Cochin Shipyard IPO
Yesterday i attended a CFA Conference where speaker was Midcap Moghul kenneth Andrade and his investment philosophy is pretty simple “If 80% of a Industry is making losses, buy the 20% companies that are able to make profit, because when the cycle turns, these 20% companies go up 3-4-5x”
Cochin Shipyard fits that criteria where most of its competitors are heavily debt ridden and near bankrupt but this company is holding strong. The government of India is Divesting Stakes in its good profitable assets like HUDCO and now Cochin Shipyard. The best part about the deal is that the government has left a lot on the table for retail investors.
Ipo Details –
The Grey market is very excited about it and pricing it at a premium of 145/ Share, this is a listing gain of a Whopping 35-40%. Retail Investors will get an additional Discount on IPO price of 5% ie 21 /- per share. The company has cash of 220/per share post the issue and did a ROIC of 47% in FY2017. The Company has a post issue EPS of 23.7 /Share in 2017 and is offered at 18 PE Multiple. If we take out the cash, the IPO is coming at 432 minus 220/cash per share = 212/Share. We Value the company at 15 PE multiple for Operating business at 355 plus 220 cash/share at 575/share. We believe the company can Grow at 10% for the foreseeable future and generate 15-16% ROE.
Lets Understand the business in next 5 mins.
Factor #1- About the Business –
Cochin Shipyard commenced operations in 1975 and is one of the largest public sector shipyard in India in terms of dock capacity. The company can be divided into 2 part 1) Ship Repair Business and 2) Ship Building Business.
1. Ship Repair Business – This segment is 26% of the company’s revenues and has grown 38% in last 2 years and the industry is expected to grow at 10% CAGR going forward till 2021 . Cochin Shipyard has 39% Marketshare in Ship Repair business. When we met the management in its analyst meet, the management said that the repair business has 5x more profitability compared to Ship Building business. The current capacities allow the company to repair approximately 80-100 vessels per year.
2. Ship Building Business – This is 74% of company’s revenue and the company has order book of 3000 crores in this segment with navy and coast guard being the main client. The strong order book show visibility of revenues for the next 2 years. The government’s make in India project especially for defence vessels will help the company going Forward. The company gets 85% of its total revenue from non cyclical defence companies. This is basically a recession proof business.
Factor #2 – Reason of the IPO – The IPO is a Book building Issue as well as Offer for Sale. The company will get 979 crores whereas the government will get 489 crores. The Company has 2000 Crores cash on book and will get another 979 crores from the IPO, which will be used for a expansion of capacity in both Ship repair as well as Ship Building facility. The Total Capex of 2800 Crores will be completed in next 2.5-3 years.
Ship Building Capex – They would be Setting up of a new dry dock within the existing premises of Company (“Dry Dock”) ~1800 Cr .The construction commencement is expected from Jan 2018 and execution time of 30 Months
Ship Repair Capex – Setting up of an international ship repair facility at Cochin Port Trust area (“ISRF”) ~970 Cr The construction commencement is expected from Nov 2017 and execution time of 30 Months. This will Increase Capacity by 60% from currently 80-100 vessels per year.
Factor 3 – Peers Bankrupt – All the listed peers of the company are bankrupt and are facing major problems. The company will be the only good surviving company in a struggling industry due to its defence orders and debt free status. Reliance Defence, ABG and Bharati defence had an EPS of -8,-686,-438 respectively against a positive 27.56 EPS of cochin shipyard.
Factor 4 – Valuation – Post IPO the company will have a cash balance of 3,000 crores whereas at top range the issue is priced at a market cap of 5800 crores. The Cash Per share is roughly 220 per share. The company generated adjusted operating cash of 350 crores in FY2017 and its expected to remain at 350-450 crores till new capacity comes. The company did a mindblowing ROIC of 47% in FY 2017 and expected to remain at elevated levels for the foreseeable future. We value the Operating business at 15x Trailing PE Multiple at 355/share+ 220 cash on books = 575/Share.
Factor 5 – Moat (barrier to Entry) – High capital investments and the requirement of adequate cash flows act as major barriers to entry in this space. The whole industry is struggling except this company, we don’t see any new competition coming in for the foreseeable future. Moreover, critical factors such as expertise and technical know-how are some of the pre-requisites that limit the entry in this industry.
Factor 6 – Financials –
Conclusion – Cochin Shipyard is a superb bet on the Make in India Story and at IPO price its a steal with smart management whose revenues are primarily in defence space which are non cyclical in nature. The ship repair business generates great cashflow and is of great importance tactically for the country. We recommend a Strong Subscribe to it.