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MAZAGON IPO Note (Apply)

Review By Rudra Shares & Stock Brokers Ltd on September 28, 2020


Incorporated in 1934, Mazagon Dock Shipbuilders Ltd is the India's leading defence public sector undertaking shipyard under the Department of Defence Production, MoD with a maximum shipbuilding and submarine capacity of 40,000 DWT (Source: CRISIL Report), engaged in the construction and repair of warships and submarines for the MoD for use by the Indian Navy and other vessels for commercial clients.

?It is Wholly owned GoI company, conferred with the 'Mini-ratna-I' status in 2006, by the DPE.

?It is the only shipyard to build destroyers and conventional submarines to be used by the Indian Navy.

Also one of the initial shipyards to manufacture Corvettes (Veer and Khukri Class) in India (Source: CRISIL Report).

The company primarily builds war-ships and submarines for the Indian naval defence. Apart from that, Mazagon also builds merchant-ships, tankers and other similar products

Some of the vessels built and delivered by company in the past include, 6 Leander class frigates, 3 Godavari class frigates, 3 corvettes, 4 missile boats, 6 destroyers, 4 submarines and 3 Shivalik class frigates for the MoD for use by the Indian Navy and constructed and delivered 7 offshore patrol vessels to the Indian Coast Guard. The company has also fabricated and delivered jackets, main decks of wellhead platform, process platforms, jack up rigs etc.

The business has 2 key operating divisions -  Shipbuilding division that undertakes building and repairing of naval ships. Whereas, Submarine and heavy engineering division includes building, repairing, and refitting of diesel electric submarines.

Its shipyard is strategically located on the west coast of India, on the sea route connecting Europe, West Asia and the Pacific Rim, a busy international maritime route. Has headquartered in Mumbai which is also the headquarters of the Western Naval Command of the Indian Navy. Company also 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, company's  Order Book for shipbuilding and submarines and heavy engineering was `54074 crores comprising of 3 major shipbuilding projects and 2 submarine projects. Company's revenues under these contracts are dependent on achievement of certain milestones. In order to diversify its revenue streams, company intend to increase its ship repair activities in the future as such activities are for a shorter period of time and result in the early booking of revenues.


Further, company  have recently undertaken the repair and refit of a ship. Company have in the past undertaken ship repairs for its clients in the defence and commercial sectors. This will help generate more revenues, increase company's client base and reduce its dependency on the MoD for future orders.



Issue Open : 29th September 2020 to 01 st  October 2020

  »»  Issue Type:  Book Built Issue IPO

    »»  Total Issue Size:  Rs 443.69 cr 

   Ü  Offer for Sale:  30,599,017 Equity Shares @ 10 aggregating up to Rs 443.69  cr 

       »»  Face Value:  Rs 10 Per Equity Share 

  »»  Issue Price:  Rs 135  - Rs 145 Per Equity Share 

  »»  Market Lot:  103 Shares 

  »»  Minimum Order Quantity:  103 Shares 

  »»  Listing At:   BSE, NSE



The  share capital of Company, is set forth below:-

                                                                                                                   (Amount in Rs except share data)

Authorized Share Capital :-

   323,720,000 Equity Shares @10 Aggregate value Rs 3,237,200,000

Issued, subscribed and paid up capital before the Offer :-

   201,690,000 Equity Shares @10 Aggregate value Rs 2,016,900,000

Offer for sale: Equity Shares @10 aggregating up to Rs 443.69 cr



The objects of the Offer are:

ØTo carry out the disinvestment plan of 30,599,017 equity shares by selling shareholders constitutes 15.17% of pre-offer equity share capital.

ØTo achieve the benefits of share listing on the stock exchanges.

Company will not receive any proceeds from the Offer and all such proceeds will go to the Selling Shareholder.


Collaborations & Competition

The company has been successful in forging business partnerships with leading technology players and premier government institutions for research and development and providing technical know-how. They have entered into an agreement with National Institute of Design situated at Ahmedabad on June 13, 2014 which provides for studies related to ergonomics and human factors engineering in the context of warship design including design of furniture and interior systems for selected compartments as per marine usage. MDL has also entered into memorandum of undertakings with certain companies for design of ships, supply of equipment, construction and repair of ships.



Company has posted profits continuously over FY17-20, is satisfactorily-

  Company reported 12.25% CAGR increase in consolidated operating revenue to Rs 4977.65 crores in FY20. While, Total operating expenditure increased by 11.6% CAGR over FY17- 20.

  Total income was Rs 4274.86 crores, Rs 5027.62 crores, Rs 5204.67 crores and Rs 5535.30 crores for FY 2017, 2018, 2019 and 2020 respectively.

 Lower other income and higher effective tax expenses led to a 7.27% CAGR fall in reported PAT to Rs 477.06 crores in FY20. PAT margin contracted by 742 bps over the period  and stand at 9.58% in FY20.

The company had generated a negative operating cash flow of (Rs 95.56 crores) in FY 20 compared to Rs 65.23 crores in FY19. Its ROE stand at 15.5% in FY20 as compared to 20% in FY17.



    Expects to benefit from the government's Atmanirbhar Bharat initiative, a post-pandemic financial rescue package, as increase in local manufacturing will aid its order book.

ØBy the end of 2023, all four submarines of the Scorpene plan—jointly developed by DCN of France and Navantia Spain—will be delivered

Ø In fiscal 2020, the company executed value of production worth Rs 5,000 crore and it's expected to grow 8-10% per year.

Ø Repair and pre-fits order contribution to total revenue to increase from 3.5% to 15-20% in next 5 years, which will improve the overall margin profile of the company.

Ø Margins are currently pegged at 7.5% and company remains hopeful that it will increase to 8% under the ministry's defence procurement regulations.


Modernization programme for DPSUs

Government has introduced a modernization programme for DPSUs. Currently, all major Indian warships and submarines under construction are being built in Indian shipyards. These include both DPSUs and private shipyards.

 Mazagon Dock Shipbuilders Ltd has undertaken a modernization programme at a cost of Rs 900 crore (of which`800 crore was provided by GoI and the rest from internal accrual). The modernization included the following facilities :

ØModule workshop with two 50T EOT crane and retractable roof designed for fabrication of large hull blocks, substantially pre-outfitted within a covered environment.

ØGoliath crane with a capacity of 300 tonne with a span of 138 meter straddling over two slipways and the module shop.

Ø New wet basin equipped with about 27,000 sq. meters of area to accommodate two large frigates and two submarines for outfitting.

ØCradle assembly shop, used for fabrication and pre-outfitting of cradle structure in unit block assemblies.

With the programme, MDL is aiming at a paradigm shift in warship construction, i.e., construction from unit assembly to block assembly, enabling integrated modular construction. This would substantially reduce the construction/ building period. Post-modernisation, MDL's capacity for ship building has increased from 8 warships to 10 warships since 2014 and submarine capacity has increased from 6 submarines to 11 submarines since 2016. The submarine-building capacity has been further enhanced by construction of additional submarine section assembly workshop of 9,900 sq. meters. The workshop comprises of 2 bays, equipped with 2 levels of EOT Cranes as well as semi goliath cranes, which will facilitate fabrication as well as assembly of submarine units simultaneously.


Indian commercial & warship building industry

} India's commercial order book to grow at a modest pace of 1-3% CAGR over next 5 years

} Non-cargo segment to drive domestic commercial order book, expected to grow 4-6% CAGR over next 5 years

} Domestic commercial non-cargo order book to pick up by 2021-22

} Impact of policy initiative insufficient to offset weak global commercial demand

} Indian shipbuilding industry to deliver 145,000 - 155,000 tonnes displacement to navy and coast guard by 2021- 22

} Indian shipyards to deliver export orders for foreign clients in defence


Defence shipbuilding order book to grow 8-10% CAGR over the next 5 years:

Indian shipbuilding industry's order book is expected to receive a boost on account of Indian Navy and Coast Guard's ambitious ship acquisition plans- the forces plan to have fleets of 200 ships each till 2020-21. However, constrained capacities of the defence public sector undertakings and weak financial position of private players having defence shipbuilding licenses can prove to be an impediment to the execution of this plan. Some of the key orders of the navy would be:

  • Landing platform docks (LPDs)
  • Anti-submarine warfare shallow water crafts
  • A new generation aircraft carrier of 65,000 tonnes ('IAC-2 Vishal')
  • Mine counter-measure vessels
  • New generation missile frigates and corvettes
  • Conventional submarines with AIR Independent Propulsion (AIP) system (project code name P75-I)



?Export of products to the international markets

?Focus on ship repair

? Augmentation of infrastructure and enhancing its manufacturing capacity

 Improve Automation in our Businesses



?Only public sector defence shipyard constructing conventional submarines

?Increase in indigenisation of its vessels and implementation of the 'Make in India' campaign

?Established track record with strong financial position and strong Order Book

? World class infrastructure capable of serving the requirements of the Ministry of Defence?

? Experienced board and senior management team and skilfully trained workforce



Ø The outbreak of Corona virus, could have an adverse impact on the  business

Ø Delay in project execution. And increased competition

Ø Any decline, delay or reprioritization of funding under the Indian defence budget or that of customers including the MoD for use by the Indian Navy could adversely affect the business.

Ø Future growth and expansion is limited by the location at which it operate.

ØUnfavorable change in defence procurement policy and lower defence budget

Ø High dependency on foreign sources for equipment, weapons, sensors and propulsion systems.

Ø Company has had negative net cash flows from operating activities in the past and may continue to have negative cash flows from operating activities in the future




Conclusion / Investment Strategy

Being an only public sector defence shipyard constructing conventional submarines with a maximum shipbuilding and submarine capacity of 40,000 DWT. As on 31st July 2020, it had healthy order book of Rs 54074 crores, to be executed over next 6-7 years which gives strong revenue visibility ahead. Company plans to increase its ship repair activities in the future (being a higher margin business due to shorter time, resultant an early booking of revenue), could be a big positive which will help to generate more revenues, increase its client base, and reduce its dependency on the MOD for future orders. Currently, ship repair is just 3.5% of total revenue & is expected to reach 15-20% of total revenue in next 5 years. Further, is a cash rich company having no debt, long term visibility of top line growth, attractive dividend yield and healthy ROE of 15% for FY20, will command premium valuations. Though, the company has negative net cash flows from operating activities in FY20, could be a concern. On an upper price band of Rs 145, with EPS at Rs 21.36 for FY 20, the stock is available at a P/E ratio of 6.78x (lower than its industry peers),makes valuation attractive. Hence, we recommend to subscribe the issue for listing as well as long term gains.

Reviewer recommends Subscribing to the issue.

Review By Rudra Shares & Stock Brokers Ltd on September 28, 2020

Review Author

Rudra Shares & Stock Brokers Ltd.

Rudra Shares & Stock Brokers Ltd. is Kanpur based brokerage houses offering services to Retail and HNI customers. Rudra Shares offer a range of financial services which includes institutional and retail brokerage of Equity, Currency, Commodities, Derivatives, Online Trading, Depository Services, Fixed Deposits, IPOs and Mutual Funds Distribution, Wealth Advisory and Research.

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