Mazagon Dock Shipbuilders coming with an IPO to raise upto Rs 444 crore

Mazagon Dock Shipbuilders

• Mazagon Dock Shipbuilders is coming out with a 100% book building; initial public offering (IPO) of 30,599,017 shares of Rs 10 each in a price band Rs 135-145 per equity share. 
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 29, 2020 and will close on October 01, 2020.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 13.50 times of its face value on the lower side and 14.50 times on the higher side.
• Book running lead manager to the issue are Yes Securities India, Axis Capital, Edelweiss Financial Service, IDFC Securities and JM Financial.
• Compliance Officer for the issue is Vijayalakshmi Kumar.

Profile of the company

The company was incorporated in Bombay as a private limited company on February 26, 1934 as Mazagon Dock Private Limited with the Registrar of Companies, Bombay under the Indian Companies Act, 1913. The company was thereafter converted to a public company pursuant to a special resolution passed at an extra-ordinary general meeting dated January 02, 1936. Pursuant to the provisions of section 23 of the Companies Act, 1956 and under order of the Central Government, conveyed by the Ministry of Finance, Department of Company Law Administration by their No. 18 (30)-CL 57 dated October 26/28, 1957, the company was converted into a private limited company and the name of the company was changed to Mazagon Dock Private Limited and a certificate of incorporation was issued by the Registrar of Companies, Bombay on December 10, 1957. Since the company was acquired by the Government of India in the year 1960, it became a government company on May 13, 1960 and the name of the company was changed to Mazagon Dock Limited and a fresh certificate of incorporation consequent to the change of name was issued by the Registrar of Companies, Bombay on December 23, 1960. Further, the name of the company was changed to Mazagon Dock Shipbuilders Limited to reflect its core competencies in shipbuilding and a fresh certificate of incorporation pursuant to the change of name was issued by the RoC on May 28, 2015. Subsequently, the company was converted to a public limited company and a certificate of incorporation consequent upon conversion to a public limited company was issued by the RoC on December 08, 2017.

The company is a defence public sector undertaking shipyard under the Department of Defence Production, MoD with a maximum shipbuilding and submarine capacity of 40,000 DWT, 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 a wholly owned GoI company, conferred with the 'Mini-ratna-I' status in 2006, by the DPE. It is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy. It is also one of the initial shipyards to manufacture Corvettes (Veer and Khukri Class) in India.

The business divisions in which the company operates are (i) shipbuilding and (ii) submarine and heavy engineering. Its shipbuilding division includes the building and repair of naval ships. It is currently building four P-15 B destroyers and four P-17A stealth frigates and undertaking repair and refit of a ship for the MoD for use by the Indian Navy. Its submarine and heavy engineering division includes building, repair and refits of diesel electric submarines. It is currently building/ in the process of delivering four Scorpene class submarines under a transfer of technology agreement with Naval Group as well as one medium refit and life certification of a submarine for the MoD for use by the Indian Navy. Since 1960, it has built a total of 795 vessels including 25 warships, from advanced destroyers to missile boats and three submarines. It has also delivered cargo ships, passenger ships, supply vessels, multipurpose support vessels, water tankers, tugs, dredgers, fishing trawlers, barges and border outposts for various customers in India as well as abroad.

Proceed is being used for:

• Carrying out the disinvestment of 30,599,017 Equity Shares by the Selling Shareholder constituting 15.17% of the company’s pre-Offer paid up Equity Share capital.
• Achieving the benefits of listing the Equity Shares on the Stock Exchanges.

Industry overview

Based on the types of ships built, the Indian shipbuilding industry can broadly be categorised as (i) Large ocean-going vessels catering to overseas and coastal trade; (ii) Medium-sized specialised vessels, such as port crafts, those for fishing, trawlers, offshore vessels, inland and other smaller crafts; (iii) Defence/naval crafts and coast guard vessels. 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. Ship orders from the navy are expected to have a larger share of this order book in terms of DWT, compared with the Indian Coast Guard. In case of the Indian Navy, the orders expected are: warship vessels like corvettes, submarines, etc. as well as patrol vessels and crafts. The category-wise vessel composition of both the Indian Navy and the Indian Coast Guard fleet is expected to remain constant over the next five years.

The Indian government has taken steps to encourage defence shipbuilding in the country. According to PIB, in June 2016, Foreign Direct Investment (FDI) Policy in defence sector has been reviewed. As per the updated policy, FDI of up to 49% is allowed under automatic route and above 49% under Government route wherever it is likely to result in access to modern technology or for other reasons to be recorded. To further the ease of process of approvals, the Government has abolished Foreign Investment Promotion Board (FIPB). Moreover, the government is working on Strategic Partnership Model for creating capacity in the private industry on a long term basis and a policy document shall be released shortly for selection of strategic partners. In line with the government’s vision of 'Make in India', Indian Navy has prepared a guideline document, titled ‘Indian Naval Indigenisation Plan (INIP), 2015-2030,’ to enunciate the need for developing various advanced systems for its platforms. This plan states that the domestic industry can play a vital role in meeting the sophisticated needs of the armed forces through cost-effective utilisation of its know-how and existing infrastructure, in pursuance of the government’s vision of ‘Make in India'.

Pros and strengths

Only public sector defence shipyard constructing conventional submarines: The company is primarily engaged in the defence shipbuilding segment catering to the needs of the MoD. It is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy. It has in the past constructed two SSK submarines, modernized and refitted four SSK submarines. This has enhanced its capability of handling construction of conventional submarines. It has also entered into a technology transfer agreement with Naval Group, France for Scorpene submarines which are currently manufactured by it. It has delivered two of the Scorpene submarines, INS Kalvari and INS Khanderi to the MoD. It along with the Naval Group has trained its workforce in relation to the construction of such submarines. Its personnel associated with submarine construction process are now adept with the nuances of submarine technology.

World class infrastructure capable of serving the requirements of the Ministry of Defence: The infrastructure and facilities available at its shipyard combined with its vast expertise give it a significant edge over its domestic peers. Its facilities currently comprise of three dry docks, two wet basins, three slipways, production shops, assembly shops, module shop with painting chamber for integrated construction, sheet metal shop, pipe shop, machine and fitting shop, ship dry dock and dredging, electrical repair shop and instrumentation shop for its shipbuilding division. Its submarine division infrastructure includes shops for fabrication of frame, sub-section assembly and section formation, cradle assembly shop for structural and equipment outfitting and final assembly, one dry dock and submarine section assembly shop. Its shipbuilding and submarine and heavy engineering divisions are both ISO 9001:2015 certified. In the past, it undertook and completed the ‘Mazdock Modernization Project’ which comprised of a new wet basin, goliath cranes, module workshop, cradle assembly shop, store building and associated ancillary structures enabling integrated modular construction which would substantially reduce the build period.

Location of facilities promotes closer association with vendors, customers: The company’s shipyard is strategically located in Mumbai on the west coast of India, on the sea route connecting Europe, West Asia and the Pacific Rim, a busy international maritime route. Its customers, being the MoD and Indian Coast Guard and its vendors are based in Mumbai which results in closer co-ordination and greater efficiencies. Further, a majority of its subcontractors are based in and around Mumbai which provides it with an ease of access to labour. The location of its facilities provides it a strategic competitive advantage over its peers.

Increase in indigenization of vessels and implementation of the ‘Make in India’ campaign: The company intends to increase the quantum of indigenized components for its warships and submarines in order to give an impetus to the GoI’s ‘Make in India’ campaign. In the past, for its warships and submarines, the company used to import equipment related to design support, model testing evaluation and simulation, major engineering and weapon equipment and systems, equipment related to planning and project management, installations and system integration, due to non-availability of domestic manufacturers. Importing such items and equipments resulted in increased costs, quality compromises and unsatisfactory after sales support. In order to address these issues, a dedicated department of indigenization was set up in November 2015 along with a ‘Make in India’ webpage to boost the Make in India campaign. The entire indigenization process and the list of systems, equipment and items along with the necessary technical details which are to be indigenized have been identified.

Risks and concerns

Predominantly depend on the MoD for defence orders: A significant portion of the company’s Order Book has been awarded to it by the MoD on a nomination basis, which means that such orders have been awarded to it pursuant to floating of tenders by the MoD only to the company except for a recent order which has been awarded to it on a competitive basis. Its Order Book currently comprises of building and construction of four ‘P-15B’ destroyers, four ‘P-17A’ stealth frigates, repair and refit of a ship, four Scorpene class submarines and undertaking the medium refit and life certification of a submarine for the Indian Navy. There is no assurance that it will be selected by the MoD for future defence orders by the MoD on a nomination basis. In addition, the MoD has imposed changes that increase competition with international competitors.

Earnings and margins may vary based on mix of contracts, ability to control cost:  The company’s earnings and margins may vary materially depending on the types of long term MoD contracts undertaken, the nature of the products produced or services performed under those contracts, the costs incurred in performing the work, the achievement of other performance objectives, and the stage of performance at which the right to receive fees is finally determined. Changes in procurement policy favouring new, accelerated or different award fee criteria may affect the predictability of company’s profit rates. Its shipbuilding contracts are fixed price contracts with a variable component for some equipments and its submarine contracts are fixed price contracts. The costs to be incurred by it in relation to any proposed project are forecasted by it at the time of submission of bids as and at the time of entering into such contracts which it typically arrive at on the basis of the final determined price of the most recently executed contracts that are similar in nature, after accounting for inflation costs.

Entire business operations based out of a single yard at Mumbai: The company’s shipbuilding and submarine and heavy engineering divisions are based out of single premises in its yard in Mumbai. Accordingly, it relies exclusively on its facilities at shipyard in Mumbai to earn revenues, pay operating expenses and service its debt. Any significant interruption to, or loss, destruction or shutdown of, operations at its yard in Mumbai would adversely affect business. Its shipbuilding and submarine and heavy engineering divisions may be subject to unexpected interruptions, including from natural and man-made disasters. Its facilities and operations could be adversely affected by, among other factors, breakdown or failure of equipment, difficulties or delays in obtaining spare parts and equipment, power supply or processes, performance below expected levels of output or efficiency, obsolescence, labour disputes, natural disasters, raw material shortages, fire, explosion and other unexpected industrial accidents and the need to comply with the directives of relevant government authorities. Its business operations were temporarily disrupted on account of the temporary shutdown of the shipyard on account of the lockdown imposed by the central/state authorities to combat the spread of infection arising out of COVID-19.

Dependent on MbPT for certain basic services required for daily operations: The company depends on MbPT and the Indian Navy for enabling the movement of its vessels for their docking and undocking from time to time, fitment of certain appendages and for meeting berthing requirements. In particular, the fitment procedure for such appendages cannot be undertaken currently at its premises due to limitation in its infrastructure facilities. There can be no assurance that MbPT / Indian Navy will continue to provide it services in the future on terms favorable to it, or at all. If its relationship with MbPT is negatively affected in any manner or if MbPT/ Indian Navy is unable to provide these services in the future, it may have an adverse impact on its operations.

Outlook

Incorporated in 1934, Mazagon Dock Shipbuilders is the India's leading defence public sector undertaking shipyard under the Ministry of Defence. The company is primarily engaged in constructing and repairing warships and submarines for the MoD and other types of vessels i.e. cargo ships, multipurpose support vessels, barges and border outposts, tugs, dredgers, water tankers, etc. for commercial clients. It is the only shipyard to build destroyers and conventional submarines to be used by the Indian Navy. 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. It has a diversified Board with directors having several years of experience in the shipbuilding as well as submarine division and each of its senior management team is experienced in the industry and has been with company for an average of more than two decades. It is a profitable shipyard with profits continuously in the last three Fiscals. On the concern side, dependency on suppliers for timely delivery of raw materials, equipment and components and non–adherence to the agreed timelines may adversely affect company’s delivery timelines. In the event of a breakdown of an equipment of company’s information technology infrastructure, its ability to access the back-up information critical for its business on a timely basis shall be severely inhibited which may result in slowdown of its operational and management proficiency have an adverse effect on its business, financial condition and the results of operations.

The issue has been offered in a price band of Rs 135-145 per equity share. The aggregate size of the offer is around Rs 413.08 crore to Rs 443.68 crore based on lower and upper price band respectively. On the performance front, the company’s total income increased by 6.35% to Rs 55,353.07 million in fiscal 2020 from Rs 52,046.74 million in fiscal 2019. Its profit for the year decreased by 10.41% to Rs 4,770.59 million in fiscal 2020 from Rs 5,324.74 million in fiscal 2019. The company is in the process of reviving the exports of its defence and commercial products to Latin America, Africa, South East Asia, Middle East and Scandinavian regions and have identified certain defence and civil sectors in such regions. For this purpose, it has entered into agency agreements with sales agents in order to procure customers for its products which it proposes to sell in the identified markets of Europe, Far East, South East Asia, Middle East, Indian Ocean Rimcountries, Latin America and Africa regions. In order to diversify its revenue streams, it intends 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.