Pipavav Defence & Offshore (PIPSHI) 57

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1 Company Update Rating matrix Rating : Hold Target : 55 Target Period : 12 months Potential Upside : -4% What s changed? Target Changed from 64 to 55 EPS FY16E Changed from -1.5 to -3.8 EPS FY17E Changed from 0.4 to - 2 Rating Unchanged Key financials Crore FY14 FY15P FY16E FY17E Net Sales 2, EBITDA Net Profit 3 (399) (277) (149) EPS ( ) 0.04 (5.41) (3.76) (2.03) Valuation summary FY14 FY15P FY16E FY17E P/E NA NA NA Target P/E 2,123.0 NA NA NA EV / EBITDA P/BV RoNW (%) RoCE (%) 6.0 (0.4) (0.7) 0.3 Stock data Particular Amount Market Capitalization ( Crore) 4,270.0 Total Debt (FY15) ( Crore) 6,715.4 Cash and Investments (FY15) ( Crore) EV ( Crore) 8, week H/L 84 / 35 Equity capital Face value 10.0 Price performance Stocks 1M 3M 6M 1 Yr Pipavav Defence ABG Shipyard Bharati Shipyard Research Analyst Bharat Chhoda bharat.chhoda@icicisecurities.com Ankit Panchmatia ankit.panchmatia@icicisecurities.com August 24, 2015 Pipavav Defence & Offshore (PIPSHI) 57 New Management push in defence opportunity Pipavav Defence & Offshore Engineering s (PDOECL) revenues declined 66% YoY to 107 crore on account. During the quarter, shipbuilding revenues stood at 107 crore as compared to crore in Q1FY15. The company has absence its trading business Owing to a significant decline in revenues and continued overheads, the company reported EBITDA loss of 10.3 crore as compared to crore profit in Q1FY15 and crore in Q4FY15. Higher depreciation and interest expenses, coupled with lower other income further widened the losses to 167 crore as compared to 5.6 crore profit in Q1FY15 and a loss of 236 crore in Q4FY15 Acquisition by Reliance Infrastructure positive over long term PDOECL in past years was unable to ramp up its revenues on the back of distressed global shipping scenario and deferring defence orders announcements. On account of which PDOECL ran into a severe financial crisis with lenders suggesting it be referred to corporate debt restructuring cell (CDR). Recently, CCI and Gujarat Maritime Board cleared the open offer by Reliance Infrastructure to acquire ~18% stake at 63 per share at a total consideration of 819 crore. We believe that this acquisition would provide requisite strength to PDOECL to withstand the financial difficulties in the near term and provide support for capturing the long term opportunity in the defence sector. Unparalleled infrastructure provides scope for defence orders Pipavav Defence and Offshore Engineering (PDOECL), spanning over 861 acres of land with two dry docking facilities is one of the largest defence shipbuilding facilities in India. The shipyard is capable of accommodating 400,000 dwt capacity ships along with construction and repair of a wide range of vessels starting from coastal and naval vessels together with repair and fabrication of offshore platforms and rigs. Recently, along with Larsen & Toubro, PDOECL was shortlisted for a potential crore order to build six submarines for Indian Navy. The current order book stood at 4000 crore. Strategic tie-ups to enable capturing of forthcoming opportunity PDOECL formed a JV with Mazagaon Dock (MDL) providing exposure to MDL s ~$20 billion order book to capture the defence shipbuilding opportunity in India. Further, to enhance its position, PDOECL formed several strategic tie-ups with a slew of foreign partners to provide integrated solution. PDOECL s tie-up with multinational players like SAAB, DCNS, Babcock, etc. that have a proven track record in defence shipbuilding provide it the ability to bid for defence projects. Further, the government raised the FDI cap from 26% to 49% with its focus on enhancing indigenous capacity and capability of defence shipbuilding. Re-rating hinges on the growth strategy charted by new promoter... The government has approved 49% FDI in defence and is expediting indigenisation of defence procurement. PDOECL stands at a vantage point for the same owing to its superior infrastructure. Defence projects are usually long gestation. With Reliance Infra at the helm, we believe PDOECL is better placed than before to capture the humongous opportunity presented by the indigenisation of Indian defence procurement. On the back of which we value PDOECL at 2.7x FY17 P/BV to arrive at a target price of 55 with a HOLD recommendation on the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q1FY16 Q1FY16E Q1FY15 YoY (%) Q4FY15 QoQ (%) Comments Revenue Revenues were impacted owing to core shipbuilding revenue declining ~68% Cost of material Purchase of stock in trade Employee benefit Other expenses EBITDA EBITDA Margin (%) NA NA Depreciation Interest Other income Extra-ordinary gain/loss Total Tax PAT NA NA Key Metrics Q1FY16 Q1FY15 YoY Q4FY15 QoQ Shipbuilding Revenue Core shipbuilding activity continued to decline Trading Revenue NA Absence of Trading revenues Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 1, , The reduction in order book would result in the downward revision of the estimates EBITDA EBITDA Margin (%) bps bps Margins to be maintained at current levels PAT NA NA EPS ( ) NA NA EPS to be impacted by higher interest expenses ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Strategic joint venture, indigenous focus to support PDOECL PDOECL s joint venture (JV) with Mazagaon Dock (MDL) provides scope for the JV to co-bid for the existing order book of MDL, which is upwards of ~$20 billion. Also, PDOECL has formed a strategic partnership with SAAB (part of Wallenberg Group) to enhance its capability to build and provide maintenance of equipment for the Indian armed forces. All this places PDOECL in a very sweet spot as the government focus shifts to buy & make Indian in the Defence Procurement Policy (DPP). Also, as the government has raised the FDI cap to 49% from the present 26% it opens up an opportunity window of ~$12 billion market size of defence orders over the years. Exhibit 1: Indian navy pipeline Segment Category Indicative Items Qnty Size($Bn) Quatity Size ($bn) Navy Helicopters Advanced Light Helicopters Naval Utility Helicopters 56 1 Advanced multi role Naval Helicopters Navalised Aircraft MiG-29K Fighter Aircrafts for IAC 2 Long Range Maritime Patrol Aircraft - Boeing P8-I Medium-range Maritime Reconnaissance Aircraft 6 1 Submarines Midget Submarines Stealth Submarines - Project 75 India (P-75I) 6 8 Warships Survey Training Vessels Project 17 A Frigates Landing Platform/dock (LPD) Survey vessels 6 Off-shore Patrol Vessels 9 Indigenous Aircraft Carriers ASW Shallow Water Crafts 16 2 Mid-Life Upgrades of the Kirch Class Corvettes 5 Sail Training Ship 1 Others mm Gun With EOFCS Autonomous Underwater Vehicle (AUV) Portable diver detection sonar (PDDS) systems Heavy Weight Torpedoes (Surface) Surface Surveillance Radars mm Close In Weapon System Mobile Missile Coastal Battery NTDS 12 Offshore engineering, fabrication provide firm footing PDOECL with its dedicated offshore yard infrastructure of 175 m x 16.9 m of both launching and loading platform together with 280 m long fixed and variable tracks is well poised to serve the strong growing offshore segment. With PSUs like ONGC and OIL together with players such as Gail, Cairn and RIL estimated to spend nearly $10-20 billion over the next three to four years; this provides a footing for the offshore segment business in India. Consequently, PDOECL received orders to the tune of $240 million from ONGC for conversion to mobile offshore production unit and maintenance of rigs. Besides, it has also received an order for rig maintenance from global players such as Trans-ocean and Noble. Going ahead, we believe, as there is significant growth in the oil & gas business, PDOECL can be a direct beneficiary of the same. ICICI Securities Ltd Retail Equity Research Page 3

4 Valuation Key features of acquisition and open offer Reliance Infrastructure together with its wholly-owned subsidiary Reliance Defence Systems Pvt Ltd has decided to acquire 13,00,00,000 equity shares from the promoters of PDOECL at 63/share aggregating to ~18% shareholding in the company with an investment to the tune of 819 crore Reliance Defence Systems, a subsidiary of Reliance Infrastructure, has launched a mandatory open offer to acquire a 26% stake from the public shareholders of the company at 66/share aggregating to 1263 crore In case Reliance Infrastructure is unable to acquire a total shareholding of 25.1%, it will acquire additional shares to the extent of the shortfall from the promoters at 63/share Post the transaction, existing promoters of PDOECL will continue to hold a minority stake in the company, together with two nonexecutive Board seats The acquisition would result in a change in management and control of the company Post completion of the transaction, Anil D Ambani, will become the chairman of PDOECL PDOECL, with one of the largest shipyards in the country, is well placed to take advantage of any policy change towards foreign direct investment (FDI) in the defence segment as the company already has a significant presence in the defence sector. The Government of India has approved 49% FDI in defence and is expediting indigenisation of defence procurement. PDOECL stands at a vantage point for the same owing to its superior infrastructure. FY15 has been a tough year for PDOECL with decline in revenues and EBITDA generation resulting in a loss at PAT level. We expect FY16, FY17 to see improved revenue performance but profitability at the net level remains a concern. PDOECL s long term prospects depend on its ability to get defence shipbuilding orders, which would provide visibility to its revenue stream. With Reliance Infra at the helm, we believe PDOECL is better placed than before to capture the humongous opportunity presented by the indigenisation of Indian defence procurement. We value PDOECL at 2.7x FY17 P/BV to arrive at a target price of 55 with a HOLD recommendation on the stock. Exhibit 2: Valuations Sales Sales EPS EPS PE EV/EBITDA RoNW RoCE ( cr) Growth (%) ( ) Growth (%) (x) (x) (%) (%) FY FY NA FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 4

5 Company snapshot Target Price Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jun-10 PM dedicates Pipavav shipyard to nation Sep-11 PDOECL announces JV with Mazgaon Dock Ltd Jun-12 PDOECL plans to enter into a strategic partnership with French defence company DCNS Dec-12 PE firm Valiant Mauritius Partners sells 1.28% stake in 95.7 Jan-13 PDOECL wins contract from ONGC worth 400 crore May-13 PDOECL wins order worth 595 crore with option to extend value to 1200 crore May-13 SAAB invests 209 crore to acquire 3.33 % stake post investment Jun-13 Wins order for maintenance and dry docking of oil rigs to the tune of 255 crore Jul-13 MDL-Pipavav JV cleared by Defence Ministry of any favouritism Aug-13 PDOECL plans to raise $150 million through London listing Aug-13 PDOECL & L&T consortium win order of $170 million ( 1152 crore) from ONGC Oct-13 Wins order of 14 fast patrol vessels from Coast Guard; order value to the tune of 920 crore Jul-15 Reported Q1FY16 results; Second consecutive loss at EBITDA level Top 10 Shareholders Rank Name Filing Date % O/S Position (m) Change (m) 1 SKIL Infrastructure, Ltd. 30-Jun Infrastructure Leasing & Financial Services, Ltd. 30-Jun LIC Nomura Mutual Fund Asset Management Company L 30-Jun Saab AB 30-Jun Valiant Mauritius Partners, Ltd. 30-Jun Grevek Investment & Finance Pvt. Ltd. 30-Jun Sembcorp Marine Ltd 30-Jun Jhunjhunwala (Rakesh) 31-Dec Export Import Bank of India 30-Jun Sneha Metals Pvt. Ltd. 30-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Rajasthan Global Securities, Ltd. 9.73m 10.33m Emerging Global Advisors, LLC -0.12m -0.21m UTI Asset Management Co. Ltd m -0.16m State Street Global Advisors (US) -0.10m -0.13m SKIL Infrastructure, Ltd m -0.10m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 5

6 Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15P FY16E FY17E Total operating Income 2, Growth (%) Raw Material Expenses Employee Expenses Others Expense Total Operating Expenditure 1, EBITDA Growth (%) Depreciation Interest Other Income PBT Exceptional loss/gain Total Tax PAT Growth (%) NA NA NA EPS ( ) Cash flow statement Crore (Year-end March) FY14 FY15P FY16E FY17E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets , Inc/(dec) in CL and Provisions 1, , Others CF from operating activities , (Inc)/dec in Investments (Inc)/dec in Fixed Assets , Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds , Others , CF from financing activities , Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY14 FY15P FY16E FY17E Liabilities Equity Capital Reserve and Surplus 1, , Total Shareholders funds 2, , , ,499.0 Total Debt 1, , , ,089.5 Deferred Tax Liability Other liabilities & prov Total Liabilities 4, , , ,665.0 Assets 4, , ,428.7 Gross Block 3, , , ,427.0 Less: Acc Depreciation Net Block 2, , , ,428.7 Total Fixed Assets 6, , , ,989.3 Inventory Debtors 1, Loans and Advances Other Current Assets Cash Total Current Assets 3, , ,022.2 Creditors Other Liab & Provisions 1, , Short term borrowing 3, , , ,425.9 Total Current Liabilities 5, , , ,346.4 Net Current Assets -2, , ,324.3 Application of Funds 4, , , ,665.0 Key ratios (Year-end March) FY14 FY15P FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E 1,639.3 NA NA EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 6

7 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 7

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