pipv: at inflection point - motilal oswal · at inflection point momentum in defense orders would...
TRANSCRIPT
Satyam Agarwal ([email protected]) +91 22 3982 5410
Pooja Kachhawa ([email protected]) +91 22 3982 5585
Pipavav Defence & Offshore
At inflection point
2 March 2012
Initiating Coverage | Sector: Defense
Pipavav Defence
22 March 2012
PIPV: At inflection point
Page No.
Summary ..............................................................................................................3
India's growing defense expenditure presents a huge opportunity ............... 4-7
PIPV is suitably positioned ............................................................................ 8-15
Expect steady growth in earnings ............................................................... 16-17
Appendix I: Largest Maritime Infrastructure in India ....................................18
Appendix II: Defense procurement procedure, 2011 .......................................19
Appendix III: Aspects of India's Defence Procurement Categories ...............20
Appendix IV: Offsets mechanism ............................................................... 21-22
Financials and valuation .............................................................................. 23-24
At inflection pointMomentum in defense orders would result in re-rating; Buy
PIPV enjoys early mover advantage and best-in-class infrastructure in the defense
shipbuilding segment. It has strong strategic partnerships with international players
and a robust order book of INR67b (4.5x TTM revenue).
Key events to monitor: JV with Mazgaon Dock, ongoing negotiations with friendly
countries for naval exports, 'offset' opportunity, attempt to emerge as an integrated
defense player (including army and airforce). Increased visibility on these opportunities
will lead to re-rating possibilities, while there could be volatility in the interim period.
The stock is available at a market capitalization of INR50b, below its replacement cost
of INR67b. We initiate coverage with a Buy rating.
India's growing defense expenditure presents a huge opportunity: Given the
~USD200b expected allocation to defense capital expenditure for the period
2012-2017, India is set to ramp up its naval capabilities meaningfully. With its
'Buy Indian, Make Indian' initiative, the Ministry of Defense (MOD) is increasing
stress on indigenization. The Ministry also envisages a greater role for the private
sector, which should benefit established players like PIPV.
PIPV is suitably positioned - has first mover advantage, strong international tie-
ups: PIPV enjoys first mover advantage and best-in-class infrastructure in the
shipbuilding segment. It operates the second largest shipbuilding capacity in
the world. PIPV uses modular construction technology, with two 600MT Goliath
cranes, which enables it to reduce the construction and delivery time of vessels.
Further, it enjoys strong strategic partnerships with several international players,
which should aid robust warship order booking in the near future. MOD's growing
stress on indigenization and its Mazgaon JV should boost order intake.
Capacity utilization increasing; expect revenue CAGR of 40% over FY12-14: PIPV's
current capacity, which is currently USD1.7b (in terms of revenue potential), is
likely to shoot up to USD2.5b once the second dry dock becomes operational by
2014. In FY11, capacity utilization stood at USD170m (10% of total capacity). We
now expect capacity utilization of USD360m (22% of total capacity) in FY12. We
expect revenue to grow at a CAGR of 40% over FY12-14. Our earnings estimates
largely factor in execution of the existing order book of USD1.3b. We have not
factored in possibilities of increased defense orders.
Initiating coverage with a Buy rating: We believe that PIPV is well placed to
exploit the massive opportunity that India's defense sector offers in the next
few years. It has global-sized assets and best-in-class tie-ups. Also, PIPV offers
the only credible large-size exposure for investors to India's defense business.
We estimate net profit at INR532m for FY12 and INR809m for FY13, translating
into an EPS of INR0.8 for FY12 and INR1.2 for FY13. We value PIPV based on
replacement cost method at INR67b (INR100/sh). Initiate coverage with a Buy.
Stock performance (1 year)
Shareholding pattern % (Dec-11)
Bloomberg PIPV IN
Equity Shares (m) 665.8
52-Week Range (INR) 93/50
1,6,12 Rel. Perf. (%) 4/5/-5
M.Cap. (INR b) 50.7
M.Cap. (USD b) 1.0
Y/E March 2011 2012E 2013E
Sales (INR b) 8.6 18.2 24.6
EBITDA (INR b) 1.5 4.2 6.1
NP (INR b) 0.4 0.5 0.8
EPS (INR) 0.6 0.8 1.2
EPS Gr. (%) -181.3 33.9 52.2
P/E (x) 127.9 95.5 62.7
P/BV (x) 2.9 2.6 2.3
EV/EBITDA (x) 43.7 18.2 12.8
EV/ Sales (x) 7.8 4.2 3.2
RoE (%) 2.3 2.9 3.9
RoCE (%) 4.9 7.7 9.1
Domestic
Inst, 19.1
Others,
22.4
Foreign,
15.1
Promoter,
43.3
3
Pipavav Defence & Offshore
CMP: INR76 TP: INR100 BuyBSE Sensex S&P CNX
17,584 5,340
2 March 2012
Initiating Coverage | Sector: Defense
506274
8698
Feb
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Au
g-11
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Pipavav DefenceSensex - Rebased
Pipavav Defence
42 March 2012
India's growing defense expenditure presents a hugeopportunityMinistry of Defense stressing on indigenization, welcoming private sector
Apart from the ~USD200b allocated to defense capital expenditure for the period 2012-
2017, India is set to spend ~INR600b over the next five years on improving its military
infrastructure and another INR600b on the Mountain Strike Corps.
With its 'Buy Indian, Make Indian' initiative, the Ministry of Defense is increasing stress on
indigenization. It intends to increase procurement from Indian companies from the current
30% to 70% in the next five years.
The Ministry also envisages a greater role for the private sector, which should benefit
established players like PIPV.
The approval of the guidelines for the formation of JVs between state-owned defense
entities and private sector organizations by the Union Cabinet will help accelerate the
process.
Geopolitical challenges underscore need for stronger defense capabilitiesGrowing geopolitical challenges have made the Government of India realize the vital
need to strengthen its defense capabilities. India is located at a prime position in the
Indian Ocean, with over 7,517km of coastline. In addition to the challenge of protecting
its sea-facing boundaries, India also shares long, contested borders with two nuclear-
armed neighbors - Pakistan to the West, and China to the East.
Recently, China entered into an agreement with Seychelles, which will allow the
Chinese navy to re-supply and recuperate its vessels there. Due to its strategic location
just off the coast of Africa/Madagascar, this base will give China direct access to the
West Coast of India. In addition, China has a naval base in Myanmar and is building a
commercial port in Sri Lanka. Recognizing these threats, the Government of India is
continuously making efforts to ensure its naval security in the Indian Ocean, which in
turn will lead to demand for better quality defense vessels.
Indian sea trade accounts for ~90% by volume and ~77% by value of India's aggregate
trade. The Indian economy is dependent on the sea for oil & gas exploration and
production, commercial trade, etc. Thus, the stability of the Indian sea trade is
becoming increasingly important. Protecting India's maritime assets is more crucial
than ever before.
India's growing defense expenditure presents a huge opportunityIndia is set to spend ~INR600b over the next five years on improving its military
infrastructure. It is spending another INR600b on the new Mountain Strike Corps in
the North East. Both these outlays are in addition to the estimate of ~USD200b
allocated to defense capital expenditure for the period 2012-2017. Due to the 'Buy
Indian, Make Indian' policy put in place by the MOD, a large part of this sum will go to
domestic companies. Even in case of imports, there is an offset clause that benefits
domestic companies. For any defense contract for capital purchases of over USD60m
(INR3b), the foreign vendor is required to allocate 30% of the contract value to Indian
players, primarily in the defense, internal security and civil aerospace sectors.
According to the Ministry of Defense (MOD), there could be an offset opportunity of
USD15b over the next five years.
China-growing nautical danger
According to the Ministry
of Defense (MOD), there
could be an offset
opportunity of USD15b
over the next five years.
Pipavav Defence
52 March 2012
Sizable opportunity prevails in defense spaceTo meet the massive geopolitical challenges, the Indian Armed Forces are likely to
order military hardware worth USD200b over the next five years.
Navy: The present fleet of the Indian Navy has ~120 ships on active duty, with an
additional 36 ships in the process of being built. The Indian Navy needs over 100
ships of diverse variety, including submarines, aircraft carriers, landing platform
docks, destroyers, frigates, corvettes, patrol vessels, etc. There also exist
significant opportunities abroad, as foreign friendly nations drift down to low
cost defense equipment providers.
Army: The Indian Army has the largest share of India's defense outlay. It is
currently looking to procure Heavy Artillery Systems (towed and self propelled)
worth over USD5b. Private sector participation in the ambitious Future Infantry
Combat Vehicle (FICV) is a first and will be an opportunity worth USD8b-10b over
the next 5-8 years. Besides this, the Indian Army is in the process of upgrading a
number of its legacy combat systems such as BMP2 (infantry vehicles) and T-72
tanks amounting to ~USD5b. The Indian Army will also be looking at private
industry for the maintenance, repair and overhauling (MRO) of its major systems.
Air Force: The Indian Air Force gets the second largest defense outlay after the
Indian Army. It is in the process of finalizing the largest fighter jet procurement
in the world, the Medium Multi Role Combat Aircraft (MMRCA), expected to be
worth USD20b. Besides this, it is also in the market for Strategic Heavy and Tactical
Cargo Aircraft, Airborne Early Warning Systems, Aerial Refuelers, Heavy, and
Medium, Light and Attack Helicopters. There is also huge tri-services requirement
for Air Defense Radar and Missiles, which will be procured from global industry
majors, but will be manufactured under transfer-of-technology in India.
Ministry of Defense budget outlay Ministry of Defense spending by services
Source: Union Budget/Company
Defence capital expenditure outlay (USD b)
Year FY11 FY12E FY13E FY14E FY15E
Army 6.9 7.6 8.4 9.2 10.2
Navy 2.1 2.3 2.5 2.8 3.1
Air Force 4.1 4.5 4.9 5.4 6.0
Total 13.1 14.4 15.9 17.5 19.2
Source: Union Budget/Company
Units size of orders in defencecategory (INR)
Army Airforce Navy
500m 10b 50-80b
Source: Company
20.722.7
30.5 31.7
2.8 2.1
7.8
1.24.3
36.0
FY08 FY09 FY10 FY11 FY12
Al located budget (USD b) Increased (USD b)
0
20
40
60
80
100
2002-04 2004-06 2006-08 2008-10 2010-12
Others R&D Navy Army Air force
Pipavav Defence
62 March 2012
India imports 70-75% of its defense requirement from the foreign nations. The
government aims to reduce its dependence on imports by encouraging indigenization,
with the introduction of the ‘Buy Indian, Make Indian’ category in its defense
procurement policy. The increasing stress on indigenization is also the result of several
bitter experiences that India has had in sourcing defense equipment from overseas.
For instance, India had once placed an order for a Scorpion submarine with France.
The order was executed with a delay of four years and the eventual cost was 4x the
original. Similarly, the Indian Navy’s order for a Gorshkov Class Aircraft Carrier
witnessed a price escalation of 3x.
Such experiences led Defense Ministry to initiate the policy of ‘Buy Indian, Make
Indian’. The government has also suitably modified its policies to allow greater
participation by domestic private sector companies. The MOD has directed public
sector companies to enter into partnerships with private players that have the
requisite capabilities and foreign collaborations.
Defence spending India Vs World GDP (%) wise highest spending across world
11.410 10
8.6 8.6
67.3
6.6 6.5 6.3
Om
an
Qat
ar
Sau
di
Ara
bia
Irag
Jord
an
Isra
el
Yem
en
Arm
enia
Equ
ator
ial
Gui
nea
Mac
edo
nia
% of GDP
Source: SIPRI/MOSL
698 3741454555
595960119
1.82.7
1.3
10.4
1
42.32.72.1
4.8
US
Chi
na UK
Fra
nce
Rus
sia
Jap
an
Saud
i
Ara
bia
Ge
rman
y
Indi
a
Ital
y
Defence spending (USD b)Defence Share % of GDP
India imports 70-75% of
its defense requirement
from the foreign nations
Pipavav Defence
72 March 2012
Increasing role of private sector playersIn addition to its 'Buy Indian, Make Indian' initiative, the government has also suitably
modified its policies to allow greater participation by domestic private sector
companies. For instance, the MOD has decided to liquidate the piling orders of
government shipyards to private players like PIPV and L&T. The cumulative order
book of government shipyards, which have a combined execution capacity of USD1b,
is USD28b. Restricting defense orders to government shipyards would have severely
constrained the growth of India's naval fleet. Mazgaon Dock, which has the largest
order book (of USD22b) among the government shipyards, has a JV with PIPV. We
expect significant order flows to this JV.
Media article
The cumulative order
book of government
shipyards, which have a
combined execution
capacity of USD1b, is
USD28b
Pipavav Defence
82 March 2012
PIPV is suitably positionedFirst mover advantage, strong international tie-ups
PIPV enjoys first mover advantage and best-in-class infrastructure in the shipbuilding segment,
including:
- The world's second largest drydock with a capacity of 662x65(mtr)
- Modular technology, with two Goliath cranes and combined capacity of 1,200mt
- Strong international tie-ups
It has a robust order book of INR67b (4.5x TTM revenue).
MOD's growing stress on indigenization, Mazgaon JV, and growing demand from non-defense
segments should boost order intake in the near term.
Enjoys first mover advantagePIPV is well placed to capitalize on its first mover advantage in the shipbuilding
segment. It has a capacity to build ships upto 400,000DWT, which is the second highest
in the world. Any new private player would need 8-10 years to set up a comparable
facility. Land acquisition, required environment clearances, construction, license
procurement and technology tie-ups can take an average of 10 years. This gives an
established player like PIPV an added advantage.
Second largest shipbuilding capacity in the world after HyundaiPIPV operates the second largest shipbuilding capacity in the world, capable of
constructing vessels up to 400,000DWT. Hyundai Heavy, the largest shipbuilder has a
total capacity of 1,000,000DWT. PIPV intends to become the world's largest shipbuilding
company after completing the conversion of its second wet dock facility to a dry dock.
It has a shipbuilding, ship repair and offshore fabrication complex spread over 750
acres with ~720 meters of sea front and 685 meters of outfit quay, including two
Goliath cranes of 600 tons each, which service the dry dock and the adjoining pre-
erection berth, enabling PIPV to handle up to 1,200 tons of pre-outfitted ship blocks.
A host of other technologically advanced infrastructure makes PIPV one of the most
modern shipyards in the world.
State-of-the art
Infrastructure
Strategic key
tie-ups
Efforts to secure license &
robust order pipeline
5 years 2 years 3 years
A 10 Year cycle
+ +
Ahead of the
curve
High entry
barriers
A new player will take ~10 years to establish itself
Source: Company/MOSL
Pipavav Defence
92 March 2012
Uses modular technology - cost effective; able to deliver 4-5x fasterPIPV uses modular construction technology, which enables it to reduce the
construction and delivery time of vessels, as it is able to simultaneously work on
different orders. It has a separate shipbuilding facility, which breaks down a complete
ship into separate blocks for construction, which include cutting, forming, blasting,
painting, steel stacking, treatment and welding. The dock is used to only assemble
mega blocks with the help of two installed Goliath cranes.
A Comparison of Indian Docks (mtr)
Source: Company/MOSL
Capacity comparison: Pipavav v/s private shipyards & public sector shipyards (mtr)
Hyundai Pipavav Pipavav Private Sector Shipyards Public Sector Shipyards
Heavy 1 2* ABG Bharati Cochin Mazgaon Hindustan Garden reach Goa
Dry Dock
Length (mtr) 700 662 740 155 176 270 150 240 155 176
Width (mtr) 92 65 90 30 33 45 18.9 53 30 33
Commercial vessels (max vessel size)
Dry Bulk Carrier 1,000,000 400,000 1,000,000 120,000 100,000 110,000 [] [] 120,000 100,000
Crude Tanker 1,000,000 400,000 1,000,000 120,000 100,000 110,000 [] [] 120,000 100,000
Product Tanker 1,000,000 400,000 1,000,000 120,000 100,000 110,000 [] [] 120,000 100,000
* Pipavav2: Second drydock conversion expected to be completed in 2014 Source: Company/MOSL
155x30 155x19 162x25
240x53 270x45
662x65
740x90ProposedAddition
ABGShipyard
MazgoanDock
GardenReach
HindustanShipyard
CochinShipyard
PipavavShipyard
PipavavShipyard
680x60
DR
Y D
OC
K
WET
DO
CK
Pipavav Defence
102 March 2012
Source: Company
Expect robust order booking in both defense and non-defense segmentsPIPV has a robust order book of INR67b (4.5x TTM revenue). The order book includes
INR30b from defense, INR4.9b from offshore, and INR36b from commercial
shipbuilding. We expect its order book to grow significantly, driven by orders from
both the defense and non-defense segments.
The only 'MODULAR' shipbuilding facility in India - a huge paradigm shift
Substantial reduction in production time
Enables simultaneous production of
multiple ships
Order book break up as at 31 Dec 12
(INR m) (USD m)
Defence 29,000 100.8
% of total orders 42 42
Offshore 5,040 580.0
% of total orders 7 7
Shipbuilding 33,390 667.8
% of total orders 51 51
Total order book 67,430 1,348.6
Source: Company
Pipavav order book details
Segment and Clients Vessel Type No of vessels
Defence (Navy) NOVP (Naval Offshore Patrol Vessels) 5
Offshore & Engineering (ONGC) OSV (offshore support vessels) 12
Commercial Export order
* Panamax bulk-carrier (74,500 DWT) 4
* Panamax 17
Total Order-book 38
Source: RHP/Company
Growing indigenization, Mazgaon JV to boost order booking from defenseWe expect PIPV's defense order book to be boosted by:
MOD's increasing stress on indigenization - 'Buy Indian, Make Indian' policy: The
Ministry intends to increase procurement from Indian companies from the current
30% to 70% in the next five years. We believe this will turn out to be a major boon
for private sector players like PIPV.
MOD's decision to liquidate the piling orders with government shipyards to private
sector players like PIPV and L&T: The cumulative order book of government
shipyards, which have a combined execution capacity of USD1b, is USD28b.
Mazgaon Dock has the largest order book of USD22b and PIPV's JV with Mazgaon
Dock should give it an edge.
Pipavav Defence
112 March 2012
Defence PSUs can have JVs with CosCabinet nod may increase chancess for obtaining foreign technology
Date: 10 Feb 2012
The government on Thursday made a significant step for bolstering domestic defence industrial base by clearing
of guidelines for its defencePSUs to establish joint ventures with private firms. This could increase opportunities
for obtaining advanced technologies from foreign sources. However, though the defence sector was opened up
in 2001-02 to 100% private investment, with up to 26% FDI, it did not have the desired impact on the performance
of the eight defence PSUs.
"The Union Cabinet today approved the guidelines for establishing Joint Venture Companies by Defence Public
Sector Undertakings(DPSUs). The guidelines contain provisions for important matters that are critical from a
national security perspective," an official release said. "The ministry will issue the guidelines to harness the
emerging dynamism of the private sector in India and increasing opportunities to obtain advanced technologies
from foreign sources through adoption of appropriate partnership approaches by DPSUs," it said. There was
urgency in laying down guidelines as the government is in the process of negotiating over 40 offset contracts
worth Rs 50,000 crore with global armament firms. Besides, the $20 billion MMRCA project will have 50% offsets.
JVs were allowed in the Defence Production Policy released last year but was put on hold by the ministry after
the Mazagon Dockyards (MDL) tied up with a private shipyard, which was opposed by rival companies. Officials
said the guidelines would help in "enhancing fairness and transparency in the selection of the JV partner" by
DPSUs while ensuring a "well-defined nature and scope" of the tie up. According to the guidelines, DPSUs will
retain the "affirmative rights" for taking key decisions in the JV company.
"Retention of the affirmative right of DPSU for prior approval to key joint venture decisions, such as amendments
to the articles of association of the JV company, declaration of dividend, sale of substantial assets, and formation
of further subsidiaries," the release said.
The guidelines provide a "streamlined, fair and transparent framework for entering into JVs by DPSUs, with the
ultimate objective of better risk-management and shorter time frames for delivery to meet the increasing
demands of our armed forces." They said the new framework would also help in enhancing self-reliance in the
defence sector as a whole.
According to the guidelines approved by the Cabinet, DPSUs will have the "exit" provision in the joint venture
companies.Source: Economic times
Pipavav Defence
122 March 2012
Significant opportunity in non-defense segments as wellThere is significant opportunity in non-defense segments, as well, which PIPV is well
placed to exploit.
Growing demand for ship repair: In India, ~50% of the commercial fleet is more
than 15 years old and Indian ship owners are expected to spend ~USD4b to replace
old ships during FY10-15. While PIPV stands to gain from increasing domestic
demand for commercial shipbuilding and repair, we expect it to garner significant
overseas orders as well. International MRO facilities are running at overcapacity
and are looking to offload work to low cost destinations like India. PIPV's
infrastructure is comparable with Chinese and Korean players.
Huge demand for offshore supply vessels: The demand for high-end offshore
facilities such as drill ships and floating production storage platforms amounts to
USD20b-40b. With rising oil prices, this segment is gaining importance. Higher
demand for offshore assets would lead to a consequential increase in demand for
offshore supply vessels (OSVs) required to service them.
Ship repair a large opportunity
Source: Aero Strategy report "Air Transport MRO Outlook". April, 2009
60-70% of the
maintenance and
repair work is
contributed by the
North America and
Europe.
India will now
become the next
destination for the
huge replacement
market.
Pipavav Defence
132 March 2012
Partnering company
KOMAC (Korea)
SembCorp (Singapore)
SAAB (Europe)
Northrop Grumman
Babcock
Rosoboron Export
DCNS - Ministry of Defense
Thyssenkrupp
Airbus
Oto Melara
Sagem
Scope of partnership
Design support, material support
Technical support , ship repair, ship building,
ship conversion, rig building, offshore
engineering and construction
Product services and solutions for military
defense and civil security
Providing products in the aerospace,
electronics, information systems and
shipbuilding segments, and technical services
to government and commercial customers
worldwide
Focusing on defense, telecommunications,
energy and transportation. This includes
building next generation aircraft carriers for
Indian Navy.
Export and import of defense-related products,
technologies and services
Helicopter carriers and submarines
Specializes in integrated materials and
technology; will also provide complete
systems solutions and innovative services
France to develop state-of-the-art MRO
facilities in India
Leading manufacturer of artillery and
ammunition systems
Leading manufacturer of defense electronics,
navigation systems and optronics
Partner Profile
Established naval architects and marine engineers
Global leader in marine & offshore engineering
bus iness
Sweden-based industrial and technology giant
Leading US defense major, with annual revenue of
USD35b
UK's leading engineering and naval warship
services
State intermediary agency for Russian Defense
Exports
France Ministry of Defense Company
German industrial conglomerate, with deep
presence in defense
EADS parent company of airbus, allows to utilize
technology to both civil and defence applications
Part of USD25b Finmeccanica Group (Italy)
Part of France's leading defense conglomerate,
Safran Group.
Global partnerships contribution to the business
Source: Company
Partnerships with global giants boost ability to deliverPIPV enjoys strong strategic partnerships with 9-10 international players, which should
aid robust warship order booking in the near future. It has also initiated the process
of working with six friendly nations to build warships at its facilities in accordance
with the government of India's policy framework. Besides, PIPV is working towards
developing suitable infrastructure to tap the significant opportunity the Indian Army
offers. It has recently entered into a strategic partnership with Airbus Industry, France,
which will allow the company to cater to the aerospace segment as well, both for civil
and military applications. Many offshore rigs need modernization and refurbishing -
PIPV is targeting this opportunity as well. Its technological tie-ups with various global
giants boost its ability to deliver.
Pipavav Defence
142 March 2012
PIPAVAV global partnerships provide a technological edge
Source: Company
Pipavav Defence
152 March 2012
Strategically located to garner huge ship repair and commercial shipbuilding contracts
On the West Coast of India (Gujarat), Gulf of Cambay
Spread over 782 acres of land, 150 nautical miles from Mumbai
Adjacent to Pipavav's sea port, road, rail and logistics infrastructure
Only shipyard in an integrated format
Natural breakwater, short navigation channel and deep draught, which results in
significant savings in logistics cost
Block making engineering complex is in a notified SEZ, leading to fiscal advantage,
tax breaks, etc
Pipavav Defence
162 March 2012
Expect steady growth in earningsBuy with a target price of INR100
We believe that PIPV is well placed/ahead of the curve to exploit the massive opportunity
that India's defense sector offers in the next few years.
We estimate net profit at INR532b for FY12 and INR809b for FY13, translating into an EPS of
INR0.8 for FY12 and INR1.2 for FY13.
We initiate coverage with a Buy rating and a replacement cost-based target price of INR100.
Rightly placed to capture defense order opportunityThe private sector defense business is at a nascent stage in India. Given the various
government initiatives encouraging indigenization and private sector participation,
we believe defense orders offer immense opportunity to private sector players. PIPV
is well placed/ahead of the curve to exploit this opportunity in the next few years. It
has global-sized assets and best-in-class tie-ups. Also, PIPV offers the only credible
large-size exposure for investors to India's defense business.
Capacity utilization increasing; expect revenue CAGR of 40% over FY12-14PIPV's current capacity, which is currently USD1.7b, (in terms of revenue potential) is
likely to shoot up to USD2.5b once the second dry dock becomes operational by 2014.
In FY10, capacity utilization stood at USD13m (7% of total capacity), which grew to
USD170m (10% of total capacity) in FY11. We now expect capacity utilization of
USD360m (22% of total capacity) in FY12. We expect revenue to grow at a CAGR of 40%
over FY12-14. With pick-up in utilization levels, we expect significant boost to revenue
growth and margin expansion, going forward.
We have forecasted EBITDA margin at 23% for FY12 and 25% for FY13. We estimate net
profit at INR532m for FY12 and INR809m for FY13, translating into an EPS of INR0.8 for
FY12 and INR1.2 for FY13. Our earnings estimates largely factor in execution of the
existing order book of USD1.6b. We have not factored in possibilities of increased
defense orders (including from Mazgaon Shipyard JV, offset clauses, exports to friendly
countries, strategic tie-ups with several defense majors, positioning as an integrated
defense player, etc). Some of these orders could materialize in FY13, leading to serious
earnings upgrades (we currently factor in capacity utilization of just 28% in FY13).
Pipavav: Financials snapshot
Operational capacity FY11 FY12E FY13E
Operational capacity (b USD) 1.7 1.7 1.7
Reveune (b USD) 0.17 0.36 0.48
% Utilization 10.2 21.1 27.9
Revenue (INR)
OSV Type -1500 DWT 1,680 1,260 2,100
OPV Type - 2500 DWT - 6,960 10,440
Bulker Category- 75,000 DWT 5565 7,950 9,540
Defence category (I) - - -
Defence category (II) - - -
Subsidy income (26%) 1,354 2,067 2,480
Total Revenue 8,599 18,237 24,560
Source: Company/MOSL
Pipavav Defence
172 March 2012
Replacement cost the appropriate measure of fair value; BuyWe believe that PIPV is well placed/ahead of the curve to exploit the massive
opportunity that India's defense sector offers in the next few years. It has global-
sized assets and best-in-class tie-ups. Also, PIPV offers the only credible large-size
exposure for investors to India's defense business. We believe that the near term
stock performance is more a function of macro news flows and order intakes. Hence,
an earnings based valuation approach may not be the correct representative of the
fair value for PIPV, given the low capacity utilization in the interim period. We thus
value PIPV based on replacement cost method at INR67b (INR100/sh). We initiate
coverage with a Buy rating.
Replacement cost valuation
New Factor
PIPV Entrant (x) Remarks
Land 2,233 22,330 10.0 Contagious land availability with a large
waterfront is the key challenge; Land
Acquisition, Rehabilitation and Resettlement
Bill will lead to a meaningful increase in
land acquisition & R/R cost
Machinery 16,574 20,717 1.3 PIPV had ordered large parts of the
machinery in FY07-09; and since then
the costs have increased meaningfully
Infrastructure, 16,193 40,483 2.5 Increased wages and material costs
Others (particularly cement and steel) have led to
a manifold increased in setting up cost
Project Cost 35,000 83,530
Less: Project Debt 17,000
Equity Value 66,530
PIPV (INR/Sh) 100
Source: MOSL
Note: Our workings do not factor in:
(1) Cost of delays in obtaining requisite clearances and certification from various
defense departments.
(2) Technology tie-ups with global players.
Pipavav Defence
182 March 2012
Appendix I: Largest Maritime Infrastructure in India
The offshore supply vessels ready for their journey – at Pipavav The largest ship ever built in India
Fit out berth (684 meters of berthing space) Converting adjacent wet dock into the largest dry dock
Largest panel line in the World Two goliath crane with combined lifting capacity of 1,200 tons
Source: Company/MOSL
Pipavav Defence
192 March 2012
Appendix II: Defense procurement procedure, 2011
BackgroundThe Defense Procurement Procedure - 2002 (DPP- 2002) came into effect from 30
December 2002 and was applicable for procurements flowing out of 'Buy' decision of
Defense Acquisition Council (DAC). The scope of the same was enlarged in June 2003
to include procurements flowing out of 'Buy and Make' through Imported Transfer of
Technology (TOT) decision. The Defense Procurement Procedure has since been revised
in 2005, 2006, 2008 and 2009 enhancing the scope to include 'Make' Procedure, and
'Buy and Make (Indian)'categories.
As part of the review exercise and on basis of experience gained in the procurement
process, Defense Procurement Procedure has now been revised to DPP-2011.
AimThe objective of this procedure is to ensure expeditious procurement of the approved
requirements of the Armed Forces in terms of capabilities sought and time frame
prescribed by optimally utilizing the allocated budgetary resources.
ScopeThe DPP-2011 will cover all Capital Acquisitions, (except medical equipment)
undertaken by the MOD and Indian Coast Guard both from indigenous sources and
ex-import. Defense Research and Development Organization (DRDO), Ordnance
Factory Board (OFB) and Defense Public Sector Undertakings (DPSUs) will, however,
continue to follow their own procedures for procurement.
Capital AcquisitionsCapital Acquisitions are categorized as under: -
Acquisitions Covered under the 'Buy' Decision: Buy would mean an outright
purchase of equipment. Based on the source of procurement, this category would
be classified as 'Buy (Indian)' and 'Buy (Global)'. 'Indian' would mean Indian vendors
only and 'Global' would mean foreign as well as Indian vendors. 'Buy Indian' must
have minimum 30 % indigenous content if the systems are being integrated by an
Indian vendor.
Acquisitions Covered under the 'Buy & Make' Decision: Acquisitions covered under
the 'Buy & Make' decision would mean purchase from a foreign vendor followed
by licensed production / indigenous manufacture in the country.
Acquisitions Covered under the 'Buy & Make (Indian)' Decision: Acquisitions
covered under the 'Buy & Make (Indian)' decision would mean purchase from an
Indian vendor including an Indian company forming joint venture / establishing
production arrangement with OEM followed by licensed production / indigenous
manufacture in the country. 'Buy & Make (Indian)' must have minimum 50 %
indigenous content on cost basis.
Acquisitions Covered under the 'Make' Decision: Acquisitions covered under the
'Make' decision would include high technology complex systems to be designed,
developed and produced indigenously.
Pipavav Defence
202 March 2012
Appendix III: Aspects of India's Defence ProcurementCategories
Pipavav Defence
212 March 2012
Appendix IV: Offsets mechanism
ScopeThe offset clause would be applicable for all procurement proposals where indicative
cost is INR3b or more and the schemes are categorized as:- 'Buy (Global)' involving outright purchase from foreign / Indian vendors and 'Buy and Make with
Transfer of Technology' i.e. Purchase from foreign vendor followed by Licensed Production.
A uniform offset of 30% of the estimated cost of the acquisition in 'Buy (Global)'
category acquisitions and 30% of the foreign exchange component in 'Buy and Make'
category acquisitions will be the minimum required value of the offset. Offset
obligations may be discharged only with reference to "eligible" products and eligible
services.
The procedure for implementing the offsets provisions is:
Defence Products
Small arms, mortars, cannons, guns, howitzers, anti tank weapons and their
ammunition including fuze.
Bombs, torpedoes, rockets, missiles, other explosive devices and charges, related
equipment and accessories specially designed for military use, equipment
specially designed for handling, control, operation, jamming and detection.
Energetic materials, explosives, propellants and pyrotechnics.
Tracked and wheeled armored vehicles, vehicles with ballistic protection designed
for military applications, armored or protective equipment.
Vessels of war, special naval system, equipment and accessories.
Aircraft, unmanned airborne vehicles, aero engines and air craft equipment,
related equipment specially designed or modified for military use, parachutes
and related equipment.
Electronics and communication equipment specially designed for military use
such as electronic counter measure and counter measure equipment surveillance
and monitoring, data processing and signaling, guidance and navigation
equipment, imaging equipment and night vision devices, sensors.
Specialized equipment for military training or for simulating military scenarios,
specially designed simulators for use of armaments and trainers.
Forgings, castings and other unfinished products which are specially designed for
products for military applications and troop comfort equipment.
Miscellaneous equipment and materials designed for military applications,
specially designed environmental test facilities and equipment for the
certification, qualification, testing or production of the above products.
Software specially designed or modified for the development, production or use
of above items. This includes software specially designed for modeling, simulation
or evaluation of military weapon systems, modeling or simulating military
operation scenarios and Command, Communications, Control, Computer and
Intelligence (C4I) applications.
High velocity kinetic energy weapon systems and related equipment.
Direct energy weapon systems, related or countermeasure equipment, super
conductive equipment and specially designed for components and accessories.
Pipavav Defence
222 March 2012
Products for Internal Security
Arms and their ammunition including all types of close quarter weapons.
Protective Equipment for Security personnel including body armor and helmets.
Vehicles for internal security purposes including armored vehicles, bullet proof
vehicles and mine protected vehicles.
Riot control equipment and protective as well as riot control vehicles.
Specialized equipment for surveillance including hand held devices and unmanned
aerial vehicles.
Equipment and devices for night fighting capability including night vision devices.
Navigational and communications equipment including for secure
communications.
Specialized counter terrorism equipment and gear, assault platforms, detection
devices, breaching gear, etc.
Training aids including simulators and simulation equipment.
Civil Aerospace Products
All types of fixed wing as well as rotary aircraft including their air frames, aero
engines, aircraft components and avionics.
Aircraft design and engineering services.
Technical publications.
Raw material and semi-finished goods.
Flying training institutions and technical training institutions (excluding civil
infrastructure).
Pipavav Defence
232 March 2012
Financials and Valuation
Income Statement (INR Million)
Y/E March 2011 2012E 2013E 2014E
Net Sales 8,599 18,237 24,560 35,607
Change (%) 36.6 112 35 45.0
Construction Exps. 3,335 8,061 10,438 15,133
Staff Cost 912 1,824 2,456 3,917
Office and Site Establish. Exps 2,828 4,195 5,526 7,655
EBITDA 1,525 4,158 6,140 8,902
% of Net Sales 17.7 22.8 25.0 25.0
Depreciation 487 1,111 1,721 2,212
Interest 1,190 2,470 3,426 4,202
Other Income 633 240 251 32
PBT 481 818 1,244 2,519
Tax 84 286 435 882
Rate (%) 17 35 35 35
Reported PAT 397 532 809 1,637
Adjusted PAT 397 532 809 1,637
Change (%) -181.3 34 52 102.5
Balance Sheet (INR Million)
Y/E March 2011 2012E 2013E 2014E
Share Capital 6,658 6,912 7,164 7,370
Reserves 10,250 12,306 15,362 18,393
Convertible warrants 625
Net Worth 17,534 19,218 22,526 25,763
Loans 20,207 28,096 32,146 35,670
Deffered Tax Liability 79 79 79 79
Capital Employed 37,821 47,393 54,751 61,513
Gross Fixed Assets 13,178 24,678 28,678 35,678
Less: Depreciation 928 2,039 3,759 5,971
Net Fixed Assets 12,250 22,639 24,919 29,707
Capital WIP 14,752 7,376 6,638 13,277
Investments 420 504 555 638
Curr. Assets 17,936 27,448 35,803 37,151
Inventory 2,453 4,497 6,056 7,804
Debtors 2,050 5,996 8,075 9,755
Cash & Bank Balance 4,256 2,966 4,178 1,056
Loans & Advances 4,831 6,495 8,075 8,780
Other Current Assets 4,345 7,495 9,420 9,755
Current Liab. & Prov. 7,644 10,575 13,164 19,259
Creditors 6,632 9,563 12,152 18,247
Other Liabilities 1,012 1,012 1,012 1,012
Net Current Assets 10,292 16,873 22,639 17,892
Misc. Expenses 107 0 0 0
Application of Funds 37,821 47,393 54,751 61,513
E: MOSL Estimates
Pipavav Defence
242 March 2012
Financials and Valuation
Ratios (INR Million)
Y/E March 2011 2012E 2013E 2014E
Basic (INR)
Adjusted EPS 0.6 0.8 1.2 2.5
Growth (%) -181.3 33.9 52.2 102.5
Cash EPS 1.3 2.5 3.8 5.8
Book Value 26.3 27.8 31.4 35.0
Valuation (x)
P/E (standalone) 127.9 95.5 62.7 31.0
Cash P/E 57.4 30.9 20.1 13.2
EV/EBITDA 43.7 18.2 12.8 9.6
EV/Sales 7.8 4.2 3.2 2.4
Price/Book Value 2.9 2.6 2.3 2.0
Dividend Yield (%) 0.0 0.0 0.0 0.0
Profitability Ratios (%)
RoE 2.3 2.9 3.9 6.8
RoCE 4.9 7.7 9.1 11.6
Turnover Ratios
Debtors (Days) 87 120 120 100
Inventory (Days) 104 90 90 80
Creditors. (Days) 370 290 280 290
Asset Turnover (x) 0.3 0.4 0.5 0.6
Leverage Ratio
Debt/Equity (x) 1.2 1.5 1.4 1.4
Cash Flow Statement (INR Million)
Y/E March 2011 2012E 2013E 2014E
PBT before Extraordinary Items 481 818 1,244 2,519
Add : Depreciation 487 1,111 1,721 2,212
Interest 1,190 2,470 3,426 4,202
Less : Direct Taxes Paid 84 286 435 882
(Inc)/Dec in WC -7,255 -7,872 -4,554 1,626
CF from Operations -5,181 -3,760 1,401 9,678
(Inc)/Dec in FA -3,122 -4,124 -3,262 -13,638
(Pur)/Sale of Investments -152 -84 -50 -83
CF from Investments -3,275 -4,208 -3,313 -13,721
(Inc)/Dec in Networth 193 1,153 2,499 1,600
(Inc)/Dec in Debt 6,908 7,888 4,050 3,524
Less : Interest Paid 1,190 2,470 3,426 4,202
CF from Fin. Activity 6,311 6,678 3,124 922
Inc/Dec of Cash -2,145 -1,291 1,212 -3,122
Add: Beginning Balance 6,401 4,256 2,966 4,178
Closing Balance 4,256 2,966 4,178 1,056
E: MOSL Estimates
Motilal Oswal Company Gallery
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