Shift from 2012 to 2014

MAZAGON DOCK IPO

(ZEE BUSINESS)

BASIC DETAILS ABOUT IPO (29 Sep- 1 Oct 2020)
Price Band	135-145
Bid Lot	103
Particulars	In Cr
`OFS (Amount)- AT  Upper Band	443.7
OFS (Shares)- cr	3.0599017
Total issue amount- AT Upper Band	443.7
Post issue Implied Market Cap-cr	2924.5
Post issue (Shares)	20.169
Book running  lead managers: Yes Securities, Axis Capital, Edelweiss, IDFC, JM Financial & Alankit

BASIC FINANCIALS (P&L& Cash Flows)
(Amount in cr)	FY20	FY19	FY18
Revenue from Operation	4997.6	4614.0	4470.4
Growth	7.9%	3.2%	27.0%
EBITDA- Ex Other Income	268	260.8	154.7
Margin	5.4%	5.7%	3.5%
PAT( Including – Other Income)	477.1	532.5	496.2
Margin	9.6%	11.5%	11.1%
PAT (Ex- Other Income)	186.1	175.4	149.0
Margin	3.7%	3.8%	3.6%
COMC as % of Revenue	50.3%	55.4%	60.2%
PAT( Including – Other Income) and excluding Non-Recurring expense *	646.3	532.5	496.2
Margin	12.9%	11.5%	11.1%
Other Income as % of Revenue	11.2%	12.8%	12.5%
Employee cost % of Revenue	15.9%	14.9%	19.8%
Subcontract  expenses % of Revenue	14.9%	3.8%	7.2%
Share of Net Profit of associates % of PAT	19.6%	11.7%	20.7%
CFO	-95.6	65.2	490.8
FCF	-205.1	-106.6	297.8

 

BASIC FINANCIALS (Balance sheet)
(Amount in cr)	FY20	FY19	FY18
PPE	831.2	787.3	676.9
% of Total Assets	4.0%	3.8%	3.5%
Inventory	4622.7	3790.3	3786
% of Total Assets	22.0%	18.2%	19.5%
Cash and Bank	5798.3	7469.6	7189.6
% of Total Assets	27.7%	35.8%	37.1%
Other CA	5972.6	4216	4105.5
% of Total Assets	28.5%	20.2%	21.2%
Trade Receivable	1458.8	1472.9	1113.4
% of Total Assets	7.0%	7.1%	5.7%
Contract liability	11383	12949.9	12338
% of Total Assets	54.3%	62.1%	63.7%
Equity	3069.1	3216.9	2834.1
% of Total Assets	14.6%	15.4%	14.6%
Trade Payable	4750.7	2898.6	2377.7
% of Total Assets	22.7%	13.9%	12.3%

 

Segmental Information
(in cr)- Revenue from	FY20	FY19	FY18
Ship Construction	4422.4	3952.6	4368.2
% of Total Revenue	88.7%	85.7%	97.7%
Sale of base and depot spars	388.9	651.9	99.2
% of Total Revenue	7.7%	14.1%	2.2%
Ship Repair	158.9	3.13	-
% of Total Revenue	3.5%	0.08%	-
Other Operating revenue	7.46.	6.3	3.0
% of Total Revenue	0.1%	0.12%	0.1%

 

*Due to change in Tax regime from 35% to 25% Deferred Tax assets have been charged to FY20 to the extent of 160cr and exceptional item of 12cr which is removed.

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PEER COMPARISION

Name	EPS	NAV	PE	RoNW	PB	EBITDA Margin-Ex Other Income	Sales growth 2017-2020	PAT growth 2017-2020	Book/Bill
Mazagon Dock	32*	152.17	4.5*	15.54	0.95	5.4%	41.4%	8%*	10.8
Coachin Shipyard	48.05	283.02	7.60	16.98	1.12	20.8%	66%	98%	4.4
Garden reach Shipbuilders 2018-2020*	14.27	90.81	14.9	7.01	1.91	2.6%	6.4%	77%	18.5

*Excluding One offs which include Deferred tax asset written off and exceptional item due to Covid19.

MANAGEMENT/Shareholding

Promoter shareholding will reduce from 100% to 84.83% held by President of India through Ministry of Defence i.e. GOI.

Vice Admiral Narayan Prasad (In Retd)- Chairman and MD

He was commissioned into the Indian Navy as an Engineering Officer in July 1983 and holds a Masters Degree in Mechinal Engineerng and MPhil in defence and strategic studies.He is alumini of Sainik School, National Defense Academy Pune and college of Naval warefare Mumbai. He has served onboard frontline warships Talwar, Ranjit and Rana etc.

 

Rear Admiral Anil K Saxena- Director Ship Building

Holds a diploma in naval construction from Indian Institute of Technlogy, Delhi, a master degree of in management studies. He is also a member of Lloyds register naval ship technique and served Indian Navy for about 35 years.Held appointments in the directorate of naval architecture and diroctrate of ship production of Indian Navy.

 

BUSINESS

Company is a defence public sector undertaking shipyard under the Department of Defence Production with a maximum shipbuilding and submarine capacity of 40,000 DWT (Deadweight Tonnage).

Business Divisions include Shipbuilding & Submarine and heavy engineering.

Shipbuilding division include the building and repair of naval ships.

Submarine and heavy engineering  division include building, repair and refits of diesel electric submarines .

Key Business Highlights

·         Since 1960 company built a total of 795 vessels including 25 warships, from advanced destroyers to missile boats and three submarines

·         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

·         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.

·         Some of the vessels built and delivered by us in the past include, six Leander class frigates, three Godavari class frigates, three corvettes, four missile boats, six destroyers, four submarines and three Shivalik class frigates for the MoD for use by the Indian Navy .

·         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

Financials

·         100% of Orders are from Ministry of Defence (MoD) with 93% constitutes Shipbuilding, with such a heavy order book at FY20 Revenue company has visibility for 11 years even if no new order is received i.e. Book to Bill Ratio of 10.8 times, However with the latest Developments in Defence sector in India banning 101 defence items and current situation on Order with Make in India order inflow won’t be an issue.

·         Management in its presentation told that bulky Order book of 54173cr will get executing in 6-7 years from FY21 and Mind it Management belongs who served for Indian Navy so their words  can be trusted although if and buts on situation likely but on the face their words can be vouched for.

·         Also currently Ship Repair is just 3.5% of Total revenue which management told is aiming to reach at 15-20% of Total revenue in 5 years time.

 

 

 

Particulars	Nos.	Client	Value in Cr	Time Expected
Shipbuiding				6-7 years
P15B Destroyers	4	MoD	26385
P17A Stealth Frigates	4	MoD	23649
Repair,refit	1	MoD	110
Submarine and heavy engineering
P75 Scorpene submarines	4	MoD	3202
Medium Refit and Life Certificate of a submarine	1	MoD	827	15% of Total revenue in 5 years.
Total Order Book	14	MoD	54173

 

 

 

 

 

 

 

 

 

·         With the PAT margin Excluding one off of FY20 at of 12.9% and using the above two points even at the current PE of just 4.5 what I am looking is EPS of 42.8 (Keeping FY21flat and PAT margin at 12%) in 5 years , Market Price comes at 193 i.e. at least 33% upside from here even at PE of 4.5.

·         As company is always Cash Rich , as company receives money in advance for executing the contract  which could be seen as Contract liabilities which was as on 31 March 2020 54.3% of Total Assets or which was 11383.1cr i.e. 2.4 times of Total expenses company did in FY20.

·         And Hence company company is able to pay very healthy dividend each year i.e. For FY20,Fy19 & FY18 Dividend per share was 10.7,4.5 & 10.9 respectively and 145rs dividend yield comes to 7.5%.

·         Now if company is such cash rich why FCF or CFO is deteriorating, Its answer lay in Decreasing Contract liabilities.

However for FY18 Trade payable shot up from 913cr to 2377.7cr which helped in offsetting to a large extent followed by Increase in other current assets (Which include Advances paid to Vendors).

·         Companies management told that when they have completed 10% of Contract they have already received 35% of Total Contract cost which is apparent from heavy Contract Liabilities.

Particulars  (in Cr)	31.03.2020	31.03.2019	31.03.2018	31.03.2017
Contract Liability	11383.1	12949.9	12338.1	13759.6
Change	-1566.8	611.8	-1421.5	-
Trade Payable	4750.7	2898.6	2377.6	913.8
Change	1852.1	521	1463.8
Other Current Assets	5972.6	4216.0	4105.5	2973.6
Change	1756.6	110.2	1131.9	-
CFO	-95.6	65.2	490.8	-1002.7

 

·         Excess is the amount left with the company From Advances received from Customer and Advances paid to vendors and thus you see company is left with extra amount which is deposited in Bank and significant interest is earned which could also seen as heavy other income as % of Revenue. Now it is not something which is exceptional to the company it is for every company in similar line of business.

Particulars (in Cr)	31.03.20	31.03.19	31.03.18	31.03.17
Advance from Customer	11383.1	12949.9	12338.1	13759.6
Advance to Vendors	5969.2	4193.4	4090.3	4961.4
Excess	5413.9	8756.5	8247.8	8798.2
Bank Balance-Ex Cash	5315.0	6740.0	6816.0	8220.0
Net Interest earned	514.0	524.7	480.9	629.8

 

·         Needed to highlight share in profit from Associate Company/Group Company from Goa Shipyard Limited and also Interest income together which account for significant part of Total revenue.

·         Decreasing % of Interest and Net profit from associate shows  company’s growth in its core standalone business on one hand but also shows companies profit numbers are heavily dependent on it but according to the nature of business it normal norm.

Particulars	31.03.20	31.03.19	31.03.18	31.03.17
PAT                                                                                  A	477.1	532.5	496.1	598.2
Interest Income+ Share of Net Profit Associate- With tax effect        B	315.8	352.0	350.0	445.0
B/A	66.2%	66.1%	70.6%	74.4%
Revenue from Operation- Total expenses	190.1	187.0	93.3	74.7

 

·         Cash Conversation Cycle ( CCC) has been improving YoY from 264 days in FY18 to Just 136 days in FY20.To be noted specifically is high Inventory days and rising Creditor days.

·         High Inventory days is due to Equipment’s  for specific projects as already highlighted Contract Liabilities which is Advance from Customers and hence it seems logical to buy equipment’s for the projects under construction.

Particulars	FY20	FY19	FY18
Inventory Days	309	300	320
Debtor Days	108	103	79
Creditor Days	281	209	135
CCC	136	194	264
Inventory	4623	3790.3	3786
Equipment for specific project % of Inventory	79.6%	94.4%	87.0%

 

PRO’s

·         Long History which dates back to 1774, However incorporated as Pvt Ltd in 1934 and tookover by Government in 1960 and got its Mini-Ratna Status in 2006.

·         Since 1960 company has built 795 vessels including 25 warships and 3 submarines & Company is the only shipyard to build destroyers and conventional submarines to be used by Indian Navy.

·         Company’s management includes Retired Personnel from Indian Navy which has vast experience thus strong management.

·         Company’s Revenue from Operation grew by 41.4% from FY17 to FY20 and PAT (Excluding on off and exceptional) grew with the same time frame by 8%.

·         Companies valuation are very attractive with PE of just 4.5(Excluding on off and exceptional), PB less than 1, Mcap/sales just 0.52 times, Debt free , Dividend yield as high as 7.5% and Cheap if compared to its peers with Cash Conversation reducing from 264 days in FY18 to 136 days in FY20

·         Companies Book to Bill is as high as 10.8times with strong commentary by management on execution to be done within 6-7 years, with that calculation in 5 years companies EPS is expected to reach to 42.8 and even with such a low PE market price arrives at 193rs i.e.at least 33% rise from 145.

·         Company gets contract on Hybrid basis i.e. of the Total cost 45% is fixed while 55% is Variable hence ensures company earns profit over cost.

  CON’s

·         100% of Companies order book is from MoD thus lacks diversification.

·         Company is in non compliance of the provision of Section 149 related to Women Director.

·         Company has contingent liabilities to the extent of 1154.1cr for sales tax

·         Even after OFS GOI holding still stands at as high as 84.8% thus overhand of further OFS is always sideby.

·         MoD has fixed margin of 7.5% so upside in improving PAT margin gets capped in a sense and as Volume of Order increase might carry a risk of Downward revision of margin.

·         Interest Income+ Share of Net Profit from associates stands as % of Revenue stands as high as 66% of PAT (With Tax effect) although dependence reduced from 74.4% but still remains high. However it is be noted that High interest income is normal in the Industry Company operates.

·         Any adverse effect of around 6 litigations pending against company under civil proceedings might affect the company. (litigation matter like- Company has discriminated the members of the Petitioner in respect of payment of revised gratuity ) and CMD also has been made party to certain Civil Proceedings.