Choice Equity Broking's IPO report on Mazagon Dock Shipbuilders
MDSL is a defence public sector undertaking shipyard with a maximum shipbuilding and submarine capacity of 40,000 DWT (deadweight tonnage). The company is primarily engaged in the construction and repair of warships and submarines for the MoD for use by the Indian Navy and other vessels for commercial clients. • Since 1960, MDSL has built a total of 795 vessels including 25 warships, from advanced destroyers to missile boats and three submarines. It has also delivered cargo ships, passenger ships, supply vessels, multipurpose support vessels, water tankers, tugs, dredgers, fishing trawlers, barges and border outposts for various customers in India as well as abroad. • Shipbuilding and submarine contracts have a long gestation period and revenues under these contracts are dependent on achievement of certain milestones. In order to diversify the revenue streams, MDSL intends to increase its ship repair activities in the future as such activities are for a shorter period of time and result in the early booking of revenues and more importantly reduces the dependence on the MoD for future orders. Apart from reviving its ship repair operations, the company is also exploring the possibilities of developing a greenfield shipyard at Nhava, Navi Mumbai with a shiplift, wet basin, workshops, stores & buildings and a ship repair facility spread over 37 acres. This proposed plan would result in higher revenues and profitability for MDSL.
Valuation and Outlook
At the higher price band of Rs. 145 per share, MDSL’s share is demanding a P/E multiple of 6.1x, which is at discount to the peer average of 9.3x. Based on the margin profile and return ratios, we feel that the asked valuation is justified. Defence manufacturing has huge potential in the long run and with sector liberalization, the company may have some concerns in the long run but not in the medium term. Considering the performance of defence companies post listing, we assign an “Subscribe with Caution” rating for the issue.
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