Cochin Shipyard's Rs1,468-cr IPO subscribed 76 times

State-run Cochin Shipyard Ltd's initial public offer of shares targeted to raise up to Rs1,468 crore received subscriptions for a total of 2578.9 million shares against the offer for sale of 33.98 million shares, about 75.92 times of the issue size.

The IPO consists of a fresh issue of 22.656 million shares and an offer for sale of 11.328 million shares by The President of India. The issue will constitute 25 per cent of the post issue paid-up equity share capital.

The largest public sector shipyard company in India, Cochin Shipyard has a present equity base of 113.3 million. With fresh issue of 22.6 million the total number of equity shares will go up to 136.0 million.

CSL had fixed the price band for the public issue of 33.984 million equity shares at Rs424-432 per share.

CSL will receive Rs978.74 crore through the fresh issue of shares. It will utilise fresh issue proceeds for setting up of a new dry dock within the existing premises (around Rs443 crore); setting up of an international ship repair facility at Cochin Port Trust area (around Rs229.5 crore) and general corporate purposes.

It is a part of divestment programme announced by the government in the budget.

Cochin Shipyard caters to clients engaged in defence sector in India and clients engaged in commercial sector worldwide. In addition to shipbuilding and ship repair, it also offers marine engineering training.

Cochin Shipyard's top customers include the Indian Navy and the Indian Coast Guard. These top two customers together accounted for a majority share of company's revenue from operations in fiscals 2015, 2016 and 2017, respectively.

Repair business, which is fast growing and has a significantly higher margin, accounts for 40 per cent of CSL's business. The size of opportunity is now pegged at around Rs2,500 crore (current revenue Rs544 crore) over the next 3-4 years. It has been rejecting several orders due to capacity constraints.

The company is now setting up new ship repair facility, which would enable a turnaround of 140 vessels in a year as against 80 vessels currently. Considering the high margin and RoE, this business will boost growth as well as return ratios for the company.

The current shipbuilding facility comprises of 2 dry docks of 255 meters having a capacity of 110000 DWT (Dead Weight Tonne). It is now building additional dry docks of 310 meters, which can built large sized vessels like Aframax or the Capesize ships. This should enable the company to build larger vessels for the India Navy like aircraft carriers.

It is already working on phase-II of its aircraft carrier INS Vikrant, a project worth Rs 20,000 crore. The new facility (to be operational in 30 months) would strengthen its execution capability. It has an order book of Rs 3,000 crore (sales Rs 2,200 crore), which will further grow as it has also placed bids for projects worth Rs 12,000 crore. That apart, it is also looking at phase III of INS Vikrant. The order book does not include the much larger phase III work. Once complete, it will pave the way for the second indigenous air craft carrier.

The company enjoys cost advantage given the fully-depreciated integrated ship building facility. Replacing these assets would be costly. That apart, the business enjoys huge entry barriers and has high switching costs especially, since the key customer is from defence, thereby, protecting the long-term economic interest of the business.