Amarjeet Maurya of Angel Broking also recommended subscribe to the issue with a long-term horizon.
The public issue of Mazagon Dock Shipbuilders, the defence public sector undertaking, witnessed good response from investors on September 29, the first day of bidding itself.
The Rs 444-crore public offer is subscribed 2.09 times as it has received bids for 6.39 crore equity shares against IPO size of 3.05 crore shares, the subscription data available on the exchanges showed.
Retail investors seem to be strongly positive on the stock as their reserved portion subscribed 5.6 times.
The portion set aside for non-institutional investors saw 78 percent subscription and that of employees 27.7 percent, while qualified institutional buyers' category saw 3 percent subscription.
The price band for the issue has been fixed at Rs 135-145 per share and the IPO subscription will close on October 1.
The government is going to sell little over 15 percent stake in Mazagon Dock Shipbuilders via public issue which consists an offer for sale of 3,05,99,017 equity shares by the government. It is a part of government's divestment programme.
Mazagon Dock is the only public sector defence shipyard constructing conventional submarines with a maximum shipbuilding and submarine capacity of 40,000 DWT. As on July 2020, it had healthy order book of Rs 54,074 crore, to be executed over next 6-7 years which gives strong revenue visibility ahead.
It is India's only shipyard to have built destroyers and conventional submarine for Indian Navy and one of the initial shipyards to manufacture corvettes in India.
Company plans to increase its ship repair activities in the future (being a higher margin business due to shorter time, resultant an early booking of revenue), could be a big positive which will help to generate more revenues, increase its client base, and reduce its dependency on the MOD for future orders, Rudra Shares said.
Currently, ship repair is just 3.5 percent of total revenue & is expected to reach 15-20 percent of total revenue in next 5 years.
"On an upper price band of Rs 145, with EPS at Rs 21.36 for FY20, the stock is available at a P/E ratio of 6.78x (lower than its industry peers), makes valuation attractive. Hence, we recommend to subscribe the issue for listing as well as long term gains," said Rudra Shares.
"Further, it is a cash rich company having no debt, long term visibility of top line growth, attractive dividend yield and healthy ROE of 15 percent for FY20, will command premium valuations. Though, the company has negative net cash flows from operating activities in FY20, could be a concern," the brokerage added.Amarjeet Maurya - AVP - Mid Caps at Angel Broking also recommended subscribe to the issue with a long-term horizon. "Mazagon Dock has a healthy ROE of around 16 percent coupled with highest dividend yield (7.4 percent) and higher cash on balance sheet among its peers."