 – 6.8. This is substantially attractive and less than what its peers like Garden Reach Shipbuilders (PE ratio of 15.2) and Cochin Shipyard (PE ratio of 8) are trading at. It also has a healthy ROCE of 15.5% and being a PSU, it pays handsome dividend. In FY2020, it paid a dividend of INR10.77 per share, amounting to a yield of 7.4%.

Overall, the company comes across as an attractive defence play with long term revenue visibility, key business drivers in place in the form of policy support and super attractive dividend yield. Meanwhile, head to this page to find out grey market premium movement by different dates.