Mazagon Dock Shipbuilders Limited is coming up with an Initial Public Offering of 30,599,017 Equity shares which constitutes 15.17% of the post-offer equity share capital. The Shipbuilding company is planning to raise Rs.413 Cr - 444 Cr at a price band of Rs.135 - Rs.145 per share. Mazagon Dock is a defence public sector undertaking company and is engaged in the construction and repair of warships and submarines for the Ministry of Defence. It has a maximum capacity of 40,000 DWT (Deadweight tonnes). Mazagon Dock is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy. The company has posted consistent profits in the last four fiscals with an efficient Return on Equity of 16.21% in the last three years. Moreover, it is also a debt-free company. Based on the strong moat and steady financials we recommend investors to Subscribe to this IPO for listing gains only.
The company was incorporated as “Mazagon Dock Private Limited” on February 26, 1934 at Mumbai and was conferred the 'Mini-ratna-I' status in 2006. It is primarily engaged in the defence shipbuilding segment catering to the needs of the MoD. Since 1960, it has built a total of 795 vessels including 25 warships, from advanced destroyers to missile boats and three submarines. Mazagon has also delivered cargo ships, passenger ships, supply vessels, multipurpose support vessels, water tankers, tugs, dredgers, fishing trawlers, barges and border outposts to various customers in India as well as abroad along with two Scorpene submarines, INS Kalvari and INS Khanderi to the MoD.
Mazagon is strategically located in Mumbai on the west coast of India and because it caters to the MOD and Indian Coast Guard, its proximity gives it better coordination and greater efficiencies. This could be a key competitive advantage which sets Mazagon apart. Apart from this, the company is also planning to develop a greenfield shipyard at Nhava, Navi Mumbai to cater to its existing and future customers in the domestic and international markets.
Currently, Mazagon has a robust order book of Rs.54,074 Cr including two shipbuilding projects for P15B Destroyers, P17A Stealth Frigates and P75 Scorpene Submarines from MoD.
Mazagon Dock has recorded a 9.1% CAGR growth in its Revenue from operations in the last four years. Its PAT has infact witnessed a degrowth in the same period due to taxes. The company has maintained operating margins in the range of 4-5% over the last three years. Moreover, it has given decent shareholder returns with an average ROE of 16.21% in the last three years. With a PE band of 6.32x - 6.79x, Mazagon is currently undervalued compared to its peer average of 9x which makes it attractive. The company has cash and cash equivalents of Rs.483.28 Cr as of March 31, 2020 and primarily relies on cash from internal sources for its business operations.
•High dependence on the Ministry of Defence and Indian Coast Guards for defence orders and there is no assurance that future defence orders will be awarded to the company.
•Pre-dominantly dependent on the Indian Defence Budget. Any substantial change in the budget plan will lead to less orders and in turn lower revenues.
•A risk of time and cost overruns due to any further extension of contracts.
Overall, Mazagon Shipbuilders Limited holds a monopoly position in its industry and is undervalued compared to its peers which makes it attractive for listing gains. However, being a risky bet investors should assess their own risk appetite and be careful before subscribing given the market conditions.
Based on this, we recommend investors to Subscribe to this IPO for listing gains.
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