Pipavav Shipyard — IPO: Avoid

Investors with a low risk appetite can give the initial public offer (IPO) of shipbuilder Pipavav Shipyard a miss; the offer does not appear to be a compelling investment option at this point in time given the lack of an operational track record, relatively attractive valuations of listed peers, pricing pressures and risks of vessel order cancellations.

The shipbuilding sector is reeling under stress as a result of the downturn, with no clear signs of revival in orders.

The offer is being made at a price band of Rs 55-60; the price discounts the estimated per share earnings for FY-11 by about 18-20 times. This is at a steep premium to the listed peers ABG Shipyard and Bharati Shipyard that are currently trading at single-digit valuations.

While a premium to peers may be justified given Pipavav’s superior dock facility and multi-product capabilities, the premium demanded may not be warranted at this stage for the following reasons: One, shipyard is a sector with high cyclical risks and has traditionally traded at a discount to the broad market. Two, lack of operational track record and execution risks associated with Pipavav makes the pricing appear even more stiff at this stage. On an enterprise value to order book ratio too (as revenue is yet to flow), Pipavav is at 1.1, stiffer than the 0.3-0.4 times ratio of its peers. Earnings may however ramp up quickly post FY-11 when a good number of the vessels contracted now are completed.

The shipbuilding business of Pipavav Shipyard, no doubt, holds huge long-term potential, given the company’s well-integrated facility comprising docks, fabrication and block assembly as well as facilities for offshore products.

Business opportunity flowing from the co-promoter Punj Lloyd may also prove to be an added benefit. Investors can therefore wait out the IPO and look at buying the stock in the secondary market at a later date, when a lower price or a year or two of sustained financial performance, make the stock a more attractive investment.

Source: thehindubusinessline