Pipavav Defence and Offshore Engineering - Buy - Kotak

Now Ministry of Defence (MoD) has lifted the hold on Mazgaon Dock Pipavav Defence Joint Venture (JV) to build the warships for Indian Navy which would help PDO to get orders from the navy. It has also launched the largest Ice Class Ship ever built in India to be delivered to one of the foreign clients. In terms of orders, it received two orders in the last five months: 1) order worth Rs 2.5 bn for maintaining and dry docking of deep water draft oil rigs from ONGC and 2) order worth Rs 11.5 bn to build two specialised offshore vessels for a European client. We estimate the company's total order book to be around Rs 120 bn to be executed by March 2018. PDO may raise $150 million through a listing on the London Stock Exchange (LSE) by end FY14E to reduce debt and for future capex.

We continue to believe that PDO 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, PDO offers the only credible large-size exposure for investors to India's defense business. However we are not bullish on the commercial shipbuilding segment. With rising interest cost and depreciation (due to further capex) along with poor income quality, we continue to remain cautious about the financial performance of PDO. We estimate net profit at Rs 1.5bn for FY14, translating into an EPS of 2.2 for FY14. It trades at 23 times FY14E PE, which is on relatively high compared to domestic and International Peers as operations of the company are still nascent and would scale-up in the future. Hence we prefer to value the company at 20% discount to its replacement cost. We recommend BUY on the stock with a reduced TP of Rs 66. (Earlier Rs 84)

Source : Equity Bulls

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