Hold Pipavav Defence; target of Rs 66: ICICI direct

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ICICI direct’s research report on Pipavav DefencePipavav Defence & Offshore (PDOECL) posted Q2FY16 revenues of Rs. 54 crore compared to Rs. 107 crore in Q1FY16 and Rs. 212 crore in Q2FY15. Shipbuilding revenues were at Rs. 54 crore compared to Rs. 200 crore in Q2FY15. However, due to discontinuance of trading activities, revenues from the same remained nil compared to Rs. 13 crore in Q2FY15. Continued overheads unsupportive of revenue growth hit EBITDA, resulting in a loss of Rs. 7.4 crore in the current quarter compared to a loss of Rs. 10.3 crore in Q1FY16 and profit of Rs. 40 crore in Q2FY15.  Higher depreciation and interest expenses further impacted PAT, which was at a loss of Rs. 170 crore compared to a loss of Rs. 68 crore in Q2FY15 and a loss of Rs. 167 crore in Q1FY16Outlook and ValuationReliance Infrastructure together with its wholly-owned subsidiary Reliance Defence Systems Pvt Ltd has decided to acquire 13,00,00,000 equity shares from the promoters of PDOECL at Rs. 63/share aggregating to ~18% shareholding in the company with an investment to the tune of Rs. 819 crore. Reliance Defence Systems, a subsidiary of Reliance Infrastructure, has launched a mandatory open offer to acquire a 26% stake from the public shareholders of the company atRs. 66/share aggregating to Rs. 1263 crore.  In case Reliance Infrastructure is unable to acquire a total shareholding of 25.1%, it will acquire additional shares to the extent of the shortfall from the promoters at Rs. 63/share.  Post the transaction, existing promoters of PDOECL will continue to hold a minority stake in the company, together with two non executive board seats. The acquisition would result in a change in management and control of the company.  Post completion of the transaction, Anil D Ambani, will become the chairman of PDOECL. PDOECL, with one of the largest shipyards in the country, is well placed to take advantage of any policy change towards foreign direct investment (FDI) in the defence segment as the company already has a significant presence in the defence sector. The Government of India has approved 49% FDI in defence and is expediting indigenisation of defence procurement. PDOECL is placed at a vantage point for the same owing to its superior infrastructure. FY15 has been a tough year for PDOECL with a decline in revenues and EBITDA generation resulting in a loss at the PAT level. We expect FY16, FY17 to see an improved revenue performance. However, profitability at the net level remains a concern. PDOECL’s long term prospects depend on its ability to get defence shipbuilding orders, which would provide visibility to its revenue stream. With Reliance Infra at the helm, we believe PDOECL is better placed than before to capture the humongous opportunity presented by the indigenisation of Indian defence procurement. With the opportunity available for the company we recommend that current shareholders not tender shares in the open offer. Subsequently, we value PDOECL at 2.7x FY17 P/BV to arrive at a target price of Rs. 66 with a HOLD recommendation on the stock.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions

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