Subsidy reversal raises concern!!! • Pipavav Defence and Offshore Engineering Co :: ICICI Securities, link

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Subsidy reversal raises concern!!!
• Pipavav Defence and Offshore Engineering Co (PDOECL) reported its
Q2FY15 results with revenues at | 212.2 crore vs. | 316.5 crore in
Q1FY15 and | 807.5 crore in Q2FY14. Revenues declined ~33% QoQ
and 74% YoY as income from shipbuilding was at | 199.6 crore vs.
| 298.2 crore in Q1FY15 and | 617 crore in Q2FY14
• EBITDA for the quarter declined ~72% QoQ and 73% YoY to | 39.8
crore. Further, the EBITDA margin expanded nearly 54 bps YoY but
contracted 2565 bps QoQ to 18.8%. The company recorded a
reversal in subsidy to the tune of | 25.7 crore in Q2FY15 thereby
denting the EBITDA further
• Consequently, PDOECL reported a net loss of | 68.3 crore vis-à-vis
profit of | 5.6 crore in Q1FY15 and | 4.5 crore in Q2FY14
Unparalleled infrastructure; defence orders remain elusive
PDOECL spanning over 861 acres of land with two dry docking facilities of
662 m x 65 m (Dry Dock-1) and 750 m x 60 m (Dry Dock-2 under
construction) is one of the largest “modular” shipbuilding facilities in
India. The shipyard is capable of accommodating 400,000 dwt capacity
ships along with construction and repair of a wide range of vessels
starting from coastal and naval vessels together with repair and
fabrication of offshore platforms and rigs. It also has a dedicated offshore
yard with 175 m x 16.89 m quay consisting of both launching and loading
platform together with installation of bollard and mooring rings. However,
as order book execution slips, the shipbuilding revenue declined ~56%
on a half-yearly basis in H1FY15, thereby leading to a decline in revenue
estimates by ~32% for the next couple of years.
Strategic tie-ups attuned to capture any forthcoming opportunity
PDOECL formed a JV with Mazagaon Dock (MDL) providing exposure to
MDL’s ~$20 billion order book to capture the defence shipbuilding
opportunity in India. Further, to enhance its position, PDOECL formed
strategic tie-ups with a slew of foreign partners to provide integrated
solution. PDOECL’s tie-up with multinational players like SAAB, DCNS,
Babcock, etc. provides depth to domestic defence shipbuilding capacity.
Further, the government raised the FDI cap from 26% to 49% with its
focus on enhancing indigenous capacity and capability of defence
shipbuilding. Hence, PDOECL with its robust infrastructure may be a
prime candidate for stake sale and, thereby, significantly de-leverage
itself. As naval orders remain elusive, PDOECL’s order book quality gets
further diluted, thereby raising concern on execution.
Subsidy reversal poses concern as execution slips and earnings taper
Though revenues for shipbuilding grew at a CAGR of 21% over FY12-14,
PAT posted a decline of ~66% CAGR over the same period largely due to
high leverage and depreciation. Nonetheless, going forward, as the
government has approved 49% FDI in defence and is expediting
indigenisation of defence procurement, PDOECL stands at a vantage
point for the same owing to its superior infrastructure. However, PDOECL
recording subsidy reversal to the tune of | 25.7 crore in Q2FY15 and
| 42.9 crore in H1FY15 raises concern over execution of the commercial
order book. Also, the shipbuilding revenue declined~ 68% YoY and 33%
QoQ in Q2FY15 and ~56% YoY on a half-yearly basis, thereby leading to
a downgrade of our revenue estimates. Consequently, we cautiously
approach PDOECL and await any announcement pertaining to winning of
defence order and subsequently put the stock Under Review.

link
http://content.icicidirect.com/mailimages/IDirect_PipavavDefence_Q2FY15.pdf