While the firm’s JV with Mazagon Dock is a positive, valuations factor in short-term gains. Till about last month, the shareholders of Pipavav Defence and Offshore Engineering Company (formerly Pipavav Shipyard) who had invested in its 2009 IPO made no money. The price of the company, even after two years, traded near its issue price of Rs 58 per share. A week ago, the company announced it would allot 100,000 convertible warrants to Rakesh Jhunjhunwala and his family at Rs 78 a share. Monday, it announced forming a joint venture (JV) with Mazagon Dock to facilitate the execution of its huge order book of Rs 100,000 crore.
These positive developments lifted its share price, up 46 per cent from mid-August and 11 per cent higher in Monday’s trade at Rs 91 a share. This price is discounting its estimated FY13 earnings and book value per share by 27 times and 2.6 times, respectively. This is much higher than its global peers trade trade below two times their book value. This is also the reason that the price risk remains in the near term, though the fundamentals are changing for better in the long run.
The Pipavav board approved the setting up of a 50:50 joint venture company with state-run Mazagon Dock, to be named ‘Mazagon Dock Pipavav’. This comes as a positive development, considering that Mazagon Dock is a leading player in the defence shipbuilding sector, having a market share of about 80 per cent. It is hardly surprising that it is sitting on an order book to the tune of Rs 1,00,000-crore, as compared to Pipavav’s Rs 6,700 crore.
| STEADY MARGINS | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Sales | 860 | 1,658 | 3,421 |
| % change y-o-y | 36.6 | 92.8 | 106.3 |
| Op. profit margin (%) | 26.0 | 24.7 | 25.2 |
| Net profit | 43.7 | 69.8 | 228 |
| % change y-o-y | NA | 60 | 227 |
| RoE (%) | 2.6 | 3.4 | 9.8 |
| P/E (x) | 139 | 87 | 27 |
| P/BV (x) | 3.6 | 2.9 | 2.6 |
| RoE: Return on equity, P/BV: Price to book value Source: Capitaline, E: Analyst estimates | |||
The JV not only brings scale and capability but also opens the opportunity for Pipavav to participate in the growing defence segment. There are three things that this JV broadly focuses on — time, capability and capacity, that will benefit the shareholders of Pipavav. In Mazagon Dock is sitting on huge orders and the execution time for delivering is considered to be 16 years. With the JV, the execution duration could come down to almost half or may be 8-10 years, which is the intention .
The JV will use the capabilities of Pipavav in shipbuilding and fabrication. Also, its tie-ups with foreign firms like Northrop Grumman and Babcock Group UK in the areas of defence could play a role here. This will also benefit Pipavav in terms of extending its capabilities in making large submarines.
Besides, Pipavav could use its surplus capacities, which are not yet fully utilised. It has the largest dry dock in India, which could accommodate ships up to 400,000 dead weight tonnes. “They can make about 32 Panamax ships in a year, whereas in the last three years, they have done only two and 12 are under construction. Besides, they have huge surplus fabrication capacity which can be utilised,” says Lancelot D’Cunha, who is head of research with ITI Securities. It is believed the real impact of this JV could only be seen over the next two to three years. However, this should definitely increase its scale. Even with a 12-year execution cycle for Rs 100,000 crore order means annual work flow of about Rs 8,000 crore and Rs 4,000 crore for the 50 per cent stake in the JV. This is large, compared to Pipavav’s turnover of Rs 860 crore in FY11.
While these are rough estimates, a lot will depend on the actual arrangement and the work that will be shared. The company is yet to give the details in the terms of the arrangement and the structure of the deal. However it seems that investors have nothing to lose as this will only lead to higher capability and capacity utilisation. Further, the company might not have to dilute earnings given the use of existing resources and internal accruals. In fact with the increase in scale, margins should improve and the returns on equity is likely to move up in the years to come. The company reported 2.6 per cent return on equity in FY11 and analysts are expecting that to touch 10 per cent by FY13.