Issue Size (mn shares) 34 Issue Open/Close Aug 01/03, 2017 Face Value (Rs) 10 Price Band (Rs) Lot Size (shares) 30

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1 Wellmanaged PSU with Bright Prospects Ltd. (CSL) a Miniratna company is one of the largest PSU shipyard companies in India. Currently, it has two docks located adjacent to Cochin Port in West Coast of India: (1) Ship Repair Dock (1.25 lakh DWT) and (2) Shipbuilding Dock (1.10 lakh DWT). Further, it is in the process of setting up a new Dry Dock and an International Ship Repair Facility (ISRF), which will enable CSL to secure more projects in ensuing period. The Company gets many government orders on nomination basis like NBCC Ltd. Notably, CSL s current order book stands at Rs33bn (1.6x FY17 revenue), which we believe will expand further in coming years owing to government s strong endeavour to increase its defence production under Make in India initiative. Unlike other PSU shipyard companies, CSL has been profitable, as it has delivered a consistent performance with over 4% CAGR in earnings in last four years, which is commendable, in our view as the shipping industry witnessed multiple headwinds during this period. CSL is coming up with an Initial Public Oering (IPO) with a fresh issue of 22.7mn shares and OFS of 11.3mn shares to mopup Rs14.7bn at upper price band. Proceeds will be utilized towards proposed expansion of Dry Dock and ISRF. Key Positives Healthy Performance Track Record amid Challenging Environment Leadership in Ship Repair Segment Bodes Well Healthy Order Book; More to Flow in Location Advantage Oers an Edge Dry Dock and ISRF to Provide Scale to its Business Healthy Financial Track Record and Dividend Payout Key Risks Any Deterioration in Global Economic Conditions Delay in Obtaining Approvals for Dry Dock and ISRF and Cost Escalation for the Same Nature of Fixed Price Contracts Single Location Plant Litigations Pertaining to Legal and Tax Proceedings against CSL Outlook & Valuation We admire CSL s ability to stay afloat in the turbulent period without compromising on margins. Going forward, government s endeavour to improve its defence strength in sea route and several initiatives under flagship Make in India programme will result in healthy orders for CSL, which will drive growth. At the upper price band, CSL trades at 18.8x FY17 EPS post dilution. Though it is diicult to compare it with peers as most of the listed peers are loss making, we believe the current valuations are not expensive given healthy return ratios and bright prospects. Further, price to book ratio after dilution stands at 1.9x, which is attractive in our view. Hence, we recommend to the issue. Key Financials (Rs mn) FY13 FY14 FY15 FY16 FY17 Revenue 16,799 17,978 15,627 19,852 20,573 EBITDA 3,519 4, ,871 3,781 EBITDA margin (%) PAT 2,663 2, ,918 3,122 PAT margin (%) RoCE (%) RoE (%) Net D/E (x) (0.6) (0.1) (0.8) (0.9) (0.9) Current Ratio (x) Debtors Cycle (Days) Issue Details PreIssue Paidup Cap. (Rs bn) 1.1 PostIssue Paidup Cap. (Rs bn) 1.4 PostIssue Mkt Cap. (Rs bn) at upper 59 price band BRLM SBI Capital Markets Ltd., Edelweiss Financial Services Ltd and JM Financial Institutional Securities Ltd. Registrar Link Intime India Private Ltd. Oer for dierent categories % QIB 50 HNI 15 Retail 35 Promoters The President of India Shareholding Pattern (%) Pre Issue Post Issue GOI Other 0 25 Objects of the issue (bn) Setting up of a new dry dock within the existing premises Setting up of an international ship repair facility at Cochin Port Trust area General corporate purposes Research Analyst: Binod Modi Contact: binod.modi@relianceada.com Note: There will be a discount of Rs21 per share for retail and firm s employees. 1

2 Key Investment Rationale Decent Performance Track Record during Turbulent Times CSL caters to commercial clients and clients engaged in defence sector with a multitude of oerings for a broad range of vessels across life cycles with superior clientele base and expertise. Further, leadership position in ship repair segment distinguishes CSL from others. These enabled CSL to secure orders from defence and public segments consistently even during turbulent times. Notably, while Indian shipbuilding order book size has witnessed consistent downfall (a decline of 9% CAGR over CY11CY15), CSL s shipbuilding revenue has been consistent over the years and registered a growth of 2% CAGR over FY13FY17. Shipbuilding revenue accounted for 74% of CSL s total revenue in FY17, which we expect to improve further considering current order book and likely flow of new orders from defence segment. Exhibit 1: Indian shipbuilding industry shrunk in size over the years Exhibit 2: Shipbuilding revenue has been consistent of CSL 4,500 4,000 3,500 3,000 2,500 2,000 1,500 3,972 3,653 3,548 2,741 2, , CY11 CY12 CY13 CY14 CY FY13 FY14 FY15 FY16 FY17 Shipbuilding Order Book ('000 DWT) Shipbuilding Revenue (Rs bn) Source: Company PPT Exhibit 3: Aspects that aided CSL to remain afloat Exhibit 4: Revenue breakup in FY17 Consistent order wins Ability to secure orders consistently from defence and commercial shipbuilding segment 26% Ship Repair Leadership position in ship repair segment 74% PSU with Miniratna Status Aided CSL to get many orders on nomination basis Shipbuilding Repair 2

3 Leadership in Ship Repair Segment Bodes Well With 1.25 lakh DWT capacity, CSL enjoys a dominant 39% market share in domestic ship repair segment, which is 2x of its closest peer Goa Shipyard. CSL is the only commercial shipyard to have undertaken repair works of Indian Navy s aircraft carriers i.e. INS Viraat and INS Vikramaditya. Further, it has also undertaken a number of complex and sophisticated repair works for the ships of Indian Navy, Coast Guard and Merchant Navy. This segment diversifies CSL to withstand any slowdown in ship building business and take advantage of proximity to trade routes. Notably, CSL s revenue has witnessed 18% CAGR through FY13FY17 from this segment. Further, we believe that Increasing strength of Indian Navy and Coast Guard s operational and support fleet will drive repair business for CSL in ensuing years. Exhibit 5: Market Share in Ship Repair Segment Exhibit 6: Repair segment revenue over the years ABG Hindustan 4% 9% L&T Kakinada 9% 11% Goa Shipyard 20% 1.0 CSL 39% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% FY13 FY14 FY15 FY16 FY17 Ship Repair Revenue (Rs bn) Healthy Order Book; More to Flow in CSL s current order book stands at Rs33bn, which is 1.6xFY17 revenue. Shipbuilding segment accounts for 89% of total order book. Though CSL did not give any guidance of the order book, we believe that it is wellpositioned to benefit from recent Make in India initiative pursuant to which the Government of India (GoI) is keen to encourage defence manufacturing in India. Policy initiatives such as granting infrastructure status to shipbuilding, granting right of first refusal to Indian shipyards for shipbuilding and ship repair work of Indian PSUs and support through new financial assistance scheme are expected to provide a steady pipeline of orders and eventually become key growth drivers. Further, the GoI also plans to promote inland water transportation and coastal shipping, which we believe will unleash several opportunities including building highspeed ferry crafts, dredgers, ropax vessels and large capacity passenger ships. This can potentially create demand for shipbuilding and ship repair services, which we believe CSL is well equipped to deliver. 3

4 Exhibit 7: Shipbuilding order book position as on 31st Mar 17 Exhibit 8: Order Book Breakup of Rs33bn as on 31st Project/Vessel Client Confidential GoI IAC Indian Navy 500 passenger cum 150 MT cargo vessel A&N Administration 500 passenger cum 150 MT cargo vessel A&N Administration 1200 passenger cum 1000 MT cargo vessel A&N Administration 1200 passenger cum 1000 MT cargo vessel A&N Administration Double ended Ro Ro Ferry Kochi Municipal Corporation Double ended Ro Ro Ferry Kochi Municipal Corporation Revenue to be recognised in future (Rs bn) % Shipbuilding 89% Ship Repair Location Advantage Oers an Edge CSL is situated adjacent to Cochin Port in West Coast of India. The yard is built up on 170 acres of land. We understand 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 Port of Kochi as well as to oshore oil fields on western coast of India and relatively close to the Middle East. Dry Dock and ISRF to Provide Scale to its Business CSL has proposed to set up a Dry Dock and ISRF at the existing location. Completion of Dry Dock, which is currently at initial phase, will help CSL to enhance its capacity in shipbuilding/ship repair by tapping the market potential of building specialised and technologically advanced larger vessels i.e. LNG and IAC among others. Further, full commissioning of international ship repairing facility at Cochin Port with stateoftheart ship repair facilities will enable Cochin to position itself as a major ship repair hub. The estimated cost of this project is Rs9.7bn. CSL targets to enhance its annual ship repair capability by 7090 ships. Healthy Track Record of Financials & Dividend Payout Unlike peers, CSL enjoys a healthy track record of financials and return ratios. A consistent flow of order, sound operating eiciencies with healthy margins, light balancesheet, better working capital management and sound rapport with the clients aided CSL to report consistent performance over the years. Further, RoE and RoCE at 16% and 24%, respectively oer an edge over others. Its revenue and PAT witnessed 5% and 4% CAGR, respectively over FY13FY17 amid turbulent environment. 4

5 Exhibit 9: Revenue Booking Remains Consistent Exhibit 10: Profit over the years FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 Revenue (Rs bn) PAT (Rs bn) Exhibit 11: EBITDA margins remain impressive Exhibit 12: Healthy margins and light B/S resulted in Decent Return ratios FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 EBITDA margin (%) RoCE (%) RoE (%) 5

6 Company Overview Ltd.(CSL) wholly owned by the Government of India is a Miniratna company incorporated on March 29, 1972 and commenced operations in The Company is one of the of the largest publicsector shipyards in India having shipbuilding capacity of 110,000 DWT. It has over four decades of experience in shipbuilding. CSL which started its ship repair operations in 1978 has undertaken repairs of various types of vessels including upgradation of ships for oil exploration industry as well as routine maintenance. It started Marine Engineering Training Institute at Kochi in 1993 to conduct marine engineering training programmes approved by Director General of Shipping (DGS). Currently, it has two docks located adjacent to Cochin Port. While the first dock is primarily used for ship repair (with 125,000 DWT capacity), the second dock is primarily used for shipbuilding (with 110,000 DWT capacity). Additionally, CSL is in the process of setting up a new Dry Dock for longer vessels. It is also setting up an International Ship Repair Facility (ISRF), which includes setting up a ship lift and transfer system. Exhibit 13: Ship building and ship repair facilities Ship Building (73.6% of FY17 revenues) Ship Repair (26.4% of FY17 revenues) Training and Lab facilities Second Largest Shipyard in India by dock capacity Shipbuilding capacity of up to 110,000 DWT with dock measuring 255 x 42.8 x 9 M Vessels delivered for clients engaged in both Commercial and Defence sectors Expertise includes tankers, bulk carriers, oshore support vessels, deck cargo barges, tugs, buoy tender vessels, FPVs, passenger vessels, and aircraft carriers Accredited with ISO 9001:2008 (2), ISO 14001:2004 (3) and OHSAS 18001:2007 (4) Dock measuring 270 x 45 x 12 M that enables to undertake repair of vessels of up to 125,000 DWT Expertise in repairs of commercial vessels, Passenger Vessels, Defence Vessels and Oshore vessels & Structures Undertaken repairs of all types of ships including: Upgradation of ships of the oil exploration industry as well as routine drydock repairs Repairs and life extension of ships of the Indian Navy, UTL, Indian Coast Guard, Fisheries and Port Trust Repairs and life extension to merchant ships of SCI and ONGC and various other private owners Training Marine Engineering Training Institute facilitates the DGS approved residential course for mechanical and naval architect engineering graduates (6) 140 sanctioned seats per year Partnered with SMSSC (Strategic Manufacturing Sector Skill Council) of GOI under skill India Mission Lab Facilities Inhouse lab facility for chemical, mechanical and nondestructive testing of metals, welds and alloys One of the leading material testing laboratories in Kerala Accredited by the NABL Source: Company PPT 6

7 Exhibit 14: Key Milestones Year Major Events and Achievements April, 1972 Laid of foundation stone for hull shop July, 1975 July, 1981 October, 1990 May, 1993 May, 1999 February, 2003 January, 2004 November, 2006 February, 2009 October, 2010 September, 2011 December, 2012 August, 2013 December, 2013 March, 2014 December, 2015 December, 2016 June, 2017 Vice Admiral N. Krishnan and Admiral S. Nanda signed contract for building the first bulk carrier Delivered first ship named Rani Padmini Delivered first tanker named 007 Motilal Nehru Received approval from Directorate General of Shipping for starting a sixmonth Graduate Engineer s course Delivered Double Hull Motor Tanker M.T. Abul Kalam Azad with a dead weight at design draught of T to Shipping Corporation of India Delivered first export order, LBII Barge to National Petroleum Construction Company, Abu Dhabi Signed contract for building of six bulk carriers for Clipper Group, Bahamas The first series of export order Delivered nine firefighting tugs to Saudi Seaport Authority, Saudi Arabia Keel laying of first Indigenous aircraft carrier for Indian Navy Signed shipbuilding order of 20 Fast Patrol Vessels for Indian Coast Guard Set up 500 Tonne Bollard Pull facility at Vizhinjam, the largest facility for bollard pull test in Asia Signed contract for setting up of ISRF at Cochin Port Trust Launched the first Indigenous aircraft carrier for Indian Navy Allotment of 8.51% secured redeemable nonconvertible taxfree bonds of face value of Rs1bn Delivered 100th ship built by the Company Obtained license from GTT to build LNG ships using containment system (MarkIII Technology) The last ship of 20 Fast Patrol Vessel delivered to Indian Coast Guard Delivered double ended RoRo ferry Sethusagar I and II to Kochi Municipal Corporation 7

8 Income Statement Y/E March (Mn) FY13 FY14 FY15 FY16 FY17 Income 16,799 17,978 15,627 19,852 20,573 % yoy growth 7.0 (13.1) Cost of materials consumed 8,793 7,757 10,008 10,543 10,087 Change in WIP (530) 402 (192) (164) (140) Sub contract & other direct exp. 2,026 1,737 1,598 1,917 3,194 Employee benefits expenses 1,888 2,092 2,128 2,091 2,167 Other expenses 1,015 1,420 1,130 1,425 1,344 Prov for anticipated losses & expendi Operating Expenses 13,280 13,813 14,940 15,981 16,793 EBITDA 3,519 4, ,871 3,781 EBIDTA Margin (%) Depreciation & Amortization Finance Costs Other Income ,117 1,512 PBT before excep items 3,973 4,330 1,104 4,497 4,802 Exceptional Item PBT 3,973 4,330 1,104 4,497 4,802 Tax 1,310 1, ,579 1,680 % Tax Net Profit Reported 2,663 2, ,918 3,122 YoY Growth (%) 5.8 (75.4) Net Profit Adjusted 2,663 2, ,918 3,122 Net Profit Margin (%)

9 Balance Sheet Y/E March (Mn) FY13 FY14 FY15 FY16 FY17 Sources of Funds Share Capital 1,133 1,133 1,133 1,133 1,133 Reserves & Surplus 11,119 13,763 14,406 17,109 19,177 Total Shareholder's funds 12,252 14,896 15,539 18,242 20,310 LT Borrowings 1,230 1,230 1,230 1,230 Other Financial Liabilities LT Provisions Total NC Liabilities 249 1,465 1,449 1,446 1,470 Trade Payables 1,400 1,716 1,710 2,099 1,613 Other Financial Liabilities 2,109 1,210 1,644 1,020 Other Current Liabilities 6,840 6,065 6,472 7,723 6,646 ST Provisions 3,264 3,621 2,282 2,151 2,105 Current Tax Liabilities (net) Total Current Liabilities 11,505 13,511 11,924 13,801 11,384 Total Liabilities 24,006 29,872 28,913 33,489 33,164 Application of Funds Gross Fixed Assets 4,444 5,948 6,287 6,622 6,943 Less: Acc. Depreciation & Amort. 2,039 2,247 2,587 2,920 3,236 Net Fixed Assets 2,405 3,701 3,701 3,702 3,706 CWIP 1, NC Investments Deferred Tax Assets (Net) Income Tax Assets (Net) LT Loans & Adv Trade Receivables Other Financial Assets 1,655 Other NonCurrent Assets Total NC Assets 4,638 4,757 4,723 6,624 5,110 Inventories 3,553 3,959 3,034 2,317 1,865 Sundry Debtors 6,839 12,028 5,825 4,541 3,070 Cash & Bank Balances 7,040 5,564 14,194 18,204 19,913 ST Loans & Adv , Other Financial Assets 324 1,192 2,327 Current Tax Assets (Net) 169 Other Current Assets 1,303 1, Toal Current Assets 19,368 25,114 24,190 26,865 28,054 Total Assets 24,006 29,872 28,913 33,489 33,164 9

10 Cash Flow Statement Y/E March (Mn) FY13 FY14 FY15 FY16 FY17 PBT 3,973 4,330 1,104 4,497 4,802 Depreciation Interest and Rent Received (597) (508) (568) (1,004) (1,314) Interest & Finance Charges Paid Others (130) 6 (45) Operating profit before WC Changes 3,765 4, ,953 3,907 Net Change in Working Capital (2,515) (9,452) 6,456 (2,218) (284) Tax Paid (767) (884) (749) (1,334) (1,500) Net Cash from Operating Activities 483 (5,835) 6, ,123 Purchase of FA (1,438) (208) (400) (462) (702) Interest Income ,277 Others Net Cash used in Investing Activities (932) Inc / (Dec) in Borrowings 3,339 (2,109) Dividend on Eq. Shares paid (Inc. DDT) (229) (199) (199) (205) (1,043) Interest & Finance Charges Paid (226) (161) (173) (110) (105) Others (443) (269) 127 (5) 23 Net Cash used in Financing Activities (898) 2,710 (2,354) (319) (1,125) Net Increase/ (Decrease) in Cash (1,347) (2,973) 4, ,645 Opening Cash 4,457 3, ,572 5,121 Closing Cash 3, ,572 5,121 6,766 FDs at Bank 3,930 5,428 9,622 13,083 13,147 Closing Cash at B/S 7,040 5,564 14,194 18,204 19,913 10

11 Key Ratios Y/E March FY13 FY14 FY15 FY16 FY17 P/E P/CEPS P/BV EV/EBIDTA EV/Sales Dividend Payout (%) Dividend Yield (%) Per Share Data (Rs) EPS (Basic) EPS (Diluted) CEPS DPS Book Value Returns (%) RoCE RoE Turnover ratios (x) Asset Turnover (Gross block) Inventory (days) Receivables (days) Payables (days) WCC (days) Solvency ratios (x) D/E (x) (0.57) (0.15) (0.83) (0.93) (0.92) Current Ratio (x)

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