Sharekhan believes Mazagon Dock has a strong competitive edge in terms of its technical capabilities in building destroyers and submarines, which are its core areas.
The Rs 444-crore initial public offering (IPO) of Mazagon Dock Shipbuilders, the only shipyard to build destroyers and conventional submarines for the Indian Navy, got a strong response on the second day, September 30, of bidding as well.
The public issue, subscribed 7.5 times, so far, as it received bids for 23 crore equity shares against an offer size of 3.05 crore shares, data available on the exchanges shows.
So far, retail investors have been in the leading position for bids as their reserved portion has been subscribed 15.5 times and that of non-institutional investors (NII) 4.96 times.
The portion set aside for qualified institutional buyers (QIB) witnessed 2.82 times subscription and that of employees 1.04 times.
The public issue comprises an entire offer for sale of over 3.05 crore equity shares by the Government of India as it is a part of the divestment programme fixed for FY21.
The government plans to divest 15.17 percent stake via the public issue. The price band has been fixed at Rs 135-145 per share. As many as 3.45 lakh shares are reserved for employees. The IPO subscription closes on October 1.
"At the upper end of the issue-price band, the stock trades at around 5x FY20 earnings versus peers (Cochin Shipyard/Garden Reach Shipbuilders)'s 7x/11x. At the IPO price, we believe the company is grossly undervalued given its strong order backlog (book-to-bill 11x FY20 revenue), potential from coming submarine orders and its net cash balance (Rs 5,800 crore in FY20). It also offers attractive dividend yield of 7.4 percent," said Anand Rathi, which recommended subscribing to the issue.
On the risk front, the brokerage feels the COVID-19 pandemic and a shutdown of operations at the Mazagon Docks would be strong headwinds.
Over FY17-20, Mazagon Dock has registered a growth of 12/3 percent CAGR in consolidated revenue/profit.
Mazgaon Dock, a public-sector undertaking under the Department of Defence production, constructs and repairs warships and conventional submarines for the Ministry of Defence for the Indian Navy, besides vessels for commercial clients.
It has a production capacity of 40,000 DWT, with two segments shipbuilding (naval shipbuilding/repairs) and submarine/heavy engineering.
To diversify its revenue stream, the company is looking to scale up its stable ship-repair business. For this, it is exploring a greenfield shipyard at Nhava Sheva, Navi Mumbai, focusing on the construction and repair of warships and commercial ships.
Its efforts regarding ship repair would enable it to diversify and broaden its client base, reducing dependence on the MoD for orders.Sharekhan believes Mazagon Dock has a strong competitive edge in terms of its technical capabilities in building destroyers and submarines, which are its core areas. "Its peers Garden Reach is concentrating on smaller ships while Cochin Shipyard has never built warships. It also has strong order book of almost 11x FY2020 revenues and has good visibility pipeline," it said.