Pipavav Shipyard's IPO price band appears high

Pipavav Shipyard, a Gujarat-based company, is raising funds from the primary market to fund the construction of its facilities for shipbuilding, ship repair and offshore vessels. After the issue, the promoters’ stake will reduce to 39.56% from 45.38%.Pipavav Shipyard started commercial operations on April 1 this year and builds vessels, like Panamax, while simultaneously completing the construction of its offshore yard and installation of two large cranes at its facilities.
Upon completion of its shipyard, Pipavav Shipyard will be capable of manufacturing ships and repair a range of vessels, including naval and coast guard vessels. The company plans to focus on the needs of the defence sector to mitigate the effects of the cyclical nature of commercial shipbuilding sector.
Pipavav Shipyard comprises two sites – an SEZ unit located on approximately 95 hectares of land and an EOU located on approximately 103.92 hectares of land. The construction of the shipyard (excluding the offshore yard) is expected to be completed in October 2009.
In addition, Pipavav Shipyard will also be involved in the fabrication and construction of products such as offshore platforms, rigs, jackets and vessels for oil and gas companies, which it intends to offer in its offshore business. The offshore yard is expected to be ready by end of March 2010.
Pipavav Shipyard currently has orders, notably from Bermuda-based Golden Ocean Group Limited and Greece-based AVGI Maritime Group, for the construction of 10 Panamax bulk-carriers with an aggregate value of $373.52 million (around Rs 1788 crore) and scheduled for delivery between April 2010 and May 2012.
IPO DETAILS
The company is offering 8.54 crore shares, of which 6 lakh shares are reserved for employees. As a result, net issue to the public is for 8.48 crore shares aggregating to Rs 509.1 crore (at the higher end of the price band of Rs 55-60 ).
The company’s total capital cost for setting up the ship building and its offshore business is pegged at around Rs 2566.1 crore, and by the middle of July this year, it had already spent Rs 1984.4 crore on the project. It will utilise Rs 179.2 crore from the IPO proceeds to fund the balance capital expenditure. In addition, Pipavav needs working capital of Rs 429 crore and plans to utilise Rs 244 crore from the IPO proceeds to meet this requirement.
Pipavav Shipyard started commercial operations from the beginning of this financial year and its consolidated other income amounted to Rs 61.7 crore during FY09 compared with Rs 27.74 crore a year ago. Also, its adjusted net profit amounted to Rs 4.85 crore in FY09, marginally higher than the previous year. And, given the limited duration of its commercial operations, a comparison with peers like Bharati Shipyard and ABG Shipyard, on financial parameters, like P/E and top line growth, is meaningless.
RISK FACTORS
Apart from the limited duration of the commercial operations of Pipavav Shipyard, the global shipping industry has been grappling with declining world trade in the past 15 months, which in turn has put pressure on spot shipping freight rates.
This difficult operating environment has led to several shipping companies cancelling orders from overseas shipyards, which could also dampen the growth prospects for Pipavav Shipyard, going forward.
However, Pipavav Shipyard’s attempts to diversity into the manufacture of equipment for the offshore segment and vessels for the defence sector should help to minimize the cyclical demand for ocean-going vessels.
Investors could avoid subscribing to this IPO and could instead consider purchasing the stock once it is listed on the bourses.