Research Recommendation of Listing Gain Mazagon Dock Shipbuilders Limited IPO

Mazagon Dock is 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. It is a wholly owned GoI company, conferred with the ‘Mini-ratna-I’ status in 2006. The business divisions in which the company operates are (i) shipbuilding and (ii) submarine and heavy engineering. Since 1960, MDSL has built a total of 795 vessels including 25 warships, from advanced destroyers to missile boats and three submarines.

Promoter Selling Shareholder- The President of India, acting through the Ministry of Defence, GoI.

Financial Performance:

Shareholding Pattern:

Source: DRHP, EWAL Research

Strengths:

• Only public sector defence shipyard constructing conventional submarines

• Established track record with strong financial position and strong Order Book

• Increase in indigenisation of vessels and implementation of the “Make in India” campaign.

Key Highlights:

• Order Book of Rs. 540,74 crore comprises of building and construction of four ‘P-15B’ destroyers, four ‘P-17A’ stealth frigates, repair and refit of a ship, four Scorpene class submarines and undertaking the medium refit and life certification of a submarine for the Indian Navy.

• The company had generated a negative operating cash flow in two out of four reported fiscals. FY20 negative operating cash flow stood at Rs.95.56 Cr.

• Intend to increase ship repair activities in the future as such activities are for a shorter period of time and result in the early booking of revenues.

• The company has opted for reduced rate of income tax by electing the non-reversible option U/s 115BAA of Income Tax Act, 1961.This has resulted in one time effect on PAT by Rs.160.7 Crore in FY20.

Risk Factors:

• Predominantly depend on the MoD for defence orders.

• Any decline, delay or reprioritization of funding under the Indian Defence budget or that of customers including the MoD for use by the Indian Navy could affect the Company.

• Entire business operations are based out of a single yard at Mumbai. The loss of, destruction, or shutdown of operations at shipyard in Mumbai will have a material adverse effect on business.

• Company had negative net cash flows from operating activities in the past and may continue in the future also.

Outlook:

Mazagon Dock is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy. It has a capacity to build warships, submarines, merchant ships upto 40,000 DWT (Dead Weight Tons). Revenue from Shipbuilding contributed 70% to the revenues in FY20.Revenue from operations is grown at a CAGR of 5.5% during FY18-FY20.  It had an order book of Rs. 54074 crore which is to be executed in next 6-7 years. Current order book is around 10.9x of its TTM revenue, thereby providing revenue visibility for the mid to long term. At the higher end of the price band of Rs. 145, the stock is be available at a PE multiple of 6.79x on FY20 EPS. Listed Peers Cochin Shipyard trades at 6.59x FY20 EPS while Garden Reach Shipbuilders & Engineers trades at 12.1x FY20 EPS. Hence Mazagon Dock is available at fair valuation however considering the Risk factors; we would recommend listing gain to this IPO.

 DISCLOSURE IN PURSUANCE OF SECTION 19 OF SEBI (RA) REGULATION 2014

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