Cochin Shipyard IPO – Should you Invest in this IPO?

 Cochin Shipyard IPO - Should you Invest in this IPOCochin Shipyard IPO – Should you Invest in this IPO?


Cochin Shipyard IPO would open for subscription on 1st August, 2017. Cochin Shipyard Ltd is the largest public sector shipyard in India in terms of dock capacity. Its revenues grew at just 5% CAGR in last 5 years. It earned good profits of 14% for FY17. It has unique business model which is attracting investors to invest in this IPO. What are the positive factors in Cochin Shipyard IPO? Are there any hidden factors in Cochin Shipyard Ltd IPO?  Is Cochin Shipyard IPO Price is reasonably priced? In this article, I would provide some interesting insights and do Cochin Shipyard Limited IPO Review.

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About Cochin Shipyard Cochin Shipyard Ltd


They are the largest public sector shipyard in India in terms of dock capacity, as of March 31, 2015, according to the CRISIL Report. They cater to clients engaged in the defence sector in India and clients engaged in the commercial sector worldwide. In addition to ship building and ship repair, they also offer marine engineering training.

As of May 31, 2017, they have two docks – dock number one, primarily used for ship repair and dock number two, primarily used for shipbuilding. Its Ship Repair Dock is one of the largest in India and enables us to accommodate vessels with a maximum capacity of 125,000 DWT. Its Ship building Dock can accommodate vessels with a maximum capacity of 110,000 DWT.

They are in the process of constructing a new dock, a ‘stepped’ dry dock. This stepped dock will enable longer vessels to fill the length of the dock and wider, shorter vessels and rigs to be built or repaired at the wider part. They are also in the process of setting up an International Ship Repair Facility, which includes setting up a shiplift and transfer system.

In the last two decades, they have built and delivered vessels across broad classifications including bulk carriers, tankers, Platform Supply Vessels, Anchor Handling Tug Supply vessels, launch barges, tugs, passenger vessels and Fast Patrol Vessels.

They are currently building India's first Indigenous Aircraft Carrier for the Indian Navy. They have also grown its ship repair operations and are the only commercial shipyard to have undertaken repair work of Indian Navy's aircraft carriers, the INS Viraat and INS Vikramaditya.

Cochin Shipyard IPO Issue details


  • IPO open date: 1-August-2017
  • IPO close date: 3-August-2017
  • Face Value: Rs 10 per share
  • Issue price band: Rs 424 to Rs 432 per share. There is discount offered for Rs 21 to Retail Investors and employees of Cochin Shipyard Ltd. Such discounted price band is Rs 403 – Rs 411.
  • Issue size: Rs  1,454
  • Cochin Shipyard IPO Lot size: 30 shares and in multiples of 30 shares there-of.
  • Minimum investment: Rs 12,960 on higher price band
  • Leading Managers: SBI Capital Markets, Edelweiss Financial Services and JM Financial Institutional Securities
  • Listing: BSE / NSE
  • Download Cochin Shipyard IPO RHP Prospectus at this link.

Objects of the Cochin Shipyard Ltd IPO issue


1) The Offer for Sale: Company will not receive any proceeds from the Offer for Sale by the Selling Shareholders and the proceeds received from the Offer for Sale will not form part of the Net Proceeds.

2) Setting up of a new dry dock within the existing premises of the Company;

3) Setting up of an international ship repair facility at Cochin Port Trust area and

4) General corporate purposes.

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Company Financials (reinstated)


1) The company generated revenue of Rs 1,766.7 Crores for the year ended Mar-13 and Rs 2,208.5 Crores for the year ended Mar-17.  

2) The company posted profit of Rs 266.3 Crores for the year ended Mar-13 and profit of Rs 312.1 Crores for the year ended Mar-17.

3) Its restated basic EPS for FY ending Mar-17 is Rs 27.56 and last 3 years weighted EPS was Rs 23.38.

Financials of Cochin Shipyard Ltd IPO-min

What are Cochin Shipyard Key Strenghts?


Here are Cochin Shipyard strengths.

1) One of India's leading public-sector shipyards catering to both commercial clients as well as clients engaged in the defence sector with a multitude of offerings for a broad range of vessels across life cycles.

2) Modern facilities and infrastructure and integrated capabilities to deliver quality products and services Order book with a strong customer base of reputable ship owners and marquee clients.

3) Competitive cost structure and efficient operations Led by a dedicated board, long serving and experienced senior management backed by a strong pool of experienced professionals.

4) Continuous profits leading to robust financial performance.

What are its Key Strategies?


Company is focusing on few key strategies.

1) Expand its capabilities through its proposed Dry Dock and International Ship Repair Facility.

2) Build a strong order book by bidding vigorously for projects to be awarded by the Indian PSUs and defence sector pursuant to ‘Make in India’ initiative.

3) Continue to enhance its construction quality and delivery time and enhance its price competitiveness in order to increase market share

4) Strengthen its market leadership by continuously adding upgraded and new vessel models to its offerings and expanding customer services.

5) Continue to leverage its market position and relationships with customers, suppliers and other business partners to support company growth and improve its competitiveness.

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Reasons to invest in Cochin Shipyard IPO


1) Its revenues are growing consistently. Its revenues grew at 5% CAGR in last 5 years. However there is dip in revenues in FY15.

2) Its posting decent margins of 14% to 15% in the last 4 out of 5 years. However in FY15 it earned low margins.

3) It has unique business model. It is one of India's leading public-sector shipyards catering to both commercial clients as well as clients engaged in the defence sector.

Risk Factors / Reasons not to invest in a Cochin Shipyard Ltd IPO


Worldwide demand and pricing in the commercial shipbuilding industry are highly dependent upon global economic conditions. If the global economy fails to grow at an adequate pace, it may adversely impact the commercial shipbuilding industry which may negatively affect its business, financial condition and growth prospects.

Loss of any of its major customers or a reduction in their orders, or failure to succeed in tendering for shipbuilding or ship repair projects for the Indian Navy in the future, despite its previous track record will have a material adverse impact on our business, financial condition, results of operations and growth prospects as we are dependent on a few of its major customers.

Company cannot assure that its proposed Dry Dock or International Ship Repair Facility will become operational as scheduled, or at all, or operate as efficiently as planned. They have not, as on date of this Red Herring Prospectus, obtained certain licenses or approvals for its proposed ISRF project for which funds are being raised through the Issue. Company shall transfer the Net Proceeds assigned for the proposed ISRF project to a separate bank account and shall incur all expenditure on the ISRF project through internal accruals till the time such pending approvals are received. Further, if they are unable to commission its new proposed Dry Dock or the ISRF in a timely manner or without cost overruns, its business, results of operations and financial condition may be adversely affected.

The cost estimates by the Dry Dock Project Consultant and the ISRF Project Consultant have been derived from and benchmarked against similar maritime and dry dock/shipyard projects carried out by the Dry Dock Project Consultant and the ISRF Project Consultant respectively in recent years and may not be accurate.

They could incur losses under its fixed price contracts as a result of cost overruns, delays in delivery or failures to meet contract specifications which may have an adverse effect on its business, financial condition and results of operations.

The environmental clearances for its proposed Dry Dock and ISRF project is subject to the final order in the matter of Goa Foundation v. Union of India and amongst others for ISRF project, the prior clearance of the Standing Committee of the National Board for Wildlife.

Its entire business operations are based out of a single shipyard at Kochi. The loss of, or shutdown of, its operations at its shipyard in Kochi will have a material adverse effect on its business, financial condition and results of operations

There are outstanding legal and tax proceedings involving Company. Further, in one of the outstanding legal proceedings, the Chairman and Managing Director of its Company has also been made a performa party. Any adverse decision in such proceedings may expose to liabilities or penalties and may adversely affect its business, financial condition, results of operations and cash flows.

Its operations expose to potential liabilities that may not be covered by insurance or greater than its existing insurance cover. As a result should it incur substantial liability which its insurance does not cover business, financial condition and results of operations may be adversely affected

They have negative net cash flows in the past and may continue to have negative cash flows in the future.

Other risk factors (Internal and external) can be viewed in the draft prospectus.

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Recommendation / Investment strategy – Cochin Shipyard IPO


1) On the upper price band of Rs 428 and on FY17 EPS of Rs 27.5, P/E ratio works out to 15.5x. Even based on last 3 years EPS of Rs 23.38, P/E ratio works out to 18.3x. Means, company is asking higher price band of Rs 428 in the P/E ratio of 15.5x to 18.3x. Its listed peers like Reliance Defence and Engg, ABG Shipyard and Bharati Defence are incurring losses, hence we cannot compare their P/E ratio wit this company. We also cannot ascertain whether Cochin Shipyard IPO Price is under priced or over priced as there is no comparison with its peers.

2) Company revenues grew at 5% CAGR in last 5 years. It earns good profits in the last 4 out of 5 years. Its IPO price cannot be ascertained whether under priced or over priced. Investors with high risk appetite can invest in this IPO for 2-3 years time frame. If one can get good listing price, they can do party.

Disclaimer: I have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

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Suresh

Cochin Shipyard IPO – Should you Invest in this IPO

Suresh KP

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