Buy Pipavav Defence; target of Rs 80: ICICIdirect

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ICICIdirect.com`s research report on Pipavav Defence“Pipavav Defence and Offshore Engineering Co (PDOECL) reported Q1FY15 results with revenues at Rs 316.5 crore against Rs 450.7 crore in Q4FY13 and Rs 702.8 crore in Q1FY14. Revenues declined ~30% QoQ and 55% YoY as income from trading was at Rs 18.2 crore vs. Rs 94.3 crore in Q4FY14 and Rs 175.2 crore in Q1FY14. EBITDA for the quarter was flattish QoQ whereas it declined 7% YoY to Rs 140.5 crore. However, the EBITDA margin (including subsidy) expanded nearly 2289 bps YoY and 1330 bps QoQ to 44.4%. On a PAT basis, PDOECL reported a net profit of Rs 5.6 crore vis-à-vis Rs 1.3 crore in Q4FY14 and Rs 7.3 crore in Q1FY14.” “PDOECL spanning over 861 acres of land with two dry docking facilities of 662 m x 65 m (Dry Dock-1) and 750 m x 60 m (Dry Dock-2 under construction) is one of the largest “modular” shipbuilding facilities in India. The shipyard is capable of accommodating 400,000 dwt capacity ships along with construction and repair of a wide range of vessels starting from coastal and naval vessels together with repair and fabrication of offshore platforms and rigs. It also has a dedicated offshore yard with 175 m x 16.89 m quay consisting of both launching and loading platform together with installation of bollard and mooring rings. PDOECL formed a joint venture with Mazagaon Dock (MDL) providing exposure to MDL’s ~$20 billion order book to capture the defence shipbuilding opportunity in the country. Further, to enhance its position, PDOECL formed strategic tie-ups with a slew of foreign partners to provide integrated solution. PDOECL’s tie-up with multinational players like SAAB, DCNS, Babcock, etc. provides depth to domestic defence shipbuilding capacity. Further, the government raised the FDI cap from 26% to 49% with its focus on enhancing indigenous capacity and capability of defence shipbuilding. Hence, PDOECL with its robust infrastructure may be a prime candidate for stake sale and, thereby, significantly de-leverage itself.” “Though revenue for shipbuilding grew at a CAGR of 21% over FY12-14, PAT posted a decline of ~66% CAGR over the same period largely due to high leverage and depreciation. However, going forward, as the government has approved 49% FDI in defence and is expediting indigenisation of defence procurement, PDOECL stands at a vantage point for the same owing to its superior infrastructure. Further, in light of revenue visibility due to orders in the defence & offshore segment and supported by current buoyant circumstance, we continue to assign a P/BV multiple of 2.5x (four year average) to FY16E book value of Rs 32.2 to arrive at target price of Rs 80. We have a BUY recommendation on the stock,” says ICICIdirect.com research report.

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