Initiating Coverage Shipping

Pipavav Shipyard Ltd (PSL) CMP: Rs 73 Target : Rs 50 Rating : SELL

Set to meet future needs 1st April 2010
Pipavav Shipyard the new venture of the SKIL group is one of the five largest docks in the world and largest in the
country. Because of its huge size it can accommodate ship of any capacity. It is currently constructing commercial
vessels (Panamax) and would also construct ships for the navy and the coast guard. A part of the shipyard would be
dedicated to the offshore segment which would be involved in construction of jack up rigs, floating rigs and other
offshore equipments. Punj as a co-promater has exited the company recently which jeopardizes the offshore
venture. However the yard with other partners envisages to focus on every aspect of shipbuilding.
(Rs. mn)
Size does matter - largest dry-dock in the country- Pipavav
Key Financials FY09 FY10E FY11E FY12E
Shipyard currently consists of two wet docks -one approximately
Sales na 8,750 15,313 32,984 680 meters long and 60 meters wide, and the other approximately
SBICAP Securities Limited

YoY change (%) na - 75.0 115.4 680 meters long and 65 meters wide. These docks are largest in
EBIDTA na 1,772 3,101 6,597 the country and one of the largest docks in the world capable of
accommodating vessels upto 4,00, 000 DWT. The company has
EBIDTA margins (%) na 20.3 20.3 20.0
already converted one of the wet docks into a dry dock and
Adj. PAT na 227 847 3,498 would be converting the 2nd wet dock into a dry dock in 2nd
YoY change (%) na - 273.4 313.0 phase of the yard expansion ~ post FY12E.
PAT margins (%) na 2.6 5.5 10.6 Pipavav has delayed the construction of the yard by a year-
Equity na 6,655 6,655 6,655 fresh orders not coming, current order book is also under
EPS na 0.3 1.3 5.3 pressure - The shipyard was expected to be commercially
operational in FY09 which got postponed to FY10, delay of nearly
Key Ratios FY09 FY10E FY11E FY12E a year. Even the IPO got delayed by a year to October 2009. This
we believe was primarily due to global slowdown. PSL today has
PER (x) na 176.0 47.1 11.4 confirmed orders of $374mn in the commercial segment (I0
P/B (x) na 2.2 2.1 1.9 Panamax) and $112 mn in the offshore segment (12 OSV's from
EV/EBIDTA (x) na 22.5 13.8 6.6 ONGC). Due to cancellations and renegotiations the confirm
ROE (%) na 1.5 4.7 17.5 order book has come down from $ 1046 mn for 26 Panamax bulk
carriers in 2008. We have assumed the order book to grow to Rs
ROCE(%) na 5.9 8.1 16.2
6000 crores by FY12E and Rs 8300 crores by FY14E.
Offshore segment venture, would also tap the defence segment
Key Data
- opportunities in non cyclical segment - PSL with assistance
Face Value (Rs) 10 from Sembcorp Marine (3% equity partner) would also enter the
Shares O/S (mn) 665 offshore construction and fabrication business. The offshore
Market Cap (Rs. mn) 43,300 facility is expected to be complete by Q1FY11, and would give
PSL capability for construction of jack up rigs, floating rigs and
21-Week Range(H/L) 75/47
other offshore equipments. Leveraging its size PSL would also
Average Volume (5 months) 4,000,000 tap the large and strategic business opportunities in the defence
Nifty 5266 sector which is a non cyclical segment. We estimate that 10% and
Bloomberg Code PIPV.IN 40% of the total revenues to come from defence and offshore
segment respectively for the company going ahead.
Year End March
Shareholding Pattern (%) Dec ’09 Strategic tie ups - with the best in the industry
With For Partner Profile
Foreign 26% KOMAC (Korea) Design support, Established naval architects and
Public & Others 6% material procurement marine engineers
SembCorp Technical support Global leader in marine &
Promoters 39%
(Singapore) offshore engineering business
Institutions 10%
Top global defence Defence segment
Corporate Holding 19%
yards

Valuation - Initiate with SELL

Relative Price Performance We have a 12 month target of Rs 50(based on FY12E numbers).
115 Pipavav yard would start delivering ships from Dec, 2010 from
the current confirmed order book of Rs 2300 crores. We have
105 assumed the order book to grow to Rs 5000 crores by FY11E and
95 Rs 6000 crores by FY12E which would be fully reflected in the
financial performance in FY12E, we are valuing Pipavav at 1.5 x
85 FY12E P/B a premium to domestic peers for the kind of growth
75
and returns it would have in future. At our target price it would
Oct-09 Nov-09 Dec-09 Feb-10 Mar-10 trade at a PE of 9x FY12E and EV/EBIDTA of 6x FY12E which is at
PIPAVAV Nifty par with global peers.
SBICAP Securities Limited Amit Agarwal
191, Maker Tower ‘F’, Cuffe Parade Securities Research,
Institutional Mumbai 400005, India Tel: 91-22-30273325
Equities Email: sbicapresearch@sbicapsec.com Email: amit.agarwal@sbicapsec.com
(For Private circulation only) Please refer to our disclaimer given at the back cover page
SBICAP Securities Limited Pipavav Shipyard Ltd

INTRODUCTION TO PIPAVAV SHIPYARD

Pipavav Shipyard the new venture of the SKIL group was initiated
as a ship dismantling yard having two large wet basins each
measuring 680 metres length and a respective width of 60 metres
and 65 metres. These are among the largest wet basins built in the
world.
The proposed Shipyard would be involved in the construction of
commercial ships and ships for the navy and the coast guard. A part
of the shipyard would be dedicated to the offshore segment involved
in construction of deep water jack rigs, floating rigs and offshore
support equipments.
The yard has the distinction of being one of the five largest docks
in the world and largest in the country, and will therefore be equipped
to handle almost any size of ship. The shipyard is expected to be the
largest in India and among the top 10 shipyards in the world, in the
league of Hyundai and Samsung of Korea, Damen of Holland, Aker
Masa in Finland and Izhar of Spain
The shipyard has been granted the status of an Export Oriented Unit
("EOU") by the Government of India for a period of 5 years from June
2006. While the block making facility has been notified as a SEZ.

Key shareholders
Stakeholder (as on March 2010) % held

SKIL group (Promoter) 39.4

Semcorp Marine Ltd 3.0

Source: Company

Note: SKIL group has given an open offer to shareholders of Pipavav

for 20% stake at Rs 61.5/share after it bought the entire 19.4 % stake
from the co - promoter Punj Lloyd at Rs 50.75/share.The offer opens
on May 21 st,10 and closes on 9 th June,10

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Pipavav Shipyard Ltd SBICAP Securities Limited

INVESTMENT ARGUMENTS
We estimate the total orderbook to grow at a healthy CAGR of 20%+
over FY10 - FY14E to Rs 8300 crores
The company would be focusing on each segment of shipbuilding to
beat the cyclicality of any one segment. These segments are;
1. Commercial
2. Offshore
3. Defence
4. Ship repair
PSL today has a confirmed order-book of US $374 mn from global
shipping companies received in 2008 (eligible for subsidy) and an
order of $112 mn received from Indian oil major ONGC in June, 2009.
As a result of cancellations and renegotiation, these orders have come
down from $1046 mn. There has been no inflow of fresh orders
primarily due to slowdown and also the fact that the company has
no track record in executing shipbuilding orders and timely ship
delivery. The first delivery is expected in the month of Dec 2010 (may
get delayed) with deliveries spreading to FY12/13E.

Old orderbook (2008)

Order Worth $1046 million

No of Ships 22 Confirmed vessels & 4
Optional vessels
Type of Vessel Approx. 75000 DWT Panamax
Bulk Carrier
Delivery Period March 09 to December 2012
Source: Company

Present orderbook
Commercial $mn No of ships Expected delivery
Firm 374 10 Dec 2010 to FY13
Under renegotiation 302 8
Under arbitration 108 3
Offshore
From ONGC 112 12 FY12
Source: Company

Post cancellations and renegotiation, the total current firm order book
stands at $486 mn for 10 Panamax bulk carriers (US$ 374 mn) and
12 OSV's (US$ 112 mn).

Securities Research Please refer to our disclaimer given at the front & back cover page
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SBICAP Securities Limited Pipavav Shipyard Ltd
Snap shot of current global order book ( as on March 10)
Category Nos DWT Anchored New Under Launched Order book Orderbook
(000) building Construction as DWT % DWT
on order (000)
Tankers
Crude oil 2095 321,000 498 368 69 28 28.92 92,833
Products 1485 49,921 354 219 61 34 32.13 16,040
LNG 329 25,700 64 24 9 21 14.68 3,773
LPG 510 13,190 126 53 18 6 10.74 1,417
Chemical 332 5,813 63 64 29 18 32.64 1,897
Total 4751 415,624 1105 728 186 107 115,960
Carriers
Bulk 6473 413,012 1190 2413 347 96 54.52 225,174
Ore 114 26,281 17 90 11 1 118.37 31,109
Vehicle 624 10,557 51 110 36 19 27.04 2,855
General 4541 56,721 703 475 313 107 24.04 13,636
Ro- Ro 444 4,824 34 31 16 4 14.16 683
Total 12196 511,395 1995 3119 723 227 273,456
Containers 4457 166,753 560 596 136 87 32.51 54,211
Source: Bloomberg
Global Shipbuilding scenario - In the bulk segment with 273 mn
deadweight of bulk tonnage still on order (delivery spread over CY10
to CY12) which is more than 50% of the present fleet, there is still
considerable uncertainty whether the global economy would be able
to absorb such an addition. It is highly unlikely that shipping
companies would show any haste in placing more orders in this
segment. Limited fresh orders would enter the maket.The situation
is much better in the tanker segment and container shipping. Flow
of new orders in the commercial ship building would completely
hinge on global economy recovery.

Orderbook assumption
(Rs Mn) Present Status FY11E FY12E FY13E FY14E CAGR
Commercial Confirmed orders worth Rs 17500 mn 28,750 33,063 38,022 43,725 10%
Offshore Confirmed orders worth Rs 5500 mn 12,500 15,625 19,531 24,414 25%
Defence Bids worth Rs 75000 mn submitted 11,000 12,100 13,310 14,641 10%
Total 52,250 60,788 70,863 82,780
Source: SBICAP Securities Research

For Pipavav once the yard starts delivering (from Dec, 2010) we
expect more and more orders to come to Pipavav from all the 3
segments (commercial, naval and offshore).Our assumption of order
book factors in current bulging commercial global order book,
spending on navy by Indian government, capex planned by global
oil majors in E & P and strengths of PSL.

Punj Lloyd exits from Pipavav - jeopardizes offshore segment

Punj Lloyd which owned 19.4% equity interest in Pipavav shipyard
since Sep 2007 acquired for a total sum of Rs 350 crores has exited
Pipavav much before the end of lock in period of 3 years by selling
their stake to co - promoter SKIL group. Punj Lloyds investment in
PSL was for a strategic partnership with SKIL group which would
have facilitated PSL in fabrication / construction of offshore
equipments.
PLL + PSL had plans to jointly tap the offshore construction market
which is forecasted to be very huge in years to come.

4 Please refer to our disclaimer given at the front & back cover page Securities Research
Pipavav Shipyard Ltd SBICAP Securities Limited
Exit of Punj from Pipavav
% No of shares Exit price Outflow
(mn) (Rs per share) (Rs mn)

Sale of stake by Punj 19.4 129.10 50.75 6,552

Open offer 20.0 133.09 61.50 8,185
Total 14,737
Present holding of SKIL 20.0
Holding of SKIL post exit of Punj 59.4
Source: SBICAP Securities Research

We believe this event has ended the arrangement between Pipavav

and Punj in the following areas:
1. Technical collaboration / supply of technology from Punj to
Pipavav in executing orders in the offshore segment.
2. Join bidding of orders under the aegis and balance sheet strength
of Punj for offshore equipments. It jeopardises order inflow for
PSL in the offshore segment.
This could seriously dent the flow of orders in the offshore segment
for Pipavav which today stands at Rs 550 crores and which we have
assumed to grow at 25% CAGR for the next 4 years to 2500 crores
by FY14E. Our assumption can hold as Pipavav has another strategic
partner/ equity partner--SembCorp Marine-- in the offshore segment.

One time capital gain of Rs 13 per share for Punj

Rs Mn
Investment in Pipavav since Sep 2007 3,500
Exit amount 6,552
Gain 3,052
No of shares of Punj (mn) 331
One time gain per share (pre tax) 13
Source: SBICAP Securities Research

World crude oil supply and demand (million barrel per day)
Jan-09 Jul-09 Oct-09 Dec-09 Jan-10
Demand
OECD 46.8 45.0 45.9 46.9 46.0
Rest of world 37.7 39.6 39.4 40.0 39.9
Total 84.5 84.6 85.3 86.9 85.9
Supply
OPEC crude 29.2 28.5 29.2 29.2 29.3
Opec NGL/Condensate 5.1 5.3 5.3 5.4 5.4
Non Opec 48.0 48.4 49.3 49.8 49.7
Processing gain 2.3 2.1 2.1 2.2 2.2
Total 84.6 84.3 85.9 86.6 86.6
Source: Bloomberg

News- International Energy Agency (IEA) in February 2010 increased its

estimate for world demand in 2010 by 170,000 barrels per day (bpd) to
86.5 million barrels per day (mbpd). It implies a gain of 1.6 mbpd, or
1.8%, from 2009 levels. Consumption would be driven entirely by economies
outside the Organisation for Economic Cooperation and Development
(OECD).

Securities Research Please refer to our disclaimer given at the front & back cover page
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SBICAP Securities Limited Pipavav Shipyard Ltd
Global E & P capex to increase by 12% in 2010 to $798 billion - to
benefit PSL
The capital expenditure of oil and gas companies, witnessed a
significant decrease in 2009, after the surge in 2007-08. However, in
2010 capex activity is expected to rise, driven mainly by large National
Oil Companies (NOCs). Industry forecasts a 12% growth in the oil
and gas sector capital expenditure in 2010 and expects the total capex
of the leading listed oil and gas companies to exceed $798 billion,
driven mainly by the investments of NOCs. The total capital
expenditure by the listed NOCs (for which data is publicly available)
is expected to register a 16% growth to around $375 billion in 2010.
Planned capex of few listed oil majors
Capex ($bn)
Company Country 2009 2010E
BP UK 21.70 22.00
Chevron US 19.82 21.60
Exxon Mobil US 27.18 28.00
PEMEX Mexico 19.50 22.00
Conoco Philips US 12.50 11.00
Petrobas US 36.00 39.50
Saudi Aramco Saudi Arabia 25.00 26.00
Shell Netherland 30.00 32.00
Statoil Norway 12.40 13.00
E & P capex ($bn)
FY10 FY11E
IOC India 2.52 2.79
ONGC India 5.41 5.80
Source: Industry
Note: Capex includes overall spending (upstream and downstream) Upstream is usually 70%
of the overall spending

Among the Indian oil firms, exploration behemoth Oil and Natural
Gas Corporation (ONGC) has allocated Rs 26,523 crore for E&P
spending. It is followed by Rs 12,823 crore by Indian Oil Corp (IOC)
and Rs 8,662 crore by ONGC Videsh. The Indian oil firms, in all
propose to spend Rs 69,457 crore in 2010-11 in E & P. While the E
& P expenditure for 2009- 2010 is estimated at Rs 59,053 crore.

Exploration and lifting cost for 2010 should be significantly less

World Average Exploration + Lifting cost
$ per barrel 2005 2006 2007 2008
Exploration 11.38 17.23 27.78 34.34
Lifting 7.09 8.32 10.19 12.59
Total 18.47 25.55 37.97 46.93
Source: Energy Information Admininstration

Rig operators (upstream companies) appear comfortable with oil

prices in the US$70-80 /barrel range, as service costs have dropped
dramatically in 2009. For instance the average cost of a rig which is
a major cost for upstream companies is down 50% from 2008 levels.
This factor coupled with increasing demand for oil would encourage
oil E & P companies to invest in exploration creating demand for
jack ups, floating rigs and other offshore assets.

6 Please refer to our disclaimer given at the front & back cover page Securities Research
Pipavav Shipyard Ltd SBICAP Securities Limited
Defence segment
The Indian Navy has three dedicated Shipyards - Mazgaon, Garden
Reach and Goa. The requirement of Navy & Coast Guard Production
is split amongst the 3 leaving only the spill over, if any, to non defence
shipyards. But they have not been able to produce all the ships that
the Navy needs. Even today the Navy import ships to meet its
growing demand. The primary reason for this is the long build times
for ships, which is due to antiquated equipment and/or building
methods in our shipyards. Shipyard productivity has to improve to
a level where they can meet all the requirements of the Navy. PSL
with a huge dry dock and assistance from key partners intends to
fill this gap. Today the company has received all the technical
qualification to bid for naval orders.

Larger orders won't come to Pipavav for the time being

Our talks with a couple of defence yards suggested that the private
shipyards would continue to get only orders for surveillance boats,
interceptor boats, pollution control vessels and some smaller boats
from the navy and the coast guard. For the next few years the larger
orders would continue to go to PSU yards and foreign yards till PSL
develops a good track record of quality and timely delivery.

Share of Navy in Defence Expenditure

Historically the allocation to Navy from the defence budget has
hovered around the 17% mark and this we believe would gradually
be increased to 20% as India will certainly need a powerful Navy as
it takes up greater responsibility in world affairs and also protects
its 7000 km long coast line.

Indian Defence Budget allocation

(Rs crs) FY06 FY07 FY08 FY09 FY10 FY11 FY12E
Total 83,000 89,000 96,000 105,600 141,700 147,344 154,711
YoY growth (%) 7.23 7.87 10.00 34.19 3.98 5.00
Navy (17%) 14,110 15,130 16,320 17,952 24,089 25,048 26,301
Orders for smaller ships 3,528 3,783 4,080 4,488 6,022 6,262 6,575
(25% of navy)
Source: Ministry of Defence, SBICAP Securities Research

We estimate the defence opportunity to be worth Rs 6500 crores in

FY12E for all the private yards (more than 20 operational) including
Pipavav, ABG and Bharati. We estimate defence segment to contribute
about 10% of the revenues at least till FY14E and only from FY15E
onwards the share to move up.

Excellent facility and site

Pipavav Shipyard is spread across approximately 175 acres of land
with a waterfront measuring 800 meters in length and 250 meters in
width. It is expected to have two dry docks of 680 meters in length
with the capacity to accommodate vessels up to 400,000 DWT, which
will also be capable of operation as four separate dry docks: two 330
meters in length and two 350 meters in length. The shipyard is
expected to be the largest in India and among the top 10 shipyards
in the world, in the league of Hyundai and Samsung of Korea, Damen
of Holland, Aker Masa in Finland and Izhar of Spain

Securities Research Please refer to our disclaimer given at the front & back cover page
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SBICAP Securities Limited Pipavav Shipyard Ltd

Pipavav Shipyard is strategically located along the west coast of

India on the sea route connecting Dubai to Singapore, and is
approximately 150 nautical miles from Mumbai, one of the busiest
international maritime routes in the region. The Pipavav Shipyard
is situated adjacent to the Pipavav Port, which is a modern sea port
possessing state-of-the-art port facilities and infrastructure. Due to
its proximity to the Pipavav Port, the Pipavav Shipyard has access
to the Pipavav Port's infrastructure facilities, such as approach
channel and navigation facilities, water, power, utilities, roads, rails
and means of communication.

Ship repair
Ship repair business commands three important requirements

• Strategic location- need based

• Cost effective labour as it is a labour intensive business
• Berths to accommodate ship of any type
PSL satisfies all the criteria's comfortably.
PSL would also have a ship repair facility at the same location.
Gujarat has an immense potential for ship repair business,
considering that there is no such facility between Dubai and
Singapore at present- one of the busiest routes in the World.
Due its size the shipyard can accommodate vessels as big as aircraft
carriers along with the aircrafts for repairs. Operating margins can
be as high as 50%.

Tie ups with the best in the industry

SembCorp - SembCorp (owns 3% in PSL) a global leader in Marine
& Offshore engineering business with a portfolio that encompasses
various segments of the value chain in the global marine and off
shore industry- from ship repair, shipbuilding, ship conversion, rig
repair and rig building to topsides fabrication and off shore
engineering has bought equity stake in Pipavav Shipyard exhibiting
their trust in the company. SembCorp would be providing expertise
and technical support to Pipavav to groom it to a World class
shipyard.
KOMAC -Korean major Korea Maritime Consultants Co. Ltd.
(KOMAC) a private organization of naval architects and marine
engineers would be providing full range of professional services
including ship design, construction supervision, and technical and
management consultancy services to Pipavav.

8 Please refer to our disclaimer given at the front & back cover page Securities Research
Pipavav Shipyard Ltd SBICAP Securities Limited

CONCERNS
Competition from foreign yards in commercial shipbuilding
The commercial shipbuilding market is a global market wherein ship-
owners are by and large free to purchase their ships from anywhere
in the world. With the kind of segment (large carriers) Pipavav is
targeting, it would be directly competing with huge credible yards
in Japan and Korea.

Competition for offshore orders

The mammoth infrastructure of PSL & assitance of Sembcorp should
accelerate PSL's access to business opportunities in the offshore
sector. But with the size of such orders (primarily from upstream oil
companies) is increasingly becoming large and bidding process more
global, the entire tendering process for such contracts has become
highly competitive. For the offshore orders to grow manifold would
take some time especially post exit of Punj.

Subsidy eludes Indian private sector

Investment in setting up any shipyard (including Pipavav) is
motivated by support from the government especially if the industry
is nascent. In 2003 Government of India started a cash subsidy policy
for Indian private companies and since then the private sector have
been booking subsidies as part of sales but not receiving the same
from the government. Timely payment of subsidies assumes a lot of
importance as it's an incentive for emerging private yards to stay in
the business encouraging capex and enables them to compete globally.

Subsidies booked by private shipyards

(Rs mn) FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Bharati 133 332 618 597 849 744 842 927
ABG 511 745 819 817 628 838 982 1,080
Source: SBICAP Securities Research

Execution risk - delays

PSL started commercial operations in April 2009. All the required
plant and machinery would be in place only by Q1FY11 vs. December
2008 as planned earlier. The delay in the yard completion of more
than a year was primarily due to economic slowdown. As a result,
the first three vessel deliveries (April/June 2009) were also delayed
by more than a year. The company today has commenced the
construction of four vessels (now deliveries scheduled from December
2010 onwards) concurrently with the development of the shipyard
infrastructure.
Any further delay in the delivery of the vessels for any reason would
not only invite penalties for PSL but also can severely affect fresh
inflow of orders.

Securities Research Please refer to our disclaimer given at the front & back cover page
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SBICAP Securities Limited Pipavav Shipyard Ltd

THE PROJECT
The shipyard consists of a dry-dock facility along with block
fabrication sites, berths, etc. The yard originally had two wet basins,
one of which has being converted into a dry dock. The second of the
two wet docks remains a wet dock. The broad details of the project
and current status are as follows:

Shipyard Plan
Work Investment Period Remark
(Rs Crs.)
Phase I Conversion of one of 2800 2008 -2010 Offshore facility to
the wet docks to dry dock begin simultaneously
Phase II Conversion of the second of 1000 2012-2013 Expansion of shipbuilding
the wet docks to dry dock facility
Source: Company, SBICAP Securities Research

Present status
1. Block making and fabrication facility ready- block making
going on
2. Two goliath cranes (600T each lifting capacity) installed
3. First dry dock completed - first ship expected to be launched
in Dec 2010.
4. Offshore facility to be completely ready by Q1FY11.
Company has ample land and water front to enhance its capacity
when opportunity prevails.

Largest Drydock (662 m x 65 m) Shipyard Layout

10 Please refer to our disclaimer given at the front & back cover page Securities Research
Pipavav Shipyard Ltd SBICAP Securities Limited

FINANCIAL ANALYSIS
Order book assumption
PSL currently has a total order book of US$486 mn to be executed by
FY12. The last order the company received was for 12 OSV's worth
$112 mn from Indian oil major ONGC in June, 2009. This order was
also received after aggressive bidding by PSL. We learnt that few
other Indian private shipyards had made bid for the same order
(12 OSV's) at 40 to 50 % premium to PSL's bid. Winning orders
under present circumstance would be integral for the company to
grow and establish itself from a Greenfield shipyard.
We forecast the global commercial shipbuilding to be subdued in
CY10; orders for PSL would primarily flow from the offshore segment
and some from the defence segment. We assume orders from the navy
and the commercial segment to grow at 10 to 15% CAGR while the
offshore order book to grow at a healthy 25% CAGR.

Orderbook assumption
(Rs Mn) Present Status FY11E FY12E FY13E FY14E
Commercial Confirmed orders worth Rs 17500 mn 28,750 33,063 38,022 43,725
Offshore Confirmed orders worth Rs 5500 mn 12,500 15,625 19,531 24,414
Defence Bids worth Rs 75000 mn submitted 11,000 12,100 13,310 14,641
Total 52,250 60,788 70,863 82,780
Source: SBICAP Securities Research

Our assumption of order book factors in current bulging commercial

global order book, spending on navy by Indian government, capex
planned by global oil majors in E & P and strengths of PSL.
Revenue CAGR of 90% over FY10 to FY12E
On the basis of our assumptions we estimate PSL to post revenue
CAGR of ~90% over FY110 -FY12E.
Operating Margins
We have estimated an operating margin of 20 -21% (ex subsidy) for
the company in line with margins of other Indian private
shipbuilders. Our margin estimates also factors in aspects like
scalability of the yard, strategic tie ups and diversified business.
Return ratios to improve - DuPont analysis
The return ratios going ahead would improve as the company starts
generating revenue on the asset base that they have developed. We
expect the ROE to improve from 2 % in FY10E to 18% in FY12E
primarily because of high asset turnover. The company has already
done most of it capex and minimum further capital investment would
be required for generating additional revenues.

FY10E FY11E FY12E

EBIT margins (%) 18.9 17.7 18.5
Capital turn (x) 0.3 0.5 0.9
RoCE (%) 5.9 8.1 16.2
Leveraging factor (x) 1.8 1.8 1.9
Interest impact (x) 0.2 0.4 0.7
Tax break (x) 0.8 0.8 0.8
Consolidation factor (x) 1.0 1.0 1.0
RoE (%) 1.5 4.7 17.5
Source: SBICAP Securities Research

Securities Research Please refer to our disclaimer given at the front & back cover page
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SBICAP Securities Limited Pipavav Shipyard Ltd

Yard to be completely functional from 2013E onwards ;

By 2013 we expect the following developments for PSL

• Block making and fabrication work to be in full flow

• The two goliath cranes (600T each lifting capacity) - to be
installed
• Conversion of both the wet docks to dry docks.
• Offshore facility to take up even high end work like
construction of floaters under the aegis of Sembcorp
• Complete delivery of present order book of Rs 2300 crores.
• Credibility developed over FY10 -FY13E leading to fresh flow
of orders- estimated order book by FY14E is Rs 8300 crores.

Subsidy evades Pipavav - we have not factored in subsidy

It has been two and half years since the expiry of the old subsidy
scheme (August 2007). Only old orders booked before the above
mentioned date are eligible for subsidy. Therefore at present only
orders worth $383 mn (old orders) are eligible for subsidy for PSL.
Orders received post August 2007 are uncertain as to whether they
are eligible for subsidy or not. Not only the old scheme has lapsed,
private shipbuilders have not been receiving cash payment for the
subsidy which they have been booking as per the guidelines of Govt.
since 2005 till date. Non receipt of subsidy booked till date continues
to haunt the private shipbuilders. Accordingly our financials doesn't
factor in the subsidy part at all for PSL.
Industry is very confident of restoration of old subsidy scheme. The
industry believes subsidy is very important for Indian shipbuilders
as shipbuilding is a capital intensive industry and Indian yards are
competing with global yards in Korea, Japan and China where their
industry receives direct and indirect support from the government.

Valuation
We have a 12 month target of Rs 50 (based on FY12E numbers).
Pipavav yard would start delivering ships by Dec, 2010 from the
current confirmed order book of Rs 2300 crores. We have assumed
the order book to grow to Rs 5000 crores by FY11E and Rs 6000
crores by FY12E which would be fully reflected in the financial
performance in FY12E, we are valuing Pipavav at 1.5 x FY12E P/B
a premium to domestic peers for the kind of growth and returns it
would have in future. At our target price it would trade at a PE of
9x FY12E and EV/EBIDTA of 6x FY12E which is at par with global
peers.

We factor in the following to arrive at the fair value:

• Healthy top line and bottom line growth of 20 - 25% p. a in

the medium term
• No dilution of equity - 2nd phase of expansion would be
financed through debt (present net debt to equity is 0.8x)
• Aspects like scalability of the yard, strategic tie ups and
diversified business

12 Please refer to our disclaimer given at the front & back cover page Securities Research
Pipavav Shipyard Ltd SBICAP Securities Limited
Upside/Downside risk to our call
Our estimates are completely based on the presumption that the order
book grows as per our forecast. More flow of orders than what we
have assumed would provide upside for the stock and vice - versa.

Peer valuation
Domestic Mkt Cap ROE (%) P/E(x) EV/EBITDA(x) P/BV(x)
(Rs mn) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
Bhararti Shipyard 8,876 12.0 12.3 8.1 6.8 4.7 4.3 0.9 0.8
ABG Shipyard 16,793 16.0 13.6 6.8 6.7 6.0 5.7 1.0 0.8
Source: SBICAP Securities Research

International Mkt Cap ROE (%) P/E(x) EV/EBITDA(x) P/BV(x)

($mn) CY10E CY11E CY10E CY11E CY10E CY11E CY10E CY11E
Hyundai Heavy Inds (Korea) 11,000 24.9 20.4 7.1 7.2 5.6 5.8 1.6 1.4
Hyundai Mipo (Korea) 1,550 17.3 14.4 6.1 6.3 3.4 3.6 1.0 0.9
Daewoo Shipbuilding (Korea) 2,600 21.9 17.4 6.2 6.6 5.1 5.3 1.2 1.0
Samsung Heavy (Korea) 5,000 26.0 21.0 7.0 7.2 5.7 5.8 1.6 1.4
Source: Bloomberg, SBICAP Securities Research

Securities Research Please refer to our disclaimer given at the front & back cover page
13
SBICAP Securities Limited Pipavav Shipyard Ltd

FINANCIAL STATEMENTS
Income Statement (Rs mn)
FY09 FY10E FY11E FY12E
Net Sales na 8,750 15,313 32,984
Direct Expense/raw Material na 5,250 9,188 19,791
Employee cost na 788 1,378 2,969
Admn Expenses na 66 115 330
Other Operating Expenses na 875 1,531 3,298
Total na 6,978 12,212 26,388
EBIDTA na 1,772 3,101 6,597
Depreciaton na 338 545 708
Interest na 1,379 1,679 1,829
Other income na 222 156 206
PBT na 277 1,033 4,266
Taxes na 50 186 768
PAT na 227 847 3,498
Minority interest na 0 0 0
JV/Associates na 0 0 0
Adjusted PAT NM 227 847 3,498
Source: Company, SBICAP Securities Research

Balance Sheet (Rs mn)

FY08 FY09 FY10E FY11E FY12E
Networth 12,592 12,609 17,792 18,639 21,318
Debt 3,925 11,536 13,786 16,786 18,286
Minority interests - - - - -
Capital employed 16,517 24,145 31,578 35,425 39,604

Fixed Assets 11,953 21,981 24,643 28,098 29,389

Investments 1,940 665 500 500 500
Working capital (5,882) (5,177) 2,747 4,336 6,388
Cash 8,506 6,676 3,688 2,491 3,327
Capital deployed 16,517 24,145 31,578 35,425 39,604
Source: Company, SBICAP Securities Research

14 Please refer to our disclaimer given at the front & back cover page Securities Research
Pipavav Shipyard Ltd SBICAP Securities Limited

Key Ratios
FY09 FY10E FY11E FY12E
Topline growth (%) - - 75.0 115.4
Bottomline growth (%) - 950.1 273.4 313.0
Operating margins (%) - 20.3 20.3 20.0
FDEPS (Rs/share) - 0.3 1.3 5.3
CEPS (Rs/share) - 0.8 2.1 6.3
DPS (Rs/share) - - - 1.1
BV (Rs/share) - 26.7 28.0 32.0
PER (x) - 176.0 47.1 11.4
P/C (x) - 70.7 28.7 9.5
Dividend yield (%) - - - 1.8
P/B (x) - 2.2 2.1 1.9
EV/Sales (x) - 5.1 2.9 1.4
EV/ EBITDA (x) - 22.5 13.8 6.6
Debt/Equity (x) - 0.8 0.9 0.9
Working capital turn (days) - (50.7) 84.4 59.3
Dividend payout (%) - - - 23.4
Source: Company, SBICAP Securities Research

Cash Flow Statement (Rs mn)

FY08 FY09 FY10E FY11E FY12E
Consolidated PAT 43 22 227 847 3,498
+ Non-cash items 8 29 338 545 708
Cash profit 51 51 565 1,392 4,206
- Inc. in working capital (5,882) 705 7,924 1,590 2,051
Operating cash flow 5,933 (654) (7,359) (198) 2,155
- Capital expenditure 11,961 10,057 3,000 4,000 2,000
Free cash flow (6,028) (10,711) (10,359) (4,198) 155
- Dividends - - - - 819
+ Equity raised 5,662 (5) 4,956 - -
+ Debt raised (738) 7,611 2,250 3,000 1,500
+ Inc. in minority interests - - - - -
- Investments 1,940 (1,275) (165) - -
- Miscellaneous items - - - - -
Net cash flow (3,044) (1,830) (2,987) (1,198) 836
+ Opening cash 11,550 8,506 6,676 3,688 2,491
Closing cash balance 8,506 6,676 3,688 2,491 3,327
Source: Company, SBICAP Securities Research

Securities Research Please refer to our disclaimer given at the front & back cover page
15
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