Pipavav Shipyard IPO Analysis – Avoid

The Pipavav Shipyard, jointly promoted by SKIL and Punj Lloyd, has set-up an integrated shipbuilding and fabrication facility. Once the fabrication facility is completely operational, Pipavav Shipyard would be the largest shipbuilding site in India capable of manufacturing ships up to 400,000 DWT (dead tonne weight) and fabricate and construct offshore supply vessels (OSVs). Pipavav Shipyard comprises two sites. The SEZ unit is located on ~95 hectares of land and an EOU located on ~103.92 hectares of land (benefits of which are available till FY12). The construction of the shipyard (excluding the offshore yard) is expected to be completed in Oct-09.

Key Data

Opening Date
16 Sept 2009
Closing Date
18 Sept 2009
Price Band
No of Shares on Offer (mn)
Total Post-Issue O/s Shares (mn)
Market Capitalisation (Rs Bn)

Project Costs (Rs Mn)

Total Cost
Invested (till 15 July 2009)
Investment from IPO Proceeds
Construction of Shipbuilding & Ship Repair facilities & Offshore Business
Working Capital Margin
Total Project Cost

Order Book

  • Pipavav Shipyard has a current order book of Rs44,596 mn (USD931.63 mn). This order book requires the company to deliver a total of 34 vessels, including 12 OSV’s for ONGC.
  • Of the below detailed order book only Rs23,234 mn are firm orders. These firm orders are for 10 panamax size vessles and 12 OSVs. Of the balance Rs21,362 mn, orders for 8 panamax vessels worth Rs14,469 mn are under re-negotiation and an order worth Rs6,893 mn (4 panamax size vessels) is under arbitration.
Order Value
No of Vessels
Vessel Type
Rs Mn
Golden Ocean
Panamax Firm Order Agreement
Panamax Firm Order Agreement
Golden Ocean
Panamax Firm Order Agreement Under renegotiation to grant option to delivery of vessel, option exercisable until 31-Dec-10
Panamax Firm Order Agreement Under renegotiation to grant unilateral right to customer to terminate the contract if it is unable to arrange funding
Panamax Firm Order Agreement Under arbitration

Offshore Supply Vessel (OSV)
Fixed price contract

Subsidy on Shipbuilding
The Government of India had instituted a shipbuilding subsidy scheme wherein shipbuilders could avail a 30% subsidy on the cost of the ship being built from the government. The caveat is that the shipbuilding order should have been placed before 14-Aug-07. Based on this criteria, all of the present order book of Pipavav Shipyard qualifies for this subsidy. This subsidy is available only on vessels ordered through the ICB (International Competitive Bidding) route, and hence the government has assurance of the subsidy demanded being within reasonable parameters. Further, the benefits are capped at 30% of the order value, thus benefits accruing on account of the SEZ / EOU status would decrease the actual cash subsidy that the company is eligible to receive.

The cost advantage that India offered, along with the subsidy provided by the Government (up to August 2007) helped improve the order inflow in the past 2-3 years. In addition, the Indian shipbuilding industry benefitted from orders being passed on from the traditional shipbuilding countries – Korea, Japan and China – as these were fully booked. In the near future, the capacities at these shipyards is likely to be freed up, resulting in increased competition. But most importantly the 30% subsidy incentive will not be available, and hence force the Indian shipyards to compete on a purely cost advantage basis, if any.

Comparative Valuations

Pipavav Shipyard
ABG Shipyard
Bharati Shipyard
Lower End
Upper End
Order Backlog Rs Mn
EV / Order Book (FY11) x
P / E (FY11) x

On a comparative basis, though Pipavav Shipyard’s superior dockyard, product facilities as well as business potential from Punj Lloyd – a co-promoter – do deserve some premium to the peer-set, we believe that the inherent nature of the business continues to be cyclical, and the lack of proven execution (vessel delivery) track record correspondingly requires a discount to the same peer-set. We thus, believe that the premium demanded is unjustified, and the stock would be available at more reasonable valuations in due course.

Highlights of the Mid-Term Reveiw of the Annual Policy 2006-07

Highlights of the Mid-Term Reveiw of the Annual Policy 2006-07

  • Repo Rate increased to 7.25% from 7.0%
  • Reverse Repo Rate, Bank Rate & CRR kept unchanged.
  • GDP growth forecast at 8.0% during 2006-07 (against earlier estimates of 7.5%-8.0%)
  • Inflation to be contained within 5.0%-5.5% during 2006-07.
  • Fresh issues of Central Government securities to be included in ‘When issued’ trading.
  • Scheduled commercial banks & primary dealers allowed to cover their short positions in Central Government securities within five trading days.
  • Resident individuals would be free to remit up to US$ 50,000 per financial year as against the earlier limit of US$ 25,000.
  • 100% of foreign exchange earnings can be retained in Exchange Earners’ Foreign Currency (EEFC) accounts.
  • Authorised dealer banks may borrow funds from their overseas branches & correspondent banks (including borrowing for export credit, external commercial borrowings (ECBs) and overdrafts from their Head Office/Nostro account) up to a limit of 50% of their unimpaired Tier I capital or US$ 10 mn, whichever is higher.
  • Eligible ECB borrower can avail additional US$ 250 mn with average maturity of more than 10 years under the approval route.
  • Prepayment of ECB up to US$ 300 mn without prior approval of the Reserve Bank.
  • Increased foreign remittances allowed for corporates: Authorised dealer banks may allow remittances on behalf of their customers higher of 15% of the average of 2 year sales or 25% of net worth, for initial expenses, & up to 10% of the average 2 year sales for recurring expenses. Remittances for acquisition of immovable property for the overseas office, within these limits is also permitted.
  • Limit on investments in Government securities by FIIs to be enhanced in phases to US$ 3.2 bn by March 31, 2007.
  • Ceiling of overseas investment by mutual funds enhanced to US$ 3 bn (from US$ 2 bn).
  • Booking of forward contracts for customs duty component of imports permitted.
  • FIIs to be allowed to rebook a part of the cancelled forward contracts.
  • Forward contracts booked by exporters & importers in excess of 50% of eligible limit to be on deliverable basis & cannot be cancelled.
  • Authorised dealer banks to be permitted to issue guarantees/letters of credit for import of services up to US$ 100,000 for securing a direct contractual liability arising out of a contract between a resident and a non-resident.
  • Lock-in period for sale proceeds of immovable property credited to NRO account eliminated, subject to a cap of US$ 1 mn in a financial year.
  • Banks, with approval of their boards, may formulate a transparent policy for providing One Time Settlement facility to those farmers whose accounts have been rescheduled/ restructured due to natural calamities as also those who have defaulted on account of circumstances beyond their control.
  • For opening small accounts, banks need to seek only a photograph of the account holder and self-certification of address.
  • Basel II: Indian banks having presence outside India & foreign banks to migrate to the Basel II framework effective March 31, 2008 & other scheduled commercial banks to migrate in alignment but not later than March 31, 2009.
  • Prudential limit on credit & non-credit facilities to Indian JVs/Wholly Owned Subsidiaries abroad to be enhanced to 20 per cent of unimpaired capital funds.
  • Financially sound Urban Co-operative Banks (UCBs) registered in States that have signed MoU with the Reserve Bank & those registered under the Multi-State Co-operative Societies Act, 2002 to be allowed to convert existing extension counters into full-fledged branches.
  • NBFCs allowed to issue co-branded credit cards with banks without risk sharing & market & distribute MF products.

(The above is extracted from the Highlights issued by the Reserve Bank of India on 31st October, 2006)

Full Text in word / pdf formats.

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Highlights of the Mid-Term Review of Annual Policy Statement for 2005-06

Domestic Developments

  • Based on the current assessment of a pick-up in agricultural output & in the momentum in other sectors, GDP growth projection for 2005-06 revised to 7.0-7.5 per cent from the earlier projection of around 7.0 per cent.
  • Annual inflation, as measured by point-to-point variations in wholesale price index, receded from 6.0 per cent in April 2005 to 4.6 per cent in October 2005.
  • Inflation in the range of 5.0-5.5 per cent as projected. Forward looking policy response is necessary to realise growth momentum & potential for higher growth without adding to inflation expectations.
  • Money supply [M3] may turn out to be somewhat higher than the earlier projection of 14.5 per cent for the full year. Aggregate deposit growth also expected to be higher than earlier projection.
  • Year-on-year adjusted non-food credit is expected to increase significantly higher than 19.0 per cent projected earlier.
  • Financial markets have remained stable & orderly, although interest rates have firmed up in almost all segments. The yield curve has steepened. Significant increase in CBLO volumes.
  • The market borrowing programme of the Central Government has so far remained consistent with the projections set out in the Union Budget for 2005-06.

External Developments

  • Exports in US dollar terms in the first half of 2005-06 increased by 20.5 per cent compared with 30.8 per cent in the corresponding period in the previous year. Imports rose by 33.1 per cent as against an increase of 37.3 per cent in the corresponding period last year. Hardening of international crude oil prices & import demand emanating from a pick-up in domestic industrial activity contributed to the import growth observed.
  • Foreign exchange reserves stood at US$ 143.4 billion as on October 14, 2005, increasing from US$ 141.5 billion as at end-March 2005.
  • Evolving developments in the balance of payments warrant careful monitoring in view of oil prices & continued b investment demand.
  • Foreign exchange market witnessed orderly conditions in the first half of 2005-06. The exchange rate of the rupee depreciated by 3.0 per cent to US dollar by October 21, 2005, from Rs.43.75 per US dollar at end-March 2005 to Rs.45.09 per US dollar. However, it appreciated by 4.2 per cent against the Euro, by 2.5 per cent against the Pound sterling & by 4.5 per cent against the Japanese yen during the period.

Global Developments

  • Global economic activity remained robust but slackened moderately in the second quarter of 2005; Likely growth of 4.3 per cent in 2005 from 5.1 per cent in 2004.
  • Rise in oil prices has triggered inflationary pressures globally , remaining the single largest risk to the global economy.
  • Risks to global growth also emanate from the persisting macroeconomic imbalances & the resulting abundance of global liquidity, asset bubbles, excessive leveraging in financial markets.

Overall Assessment

  • On balance, macroeconomic & financial conditions have evolved as anticipated. Overall industrial growth has strengthened, monsoon fears have eased, non-food credit growth has been buoyant, the demand for government securities has been sustained & a pick-up in investment demand is evident.
  • Some downward risks to the economic outlook have emerged in the recent months. Ensuring credit quality & increasing the pace of investment in infrastructure is important. Asset prices have registered a substantial increase. The overall positive sentiment, the business confidence of the private sector & the strength as well as resilience of the domestic economy would continue to determine capital flows.

Stance of Monetary Policy

  • The Reserve Bank will continue to ensure that appropriate liquidity is maintained in the system so that all legitimate requirements of credit are met, consistent with the objective of price stability. Towards this end, RBI will continue with its policy of active demand management of liquidity through open market operations including MSS, LAF & CRR, & using all the policy instruments at its disposal flexibly, as & when the situation warrants.
  • Barring the emergence of any adverse & unexpected developments in various sectors of the economy & keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy for the remaining part of the year will be:
    1. Consistent with emphasis on price stability, provision of appropriate liquidity to meet genuine credit needs & support export & investment demand in the economy.
    2. Ensuring an interest rate environment that is conducive to macroeconomic & price stability, & maintaining the growth momentum.
    3. To consider measures in a calibrated & prompt manner, in response to evolving circumstances with a view to stabilising inflationary expectations.

Monetary Measures

  • Bank Rate kept unchanged at 6.0 per cent.
  • Reverse Repo Rate increased by 25 basis points to 5.25 per cent, effective October 26, 2005. The spread between reverse repo rate and & repo rate under LAF maintained at 100 basis points.
  • The cash reserve ratio (CRR) kept unchanged at 5.0 per cent

Developmental & Regulatory Policies

Interest Rate Policy

  • Indian Banks’ Association being asked to review the benchmark prime lending rate (BPLR) system & issue transparent guidelines for appropriate pricing of credit.

Financial Markets

  • The Reserve Bank has constituted a new department named as Financial Markets Department (FMD) in July 2005 with a view to moving towards functional separation between debt management and monetary operations.
  • Intra-day short selling in government securities proposed to be introduced.
  • NDS-OM module to be extended to all insurance entities which are mandated to invest in government securities.
  • Screen-based negotiated quote-driven system for call/notice & term money markets and electronic trading platform for market repo operations in government securities are being developed by Clearing Corporation of India Ltd. (CCIL) .

External Commercial Borrowings

  • Special purpose vehicles (SPVs) or any other entity, notified by the Reserve Bank, which are set up to finance infrastructure companies/projects would be treated as financial institutions & ECBs raised by such entities would be considered under the approval route.
  • Banks to be allowed to issue guarantees or standby letters of credit in respect of ECBs raised by textile companies for modernistation or expansion of textile units.

Credit Delivery Mechanisms

  • Banks advised to fix their own targets for financing the SME sector so as to reflect higher disbursement; banks to formulate liberal & comprehensive policies for extending loans to the SME sector & rationalise the cost of loans to this sector with cost linked to credit ratings.
  • A debt restructuring mechanism for units in the SME sector, in line with the corporate debt restructuring (CDR) mechanism prevailing in the banking sector, has been formulated by the Reserve Bank. The performance of the CDR mechanism was reviewed and the changes to the existing CDR scheme have been finalised.
  • The Micro Finance Development Fund (MFDF) set up in the NABARD re-designated as the Microfinance Development and Equity Fund (MFDEF) and its corpus increased from Rs.100 crore to Rs.200 crore. The modalities in regard to the functioning of the MFDEF are being worked out.
  • Internal Working Group proposed to examine the whole gamut of issues & suggest suitable revisions to guidelines in regard to relief measures to be provided in areas affected by natural calamities.

Financial Inclusion

  • Measures proposed on credit delivery mechanisms with a view to ensuring financial inclusion of all segments of the population, in both rural and urban areas, a comprehensive framework to revive the co-operative credit system, revitalise the regional rural banks (RRBs) & reorient commercial banking towards the credit-disadvantaged sections of society.
  • With a view to achieving greater financial inclusion all banks need to make available a basic banking `no frills’ account either with `nil’ or very low minimum balances as well as charges that would make such accounts accessible to vast sections of population. All banks are urged to give wide publicity to the facility of such a `no-frills’ account so as to ensure greater financial inclusion.

Prudential Measures

  • Bank’s aggregate capital market exposure restricted to 40 per cent of the net worth of the bank on a solo & consolidated basis; consolidated direct capital market exposure modified to 20 per cent of the bank’s consolidated net worth. Banks having sound internal controls and robust risk management systems can approach the Reserve Bank for higher limits.
  • General provisioning requirement for ‘standard advances’ increased from the present level of 0.25 per cent to 0.40 per cent; direct advances to agricultural and SME sectors exempted from the additional provisioning requirement.
  • Supervisory review process to be initiated with select banks having significant exposure to some sectors, namely, real estate, highly leveraged NBFCs, venture capital funds and capital markets, in order to ensure that effective risk mitigants and sound internal controls are in place.
  • General permission to banks to issue debit cards in tie-up with non-bank entities.

Institutional Developments

  • By end-March 2006, 15,000 branches are proposed to be covered by RTGS connectivity, and the number of monthly transactions of the system is expected to expand from one lakh to two lakh.
  • The National Electronic Funds Transfer (NEFT) system would be implemented in phases for all networked branches of banks all over the country.
  • The pilot project for Cheque Truncation System is expected to be implemented in New Delhi by end-March 2006.
  • National Settlement System (NSS) to enable banks to manage liquidity in an efficient & cost effective manner to be introduced in the four metropolitan centres by end-December 2005.
  • New company for retail payment systems proposed to be set up under Section 25 of Companies Act; to be owned & operated by banks and likely to get operational from April 1, 2006.
  • Banks urged to test their business continuity plans periodically.
  • Currency chest facility & licence to conduct foreign exchange business (authorised person licence) to scheduled UCBs registered under the Multi-State Co-operative Societies Act & under the State Acts where the State Governments concerned have assured regulatory coordination by entering into MoU with the Reserve Bank.
  • Acquirer UCB to be permitted to amortise the losses taken over from the acquired UCB over a period of not more than five years, including the year of merger.
  • Details of the scheme regarding implementation of the provisions of the Right to Information Act, 2005 have been placed on the Reserve Bank’s website.
  • The Reserve Bank has recently updated its nominal effective exchange rates (NEER) and real effective exchange rates (REER) indices . The new 6-currency indices & the revised 36-country indices of NEER and REER would be published in the the Reserve Bank of India Bulletin of December 2005.

The Third Quarter Review of Part I of the annual policy to be undertaken on January 24, 2006.

Highlights amended and emphasis added. The full text of the highlights and the review is available on the RBI website. HTML version | word file | pdf version

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