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

Project Costs (Rs Mn)

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.

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

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.