The government is selling 15.17 per cent in the defence PSU, which is the only dockyard building destroyers and submarines for Indian Navy and Indian Coast Guard, to raise a maximum of about Rs 444 crore.
The price band for the IPO has been fixed at Rs 135-145 per equity share, with lot size at 103 shares. The company will offer up to 3,05,99,017 shares through an offer for sale, which includes a reservation of 3,45,517 shares for eligible employees.
Some analysts believe investing in the company not only will get listing gains but the profit could be more after some time. At the upper price band of Rs 145, Mazagon Dock is available at a price to earning multiple of 6.1 times, which is at a discount to the peer average of 9.3 times, making it look more attractive, they said.
In the grey market, unlisted shares of the company were trading at a premium of about Rs 125-130, translating into a premium of about 90 per cent.
Here is what brokerages say about the issue:
Geojit Financial: Subscribe
Analysts at Geojit Financial Services have a ‘subscribe’ rating on the IPO, considering strong technological and execution capabilities, healthy order book and attractive dividend yield.
They said the current order backlog is Rs 54,074 crore, which is 10 times FY20 sales and provides a strong visibility. Moreover, the new defence procurement policy 2020 is expected to accelerate indigenisation, which is a positive for the domestic defence industry, they added.
LKP Securities: Subscribe
The brokerage noted that the company has grown at 9 per cent CAGR over the last four years at the topline, while its stated EBITDA margins were reported at 8.5 per cent in FY20. The company has a strong balance sheet, 15% ROE and >100% dividend payout in FY20, it said.
“The stock is valued at 6.7 times FY20 earnings of Rs 21.4, which looks quite attractive considering its healthy order book, long-term visibility of top line growth, competitive edge, profitability, return ratios and dividend payout policy. We recommend investors to subscribe with a target of Rs 250 over a time horizon of six months,” said Ashwin Patil, an analyst at LKP Securities.
Choice Broking: Subscribe with caution
Based on the margin profile and return ratios, analysts at Choice Broking said the asked valuation is justified. “Defence manufacturing has huge potential in the long run and with the sector liberalization, the company may have some concerns in the long run but not in the medium term,” it said.
However, the brokerage is cautious on the issue considering the performance of defence companies post listing.
Samco Securities: High risk bet
Nirali Shah, Senior Research Analyst, Samco Securities, said the issue appears to be a decent pick from a listing gains perspective. Being a dominant player, it is undervalued from a valuation perspective, but she outlines that there are certain risks as well.
“With high barriers to entry, Mazagon is also debt-free and enjoys a few perks due to its proximity to the coasts of Mumbai. Financially, the topline has seen decent growth. However, the bottomline isn’t growing at the same pace,” Shah said adding there could also be a delay in funding from the Indian defence budget or risks of cost and time overruns due to government dependency that puts it at a higher risk.
Hem Securities: Subscribe
The broker sees strong revenue visibility and its plan to increase ship repair activities, which is comparatively higher margin business due to shorter time and early booking of revenue model as big positives.
“Along with stable business of the company, we find the valuation reasonable at which company is bringing the issue. Hence, we recommend ‘subscribe’ to the issue for listing gains as well as long-term horizon,” said analysts at Hem Securities.
SMC Global: Fair (three stars out of five)
The broker counted monopoly in building defence ships, prime location of the dockyard, increase in indigenisation of its vessels and strong order book as strength. At the same time, its dependence on the Ministry of Defence, imposition of liquidated damages and invocation of performance bank guarantees/indemnity bonds by its customers and expansion constraints due to its location in Mumbai are some of the weaknesses.