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MAZAGON DOCK IPO: REVIEW, DETAILS & ANALYSIS

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BASIS STRUCTURE OF MAZAGON DOCK IPO

The eleventh initial public offering in 2020, the Mazagon Dock IPO will be opened from subscription between September 29 and October 1. 

In these three days, the company will be offering a total of 3,05,99,017 equity shares for sale. The intention is to raise an amount of Rs. 400-550 crores.

Now, there are two main kinds of IPOs — book-building and fixed price. In the book-building offering, shares are quoted in a price band. Investors can bid on any of the prices in that price band. The final price of the share is fixed later after the bidding window has closed.

In the fixed price IPO, there is no price band. The shares that are on offer are quoted with a specific price right from the beginning. 

The Mazagon Dock IPO is of the book-building kind.

The other point to note here is that the Mazagon Dock IPO will be an offer for sale. There is no fresh issue segment to this offering. 

This means, one or more existing shareholders will be unloading their stake and selling their shares to the public. In this case, as Mazagon Dock Shipbuilders Ltd is wholly owned by the Government of India under the Department of Defence Production (Ministry of Defence), the government will be selling 15.17% of its stake.

After the Mazagon Dock IPO, the government’s stake will reduce to 85%.

In an offer for sale, the amount that is received does not get credited to the company. Instead, the proceeds from the Mazagon Dock IPO will go directly to the government itself.

It is interesting to note that this is the second attempt to launch the Mazagon Dock IPO. The first attempt came in September 2019. At that time, the intention was to raise an amount of Rs. 700-800 crores. 

The reason that plan was cancelled is because of the lack of demand. This attempt of the Mazagon Dock IPO therefore is trying to raise a lower amount.

The Mazagon Dock IPO will be available for subscription through both NSE and BSE.

The table below contains all information related to “When Mazagon IPO will open?”, “What is the lot size of Mazagon Dock IPO?”, “When is Mazagon IPO listing date?”, “When Mazagon IPO allotment?” etc.

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After the subscription, the window has closed and the shares have been allotted, the Mazagon Dock shares will be listed on both NSE and BSE, and will be available for trading.

ABOUT THE COMPANY

Mazagon Dock Shipbuilders Ltd is a government-owned defence shipyard located in Mumbai, Maharashtra.

The company was incorporated as a private company in the year 1934. In 1960, it was nationalised and the Government of India took over with the intention of expanding their warship development program. This means the promoter of Mazagon Dock Shipbuilders Ltd is the President of India through the Ministry of Defence.

The company primarily builds war-ships and submarines for the Indian naval defence. Apart from that, Mazagon also builds merchant-ships, tankers and other similar products.

In 2006, the Department of Public Enterprises conferred upon Mazagon Dock Shipbuilders Ltd ‘Mini-Ratna-I’ status.

Mazagon Dock Shipbuilders Ltd operates primarily on a B2B model, owing to the nature of their business. In fact, the company’s only client is the Ministry of Defence, Government of India.

As of June 2019, the cumulative value of the order book of Mazagon Dock Shipbuilders Ltd was in the range of Rs. 54,282.70 crores.

Currently, Rakesh Anand is the Chairman and Managing Director of the company and has been for the past decade. Apart from that, other key figures include Rajiv Lath, Director (Submarine & Heavy Engineering) and Anil Saxena, Director (Shipbuilding).

PRODUCTS & SERVICES

The business activities of Mazagon Dock Shipbuilders Ltd can be divided into two verticals — shipbuilding, and submarine and heavy engineering.

Under the shipbuilding vertical, the company offers several different types of war-ships and commercial vessels. Examples include war-ships like frigates and destroyers as well as other multipurpose support vessels for the Ministry of Defence.

Under the submarine and heavy engineering vertical, Mazagon Dock Shipbuilders Ltd can build both SSK submarines and Scorpene submarines. These are part of the Indian Navy’s defence requirements. 

The products under both these verticals involve a long gestation period. The ship-building process takes between 60 and 90 months from start to finish, and submarines take between 72 and 96 months to complete.

FINANCIAL OVERVIEW

The table below contains a summary of the Mazagon Dock Shipbuilders Ltd financials from 2016 till 2020. All the figures stated below are in Rs. crores.

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Between 2016 and 2020, the total revenue earned by Mazagon Dock Limited grew at a CAGR of 2.64%. 

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In 2019, 88.68% of the total revenue came from operating revenue. In this case, operating revenue means anything that is earned from the primary operations — ship-building and ship-repair. Other sources of income include interest income from short-term investments.

It is important to note here that the only client of Mazagon Dock is the Indian government. As of June 2019, 100% of the company’s order book was made up of government contracts. 

This restricts its opportunity for growing its order book, as this growth is wholly dependent on the growth rate of the Indian government’s naval defence needs.

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As we can see here, the net profit earned by the company has declined between 2016 and 2020. 

One of the primary reasons is the fact that with industries such as ship-building, the profit margin is quite slim in general. If you add to that the fact that the cost of raw materials and raw materials keep fluctuating and that Indian companies have to import most of the equipment, then we can explain the decline in net profit.

In fact, in 2018, the cost of raw materials consumed increased by about 25.83% of the cost incurred in 2017. This increase directly cut into the profit margin of Mazagon Dock IPO.

Another interesting point to observe here is the erratic nature of the change in net operating cashflow. In 2017, particular, we can see that the net operating cashflow was negative. There was a significant cash outflow in that year. This is primarily due to the expenditure incurred on current and non-current assets.

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Now, coming to the assets, between 2016 and 2020, the total assets of the company showed a CAGR of 1.84%. 

One of the positives here is the fact that Mazagon Dock Shipbuilders does not have any significant long-term debt. Instead, the company generally makes use of cash credit and credit lines from SBI and Canara Bank to meet their working capital requirements.

INDUSTRY OVERVIEW

The global shipbuilding industry was valued at $14.3 billion in 2018. This industry is expected to grow to $175 billion by 2025. This means the approximate CAGR is 5.7%. 

In the past few decades, the epicentre of ship-building has shifted from Europe to Asia. Currently, China, South Korea and Japan dominate the market.

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India is not on the list of major global ship-builders owing to the presence of inefficiencies and low profitability. 

One of the main reasons for this is that India imports about 65-70% of the equipment required. As equipment costs make up about 50-55% of the total shipbuilding costs, Indian firms have to rely on global equipment rates, and this stops them from optimising the production process and reducing costs.

Recent government policies, particularly the Make in India campaign which had started in 2014, could signify new opportunities for this industry.

It has been observed that between 2012 and 2016, the domestic shipbuilding capacity has increased at a CAGR of 2.14%, with the later years having a higher capacity.

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One innate opportunity for the Indian ship-building industry is the availability of cheap labour. The cost of labour in India is lower than that in South Korea, Japan and several other major suppliers. If the dependence on the import of equipment can be reduced, then Indian companies can make use of this fact to increase their productivity and profitability.

According to Indian Navy Chief Admiral Karambir Singh, “As India’s shipbuilding industry matures, there is immense potential to forge strategic partnerships and convert India into a hub for defence shipbuilding exports and repairs to friendly foreign countries.”

To provide a boost to the Indian shipbuilding industry, particularly in the sense of defence requirements, the Indian Navy has focussed on using indigenous sourcing. Almost all the orders for the requirements of war-ships and submarines have gone to domestic companies.

In India, the number of shipbuilding companies can be categorised into public sector companies and private sector companies. There are eight public sector companies here, including Mazagon Dock Shipbuilders. Among private players, there are three main companies, along with a few smaller private yards scattered across the country.

The public sector accounts for about one-third of the total orders received, and the other two-thirds goes to the private sector.

Between 2012 and 2016, the total number of orders received in terms of thousand DWT declined, as shown in the graph below. The approximate CAGR for this period is (5.58)%. 

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Among the public sector companies in this industry, Mazagon Dock Shipyards holds a market share of about 14% in terms of the number of orders.

An interesting point to note here is that, especially with regard to the market for defence ship-building, the structure is a monopsony. This means that there are many sellers but only one buyer. It is a buyer’s market, and each similar seller relies on the buyer for contracts or sales. 

The Ministry of Defence is the buyer here, and the difference ship-builders are the sellers. Each individual company thus has no control over the price, as they have to depend on the government for business.

COMPETITION

The shipbuilding industry in India is fragmented. There is high competition here.

There are about seven other public sector companies that operate in the same industry and manufacture the same kind of products for the same client — the Ministry of Defence.

This means there is high competition to win contracts for the warships and submarines that are required by the Indian Navy. There are certain opportunities presented by expansion plans of the Navy and the Coast Guard, and the additional ship-repairing business generated by the Sagarmala project.

Mazagon Dock Shipbuilders is a major player in the defence ship-building business and enjoys a 14% market share.

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The table below shows the revenue earned from ship-building for some of the major players in the industry. All the data is from 2017.

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Here, because the players are so similar to each other, profitability primarily depends on how well the company can minimise their operating costs and other expenses. Thus, the performance of the Mazagon Dock IPO will be dependent on the performance of its peers.

STRENGTHS

One of the primary strengths of Mazagon Dock Shipbuilders Ltd is the fact that it is the only public sector enterprise that can construct conventional submarines. In the past, the company has worked with the Ministry of Defence and has trained their workforce in the specialised skills required.

Another advantage of Mazagon is the fact that they stand to directly benefit from the government’s initiatives to promote indigenous ship-building. In 2015, an amount of Rs. 4,000 crores were set aside for the purpose of grants and financial aids to the domestic shipyards. 

Mazagon has also received Rs. 800 crores from the government for the purpose of modernisation of the shipyard.

WEAKNESSES

The most important weakness for Mazagon Dock Shipbuilders Ltd is related to the fact that it operates in a monopsony market structure. This means the company is wholly dependent on the Ministry of Defence for its business. If the government decides to give the order contracts to one of the other companies in this industry, then Mazagon’s primary revenue source will take a huge hit.

Apart from that, there is also the fact that the majority of the equipment required in the production process are imported from other countries. Mazagon thus has no control over one of the major constituents of the cost of production, and this means any future profit margin expectation can change at any time.

If you look at these two weaknesses together, you will see that there is a very little guarantee about Mazagon’s future revenue and profit. Either the revenue could be change suddenly, or the production cost, or maybe even both.

Another fact to note here is that the production process, in this case, is dangerous, and it is often hazardous for employees. There are at least seven pending cases the company on account of accidents which led to injuries and fatalities.

VALUATION

The table below compares the key financial ratios of the Mazagon Dock IPO with its peer group of companies in the same industry.

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The average P/E ratio in the ship-building industry is 9.34. Now, if Mazagon Dock’s P/E ratio is lower than this value, it will signify that the company is undervalued. On the other hand, if the P/E ratio is higher, then the Mazagon Dock IPO will be considered as overvalued.

As we can see here, the expected P/E ratio for Mazagon Dock Shipbuilders Ltd, based on the issue price band, is 6.08. This value is lower than the industry average. Thus, we can conclude that the Mazagon Dock IPO is undervalued.

Apart from that, we can also compare this to the other PSU IPOs that have opened in the past few years. If history is any indication, it goes to show that when government companies bring IPOs, investors rarely make listing gains.

IRCTC is one significant exception in this regard.

If we compare the Mazagon Dock IPO to the Garden Reach IPO which opened in 2018, then a less-than-optimal performance can be expected. In fact, when the Garden Reach shares listed on the stock exchange after the end of the subscription window, the share price fell by 10.93% on the first day.

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