Cochin Shipyard Ltd

INSTITUTIONAL EQUITY RESEARCH Cochin Shipyard Ltd Good company at reasonable valuations leaves room for upside 31 July 2017 INDIA | DEFENCE | IPO Note Cochin Shipyard (CSL) is a government‐owned company, India’s largest public‐sector SUBSCRIBE shipyard by capacity, and the most profitable in the domestic industry (including private shipyards). Even though it is registered as a commercial shipyard, it derived 85% of its COMPANY DATA FY17 revenues from building/repairing defence ships. CSL is building India’s first ISSUE OPENS 01st August 2017 Indigenous Aircraft Carrier (IAC‐1) for the Indian Navy. In FY17, its revenues/EBITDA/PAT ISSUE CLOSES 03rd August 2017 was Rs 20.6/3.8/3.1bn, translating into 18.5% EBITDA and 15.2% PAT margins. CSL has an PRE‐ ISSUE EQUITY SHARES 113.3mn order book of Rs 110bn, implying a robust book‐to‐bill of 5.5x FY17 revenues. PRICE BAND Rs 424 ‐ 432 34.0mn NO OF SHARES TO BE ISSUED ISSUE SIZE Rs 14.1‐14.4bn About CSL MKT CAP Rs 59bn Incorporated in March 29, 1972, CSL is a government‐owned company with 'Miniratna' status. It is the second‐largest shipyard and the largest public‐sector shipyard in India with a dock capacity to accommodate vessels up to 110,000 DWT. CSL also has the second‐largest ship‐repair capacity and largest among the public sector in India, which can accommodate vessels up to 125,000 DWT. CSL's shipyard is strategically located along the west coast of STANDALONE FINANCIALS FY17 FY18E FY19E FY20E India, midway on the main sea route connecting Europe, West Asia, and the Pacific Rim. Y/E Mar, Rs mn Net Sales 20.6 23.4 27.3 31.4 EBIDTA 3.8 4.1 5.0 5.6 IPO rationale: Raising funds for capex and offer for sale by government Net Profit 3.1 3.4 4.0 4.2 CSL is raising Rs 14.4bn through this IPO to meet part of its capex requirement (Rs 9.5bn) EPS, Rs. 27.6 25.3 29.6 30.9 and an offer from sale by the government (Rs 4.9bn). At the IPO price band of Rs 424‐432, P/E@Rs 432 15.7 17.1 14.6 14.0 the stock trades at 19x FY17 PE on a diluted equity base against a global average of 24x. Key strengths • Under the Indian Navy’s plan for 2027, it targets a fleet of 198 ships and submarines against its current strength of 136. While 42 vessels are under construction, this still leaves a gap of 20 ships that need to be built over the next ten years. CSL should be a Jonas Bhutta (+ 9122 6246 4119) beneficiary of this proposed investment. [email protected] • It is by far the most efficient company among all public sector shipyards. Its EBITDA Vikram Rawat (+ 9122 6246 4120) margins and revenue per employee are almost twice that of its peers. [email protected] • Robust orderbook of Rs 110bn offers CSL long‐term revenue visibility with a book‐to‐bill of 5.5x FY17 revenues. It also has Rs 15bn of net cash excluding customer advances. • In commercial shipbuilding, CSL focuses on engineering‐heavy rather than standard merchant vessels. This helps maintain superior margins in an otherwise highly competitive global industry. • CSL had/has technological collaborations with tier‐1 equipment suppliers such as Wartsila, Rolls Royce, GTT, and Samsung Heavy. Key risks (1) over dependence on a single project (IAC), (2) variability in profitability due to long execution period in shipbuilding, (3) high share of ‘bought‐outs’ or outsourced supplies, and (4) increased competition due to opening up of defence shipbuilding to the private sector. Our view: SUBSCRIBE Over the next five years (FY18‐22) CSL has to execute ~Rs 120bn of pending work on IAC‐1, which will lead to acceleration in its revenues. We expect FY18‐22 revenues/EBITDA/PAT CAGR at 20%/19%/15% vs. FY12‐17’s 5%/2%/4%. However, due to equity dilution and capex, RoEs will be subdued over this period at 12‐15% against its historical average of ~20%. We rate this IPO as ‘SUBSCRIBE’. We believe CSL offers a unique opportunity to investors to play the India defence theme backed by a strong management and a robust order book. Our estimates for FY18‐22 do not factor in any additional orders, even as CSL is targeting Rs 110bn of opportunities over the next three years. It is likely to be favourably placed for the Navy’s order of its next aircraft carrier (IAC‐2, possibly over the next five years). Page | 1 | PHILLIPCAPITAL INDIA RESEARCH COCHIN SHIPYARD LTD IPO NOTE About the IPO • Rs 14.1‐14.4bn issue of 34mn shares at a price band of Rs 424‐432 per share. • Issue includes 11.3mn shares offer for sale by promoter "Government of India (GoI)" and fresh issue of 22.7mn shares. • Market capitalisation at price band: Rs 57.6‐58.7bn. • Post‐issue, GoI's shareholding to reduce to 75% from 100% and the company’s outstanding shares to increase by 20% to 135.9mn shares from 113.3mn. Cochin Shipyard ‐ Issue details Share holding pattern post‐issue ISSUE OPENS 01st August 2017 ISSUE CLOSES 03rd August 2017 PRE‐ ISSUE EQUITY SHARES 113.3mn Others ‐ LOWER BAND Rs 424 25% ‐ UPPER BAND Rs 432 PRICE BAND Rs 424 ‐ 432 ‐ FRESH ISSUE 22.7mn ‐ OFS 11.3mn NO OF SHARES TO BE ISSUED 34.0mn RETAIL AND EMPLOYEE SHARE (%) 37% RETAIL DISCOUNT (RS) Rs 21 GOI ISSUE SIZE Rs 14.1‐14.4bn 75% POST‐ ISSUE EQUITY SHARES 135.9mn MKT CAP Rs 57.6‐58.7bn Source: RHP, PhillipCapital India Research • Of the Rs 9.5bn proceeds from the fresh issue, Rs 6.7bn will be utilised for setting up: (1) a new dry dock (Rs 4.4bn) at the existing facility, and (2) an international ship‐repair facility (Rs 2.3bn) at the Cochin Port. Net proceeds will be used for Rs mn Setting up of a new dry dock 4,430 Setting up of an international ship repair facility (ISRF) 2,295 General corporate purpose NA Source: RHP, PhillipCapital India Research Page | 2 | PHILLIPCAPITAL INDIA RESEARCH COCHIN SHIPYARD LTD IPO NOTE About the company Cochin Shipyard Ltd (CSL), incorporated on March 29, 1972, is a government owned company with 'Miniratna' status. It is the second‐largest shipyard and the largest public sector shipyard in India with dock capacity to accommodate vessels up to 110,000 DWT. CSL has also the second‐largest ship repair capacity and largest among the public sector in India, which can accommodate vessels up to 125,000 DWT. Its shipyard is strategically located along the west coast of India, midway on the main sea route connecting Europe, West Asia, and the Pacific Rim – a busy international maritime route. In addition, its shipyard is located close to the Kochi port and to offshore oil fields on the western coast of India, and relatively close to the Middle East. India's second‐largest shipyard, largest in the public sector Second‐largest ship‐repair capacity in India 450 Shipbuilding capacity ('000 DWT) Ship repair capacity 400 Length (mtr) Width (mtr) Depth (mtr) 375 350 300 300 250 225 200 150 150 100 75 50 0 RDEL CSL HSL BDIL Semb L&T ABG Alcock GSL 0 marine Ashdown RDEL CSL HSL BDIL ABG GSL GRSE Source: RHP, PhillipCapital India Research Key milestones Year Major events Apr‐72 Laid foundation for hull shop Jul‐75 Signed contract for the first bulk carrier Jul‐81 Delivered first ship ‘Rani Padmini’ Oct‐90 Delivery first tanker ‘007 Motilal Nehru’ May‐99 Delivered the Double Hull Motor Tanker ‘M.T. Abul Kalam Azad’ of 83576 DWT to Shipping Corporation of India Feb‐03 Delivered first export order, LB II Barge to National Petroleum Construction Co, Abu Dhabi Jan‐04 Contract for six bulk carriers for Clipper Group, Bahamas Nov‐06 Delivered nine fire‐fighting tugs to Saudi Seaport Authority from December 2004 Feb‐09 Keel laying of the first Indigenous Aircraft Carrier for the Indian Navy Oct‐10 Order of 20 Fast Patrol Vessels for Indian Coast Guard Sep‐11 Set up the 500 tn Bollard Pull facility at Vizhinjam, largest facility for bollard pull test in Asia Dec‐12 Signed contract for setting up of ISRF at Cochin Port Trust Aug‐13 Launched the first Indigenous Aircraft Carrier for the Indian Navy Mar‐14 Delivered the 100th ship built by our Company Dec‐15 Obtains license from GTT to build LNG Ships using the containment system known as the Mark‐III Technology Dec‐16 Delivered last ship of the 20 Fast Patrol Vessel to Indian Coast Guard Jun‐17 Delivered double ended Ro‐Ro ferry ‘Sethusagar – I and II’ to Kochi Municipal Corporation Source: RHP, PhillipCapital India Research Page | 3 | PHILLIPCAPITAL INDIA RESEARCH COCHIN SHIPYARD LTD IPO NOTE Business segments CSL has two major business segments: (1) Shipbuilding, which has contributed 82% of its revenues over the last five years (FY13‐17), and (2) ship repair (18% of revenues). It caters to clients from the defence sector in India and clients from commercial sectors globally for shipbuilding and ship repair. Defence shipbuilding is a complex and time‐consuming activity. While commercial shipbuilding is relatively less complex, it is subject to cyclical weaknesses. Over the last five years, CSL’s defence clients have contributed to 80% of its revenues and have helped the company to overcome cyclical fluctuations or weaknesses in commercial shipbuilding. Shipbuilding contributed 82% of its last five years revenues… ...driven by 80% contribution from defence‐sector clients Segment‐wise Revenue mix FY13‐17 Client‐wise Revenue mix FY13‐17 Commercial Ship repair 20% 18% Shipbuilding Defence 82% 80% Source: RHP, PhillipCapital India Research Shipbuilding (82% of last five years’ revenues): CSL has begun its shipbuilding operations in 1975 and has transformed its capability from building bulk carriers to building smaller and more technically sophisticated vessels such as PSVs and AHTS’.

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