Lukewarm Response

Garden Reach’s maiden public issue undersubscribed

In recent times, a number of public sector undertakings (PSUs) have turned to the market to raise funds. One such PSU, Garden Reach Shipbuilders and Engineers Limited (GRSE) came out with an initial public offering (IPO) in September 2018. The issue was not well received by investors and as a result, the company had to extend the IPO by three days, till October 1, 2018. Eventually, the issue was subscribed 1.02 times.

About the company

GRSE was incorporated in 1934 under the Indian Companies Act, 1913. It was later acquired by the Government of India from Macneill & Barry Limited in May 1960. Shortly after being remodelled as a central public sector enterprise, GRSE built the country’s first indigenous warship – INS Ajay – in 1961. In August 2017, it was once again incorporated as a public company pursuant to a special resolution of its shareholders on August 25, 2017.

GRSE operates as a shipbuilding company under the administrative control of the Ministry of Defence. It primarily meets the shipbuilding requirements of the Indian Navy and the Indian Coast Guard. In addition, it is also engaged in engineering and engine production activities, and manufacturing deck machinery items, prefabricated portable steel bridges and marine pumps. Overall, the company offers products in three core verticals – shipbuilding, engineering and engine production.

Robust finances

GRSE has had a sound financial track record. During 2017-18, the company recorded a total income of Rs 15.26 billion as compared to

Rs 11.46 billion during 2016-17, registering an increase of 33.12 per cent. During the same period, the profit after tax (PAT) (before minority interest and exceptional item) for the company stood at Rs 868.1 million, compared to Rs 114.6 million in the previous year. GRSE’s expenditure increased from Rs 10.9 billion in 2016-17 to Rs 13.61 billion in 2017-18.

With respect to revenues earned, the company derives the majority of its revenues from its shipbuilding division. From 2014-15 to 2017-18, the share of shipbuilding in the company’s total revenue averaged about 92-93 per cent.

The issue

The board of GRSE authorised the public offering on February 28, 2018. The company then prepared and issued the draft red herring prospectus incorporating the Securities and Exchange Board of India’s capital and disclosure requirements, following which an offer agreement between the selling shareholder (President of India acting through the Ministry of Defence), GRSE and book-running lead managers (IDBI Capital Markets and Securities Limited and YES Securities India Limited) was signed on March 26, 2018.

The approval by the central government was conveyed on September 6, 2018, subsequent to which the company issued the final red herring prospectus on September 7, 2018.

GRSE’s IPO took place during September 24-26, 2018. The three-day IPO came out with a price band of Rs 115-Rs 118 per equity share with a face value of Rs 10. It consisted of 29,210,760 shares. Bids could be made for a minimum lot of 120 equity shares and in multiples of 120 shares. Owing to undersubscription to the tune of 67 per cent, GRSE extended the IPO to October 1, 2018. The price band was also reduced to Rs 114-Rs 118 from the earlier Rs 115-Rs 118.

The objective of the IPO was to carry out disinvestment of 29,210,760 equity shares and achieve the benefits of listing the equity shares on the stock exchanges.

Tepid response

The IPO received a lukewarm response from investors. Despite being one of the front-runners in the defence shipbuilding segment along with a strong order book of over Rs 208 billion (as of February 28, 2018) and enjoying significant advantages over global shipyards in securing contracts due to the Make in India initiative, the IPO failed to attract investors.

One of the reasons behind such a response was the bearish investor sentiment of the Indian stock market. The other reasons that could have been responsible for the poor response include the present slowdown in the defence space, weak operational performance of GRSE, heavy dependence on orders from the Indian Navy and Indian Coast Guard, etc.

In view of the undersubscription, the IPO was extended by three days till October 1, 2018, as the weak market conditions persisted. It was only then that the offer was fully subscribed. The subscription figure stood at 1.02 times on the final day. It was largely supported by qualified institutional buyers whose portion was subscribed by 1.8 times.

Conclusion

The Indian defence shipbuilding sector is emerging as an area of high growth. While the public sector shipyards remain the front runners, a number of private players are taking specific measures to get a share in the Indian defence pie. The country’s 7,517 km long coastline, affordable labour, huge inflow of orders and the high average age of vessels are expected to drive demand for the domestic shipbuilding industry. Besides GRSE, a number of other companies in the defence sector have come out with IPOs. However, the bearish investor sentiment coupled with other prevailing issues was mirrored in the GRSE’s IPO response.

Nonetheless, GRSE is well positioned to benefit from the Make in India initiative, which is expected to promote domestic defence shipbuilding in the country. Policy initiatives such as granting infrastructure status to shipbuilding, granting the right of first refusal to Indian shipyards for shipbuilding and ship repair work for Indian PSUs, and providing support through the new financial assistance schemes are expected to provide a steady pipeline of orders and drive growth.

Meanwhile, some of the factors that may have a bearing on the shipyard’s growth plans include the cyclical nature of business, future expansion limited to a range of vessels, significant influence of the government, and complete dependence on MTU, one of the world’s leading manufacturers of large diesel engines and complete propulsion systems, for engine supplies, among others. These issues notwithstanding, GRSE is bound to register substantial growth going forward.

Garima Arora

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