Mazagon Dock IPO Financial Analysis (Subscribe for Long Term)

Strengths

Only public sector defence shipyard constructing conventional submarines.
Location provides strategic advantage and promotes closer association with vendors and customers.
Track record of strong financial performance and healthy order book.

Challenges

Diversifying into international markets.
Highly dependent on the Indian Navy for contracts. As of July 31, 2020, Order Book from the MoD was Rs 54074 crore which constitutes 100% of the Order Book. Diversifying the revenue streams by focussing on ship repairing activities in future to reduce dependency on MoD for future orders remains a key challenge.
Higher working capital requirements.

Mazagon IPO size

Incorporated in Bombay in the year 1934, Mazagon is coming up with IPO of 30,599,017 equity shares of face value of Rs 10 each amounting to Rs 444 crore. It is purely an offer for sale and the company would not receive any proceeds from the issue.

The offer includes 345,517 equity shares reserved for eligible employees.

Mazagon price band

Rs 135– Rs 145 per equity share.

Mazagon Open and Close date

Open Date: 29^th September 2020
Close Date: 1^st October 2020

BRLM of Issue:

Yes securities
Axis Capital
Edelweiss Financial services Limited
IDFC Securities
JM Financial

Registrar to the issue

Alankit Assignments Limited

About the company - Mazagon Dock Shipbuilders Limited

Defence public sector undertaking (wholly owned by GoI) shipyard under the Department of Defence Production, MoD with amaximum shipbuilding and submarine capacity of 40,000 DWT (Source: CRISIL Report), engaged in theconstruction and repair of warships and submarines for the MoD for use by the Indian Navy and other vessels for commercial clients.
Only shipyard to have built destroyers and conventional submarines for the Indian Navy.
One of the initial shipyards to manufacture Corvettes (Veer and Khukri Class) in India.
Business Divisions of Mazagon Dock are:

Shipbuilding: includes the building and repair of naval ships.
Submarine Heavy Engineering: includes building, repair and refits of diesel electric submarines.

Also delivered cargo ships, passenger ships, supply vessels, multipurpose support vessels, water tankers, tugs,dredgers, fishing trawlers, barges and border outposts for various customers in India as well as abroad.
Shipyard is strategically located on the west coast of India, on the sea route connecting Europe, West Asiaand the Pacific Rim, a busy international maritime route.Customers, being the MoD and IndianCoast Guard and vendors being based in Mumbai which results in closer co-ordination and greaterefficiencies.
Mazagon is exploring the possibilities of developing a greenfield shipyard at Nhava, Navi Mumbai with a shiplift, wet basin, workshops, stores and buildings and a ship repair facility spread over an area of 37 acres.
As of July 31, 2020, order book for shipbuilding and submarines and heavy engineering was Rs54,074 crore comprising of three major shipbuilding projects and two submarine projects.

Mazagon Dock Financial Review/Financial Performance

Financial performance of Mazagon Dock has remained strong with increasing trend seen in the revenues. Revenues for FY20 has increased to Rs 5535 crore from Rs 5204 crore in FY19. Though volatility is seen in the bottomline with variations in PAT and EBITDA on YoY basis. PAT has reduced by 10% to Rs 458.01 crore in FY20 as against Rs 513.01 crore in FY19 because of increased employee benefit expenses and subcontracting expenses. Operating and net margins are reasonable at 14.92% and 8.27% in FY20 and FY19 respectively. RoNW is 14.92% in FY20.

Table 1 - Financials and Ratios (Amount in Rs Crore)
Title	FY2020	FY2019	FY2018	FY2017
Total Revenue	5535.31	5204.67	5027.63	4274.86
PAT	458.01	513.01	456.15	597.74
EBITDA	825.63	851.53	711.9	882.51
Total Accets	20966.03	20847.93	19370.37	19391.12
Cash flow from operating activities	-95.57	65.24	490.77	-1002.71
Cash and cash equivalents	5798.18	7469.70	7189.59	8362.88
Gross Margin(%)	14.92%	15.38%	14.16%	20.64%
Net margin(%)	8.27%	9.27%	9.07%	13.98%

Conclusion

The peers of Mazagon include Cochin shipyard (P/E,7.6), Reliance Naval and engineering (NA) and Garden reach Shipbuilders and Engineers Limited (P/E, 14.91). The P/E at upper band of the issue price comes at 6.78 which is low when compared to average industry P/E of 11.25 which makes the issue attractively priced. At NAV of Rs 152.17 in FY20, P/BV comes at 0.95. Looking at good valuations and reasonable financial performance, investors may subscribe for long term.

Reviewer recommends Subscribe for Long Term to the issue.

Review By CA Priyanka Choudhary on 18th Sep 2020

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

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