Reblog: Mazagon Dock IPO review

• MDSL is one of the defence public sectors undertaking with “Mini Ratna-1” status.
• A regular dividend-paying company since last 15 years.
• MDSL has orders on hand worth Rs. 54000 cr. plus to be executed in the next 6/7 years.
• The issue is priced reasonably to benefit one and all.
• Investors may consider investment for the medium to long term.

PREFACE:

MDSL filed its DRHP in the month of March 2018 and is now finally coming with its maiden IPO in September 2020. Management clarified that while the volatile market was at center stage, regulatory clearances and other unforeseen circumstances caused the delay. It enjoys a virtual monopoly in destroyers and submarine buildings.

ABOUT COMPANY:

Mazagon Dock Shipbuilders Ltd. (MDSL) is a defence public sector undertaking shipyard under the department of defence production, MoD (Ministry of Defence) with a maximum shipbuilding and submarine capacity of 40000 DWT (Source CRISIL Report). The company 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 Government of India company, conferred with the “Mini Ratna-I” status in 2006, by the DPE. MDSL is India’s only shipyard to have built destroyers and conventional submarines for the India Navy. It is also one of the initial shipyards to manufacture Corvettes (Veer and Khukri class) in India.

Thus MDSL has business divisions in which it operates are Shipbuilding (includes building and repairs of naval ships), Submarine and heavy Engineering.  The company is currently building four P-15 B destroyers and four P-17A stealth frigates and undertaking repair and refit of a ship for the Mod for use by the Indian Navy. MDSL is currently building/in the process of delivering four Scorpene-class submarines under a transfer of technology agreement with Naval Group as well as one medium refit and life certification of a submarine for the Mod for use by the Indian Navy. Since 1960, the company has built a total of 795 vessels including 25 warships, from advanced destroyers to missile boards and three submarines (source CRISIL report). The company 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 (source CRISIL).

MDSL’s shipyard is strategically located on the west coast of India, on the sea route connecting Europe, West Asia and the Pacific Rim, a busy international maritime route. Some of the vessels built and delivered by MDSL in the past include six Leander class frigates, three Godavari class frigates, three corvettes, four missile boards, six destroyers, four submarines and three Shivalik class frigates for the Mod for the use by the Indian Navy and constructed and delivered seven offshore patrol vessels to the Indian Coast Guard.

As on the date of filing RHP, the company has a healthy order book worth Rs. 54000 cr. which is to be executed in the next six to seven years. MDSL suffered a severe setback in 2003 to 2005. The company has an uninterrupted dividend track record for the last 15 years.

ISSUE DETAILS / CAPITAL HISTORY:
For listing gains and to disinvest Government of India’s stake, MDSL is coming out with a maiden IPO of an offer for sale of 30599017 shares of Rs. 10 each. The issue opens for subscription on September 29, 2020, and will close on October 01, 2020. The company has fixed the price band of Rs. 135 – Rs. 145 per share. Minimum application is to be made for 103 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. MDSL mulls mobilizing around Rs. 413.09 cr. – Rs. 443.69 cr. (based on lower and upper price band) through this IPO. Issue constitutes 15.17% of the post issue paid-up capital of the company.

The company has reserved 345517 shares for eligible employees. From the residual portion, it has reserved 50% for QIBs, 15% for HNIs and 35% for retail category.

Having issued/converted entire equity at par, the company issued bonus shares in the ratio of 1 for4 in March 2017. The company also bought back 24900000 equity shares @ Rs. 101.80 in December 2017 and 22410000 equity shares at Rs. 124 in March 2020.

The average cost of acquisition of shares by the promoters/ selling stakeholders is Rs. 16.47 per share. Post issue, MDSL’s current paid-up equity capital of Rs. 201.69 cr. will remain the same as this is a secondary offer. With this issue, the company is looking for a market cap of Rs. 2924.51 cr. (based on upper price band). Current paid-up equity capital stands supported by free reserves of Rs.2867.44 cr. as on March 31, 2020.

The issue is jointly lead managed by Yes Securities Ltd., Axis Capital Ltd., Edelweiss Financial Services Ltd., DAM Capital Advisor Ltd. (erstwhile IDFC Securities Ltd.) and JM Financial Ltd., while Alankit Assignments Ltd. is the registrar to the issue.

FINANCIAL PERFORMANCE:
On financial performance front, for the last four fiscals, on a consolidated basis MDSL has posted revenue/comprehensive net profits of Rs. 4274.86 cr. / Rs. 598.26 cr. (FY17), Rs. 5027.63 cr. / Rs. 496.17 cr. (FY18), Rs. 5204.67 cr./ Rs. 532.47 cr. (FY19) and Rs. 5535.31 cr. / Rs. 477.06 cr. (FY20).

For the last three fiscals, on a consolidated basis, MDSL has posted an average EPS of Rs. 22.03 and an average RoNW of 16.21%. The issue is priced at a P/BV of 0.95 based on its NAV of Rs. 152.17 as on June 30, 2020 (based on upper price band). For the last three fiscals, MDSL has distributed on an average Rs. 23.4 cr.  as yearly dividend payouts.

If we attribute FY20 earnings on fully diluted equity post issue, then asking price is at a P/E of around 6.39 (based on upper price band), against peer group average P/E of 7.5. The issue is reasonably priced leaving something on the table for all.

BRLM’s TRACK RECORD:
The five Book Running Lead Managers associated with this issue have handled 23 public issues in the past three years, out of which 09 issues closed below the issue price on listing date.  

COMPARISION WITH LISTED PEERS:
As per offer documents, MDSL has shown Cochin Shipyard, Reliance Naval and Garden Reach Shipbuilders as its listed peers. They are currently trading at a P/Es of 7.36, 00 and 13.33 (as on September 24, 2020). However, they are not truly comparable on an apple to apple basis.

Conclusion / Investment Strategy

MDSL, a Mini Ratna-1, has been a profit-making and dividend distributing PSU under MoD. It has orders worth Rs. 54000+ crore on hand which are to be completed in 6 to 7 years. Its financial track record so far has been indicating sustained top line with ups and down in PAT due to certain provisioning. Being a maiden IPO from a shipyard that builds destroyers and submarine is sure to catch fancy post listing. Investors may consider investment for the medium to long term perspective in this reasonably priced issue.