Cochin Shipyard IPO closes - Should you go for it?

The initial public offering (IPO) of state-owned Cochin Shipyard Limited was subscribed 3.16 times on its second day of opening

The IPO is a fresh issue of 22.65 million shares, which at the upper end of the price band will fetch the company over Rs978 crore. There is also an offer for sale of 11.3 million shares. At the upper end of the price band, the government, which is selling 10% stake, will raise over Rs.489 crore

But whether all this makes a good bet to go for it? Let's find out on a simple 3 point criteria

1. Company Business prospects

The company has a strong reputation in the shipbuilding space, particularly in relation to the defence sector. It has been in existence since 1972. In the past it has undertaken repairs of Indian Navy aircraft carriers such as INS Viraat and INS Vikramaditya. It is also building India's first indigenous Aircraft Carrier (IAC) for Indian Navy. It is also one of the few companies with "Miniratna" status

Cochin Shipyard has a credible moat given that it receives preferential orders from the Indian navy and the coast guard. Being a Government of India company it also receives some confidential orders which can not be given to private players

2. Financials

The company's average five year ROE and ROCE were 16.1% and 24.7% respectively. Current ROE and ROCE stand at 16.2% and 23.9% respectively

The company's revenue increased at a CAGR of 5.7% in last five years. However this growth seems impressive, given the poor health of the shipbuilding industry, excess supply, low demand and volatility in crude prices

Moreover, the company is effectively debt free and has cash and cash equivalents of around Rs 2,000 crores against estimated capital expenditures of around Rs 2,000 crores over 3-4 years after adjusting for IPO proceeds

3. Pricing

The company has set a price band of Rs. 424 to Rs.432 per share for the initial share sale. One of the tempting features especially for Retail investors is the special discount of Rs.21 per equity share which will in turn reduce the cost per share Rs.411 per share assuming allotment is made at upper end of price band.

The company is best profit making one in the shipbuilding industry since all of its listed peers have negative earnings and are highly leveraged whereas Cochin Shipyard would have a PE ratio of 18.8 times which is fairly justified

This price is also clearly attractive for listing gains considering already high grey market premium running through

Verdict

Considering that the company ticks most of the boxes, investors may not want to miss this ship!