Mazagon Dock Shipbuilders Limited (MDSL) recently created quite a buzz in the shipbuilding market. It has been in the news for its initial public offering (IPO) which received an exceptional response. The issue was oversubscribed 157.4 times, receiving bids for over 230 million equity shares against an IPO size of 30.6 million shares.
About the company
Termed the “shipbuilder of the nation”, MDSL is a defence public sector undertaking shipyard under the Department of Defence Production, Ministry of Defence (MoD). It is engaged in the construction and repair of warships and submarines for the MoD for use by the Indian Navy and other vessels for commercial clients. MDSL is a wholly owned Government of India (GoI) company and the only shipyard to have built destroyers and conventional submarines for the Indian Navy. It also has several workshops with machines and equipment for hull fabrication and ship construction. Further, the company is also one of the first shipyards to manufacture corvettes (Veer and Khukri class) in the country.
Since 1960, MDSL has built 795 vessels including 25 warships, from advanced destroyers to missile boats, and three submarines. It has a shipbuilding and submarine capacity of 40,000 deadweight tonnage. MDSL has two major business divisions – shipbuilding, and submarine and heavy engineering. At present, the company is building four P-15 B destroyers and four P-17A stealth frigates, and undertaking repair and refitment of a ship for the MoD.
Stellar response to IPO
MDSL’s IPO took place from September 29 to October 1, 2020. With a target of raising up to Rs 4.44 billion, the IPO received bids for over 230.12 million shares against the total issue size of 30.6 million shares.
The issue was oversubscribed 157.41 times, with the portion reserved for qualified institutional buyers receiving bids 89.71 times the number of shares on offer, while the portions for non-institutional investors and retail investors received bids 678.88 times and 35.63 times the number of shares on offer.
The objective of the offer was to carry out the disinvestment of 30,599,017 equity shares by the government constituting 15.17 per cent of the company’s pre-offer paid-up equity share capital and achieve the benefits of listing the equity shares on the stock exchanges. Meanwhile, MDSL will not receive any proceeds from the offer and all such proceeds will go to the government.
As of July 31, 2020, MDSL’s order book from its shipbuilding, and submarine and heavy engineering segments stands at Rs 540.74 billion, comprising three major shipbuilding projects and two submarine projects. The strong order book provides long-term revenue visibility to the company. Further, MDSL expects to have a fairly stable order pipeline in the coming few years with several projects from the Indian Navy and the Indian Coast Guard worth between Rs 200 billion and Rs 300 billion lined up.
Being the only player to have built P-75i conventional submarines and new-generation destroyers, MDSL is believed to have a strong competitive advantage for such mega projects. With the upcoming order of six P-75i conventional submarines (worth around Rs 450 billion) and six new-generation destroyers (worth Rs 500 billion) likely to be fianlised in the next three to four years, any contract in its favour would propel long-term growth for the company.
Further, MDSL intends to increase its share of revenue from short-duration ship repair activities, as these would result in early booking of revenues, augment the client base and reduce dependence on the MoD for future orders. The company also intends to increase the quantum of indigenised components for its warships and submarines to give an impetus to the central government’s Make in India and Atmanirbhar Bharat initiatives. For this, MDSL has set up a dedicated Make in India department. It has also introduced an indigenisation clause in all its tenders wherein bidders have to state their indigenisation plans. Currently, the indigenisation level for the current order book is about 52 per cent.
Meanwhile, MDSL is currently working on reviving its ship repair operations and exploring the possibility of developing a greenfield shipyard at Nhava, Navi Mumbai. The greenfield shipyard will be equipped with a wet basin, a ship lift, workshops, stores, buildings and a ship repair facility spread over 37 acres, and will be suitable for construction and repair of warships and commercial ships of larger dimensions.
Key risk factors
One of the key concerns for MDSL is its high dependence on the MoD for defence orders. In the past, it has mostly been awarded such orders on a nomination basis by the MoD for ships to be used by the Indian Navy. However, there is no guarantee that future orders will be awarded to MDSL by the ministry.
MDSL competes on the basis of its ability to fulfil contractual obligations and deliver ships in a timely manner. It faces tough competition from both public and private sector players in the shipbuilding segment including Cochin Shipyard Limited, Garden Reach Shipbuilders and Engineering Limited, Goa Shipyard Limited, Bharati Defence and Infrastructure Limited, Hindustan Shipyard Limited, ABG Shipyard Limited, L&T Shipyard and Reliance Defence and Engineering Limited. The Defence Procurement Procedure, 2016, encourages domestic private sector players to participate and invest in the production and acquisition of defence assets, and this could have a bearing on MDSL‘s ability to secure orders from the MoD.
MDSL’s entire business operations are based out of a single yard in Mumbai. Any disruptions in the operations of its shipyard will have an adverse effect on its business, financial condition and future commitments. Further, the shipbuilder is dependent on the Mumbai Port Trust (MbPT) for certain services required for daily operations. Any disruption in either the operations of Mumbai port or its relationship with MbPT will have an unfavourable impact on its operations. Besides, the effect of the ongoing Covid-19 pandemic on MDSL’s business and operations cannot be ascertained.
What lies ahead
India is one of the biggest military spenders in the world. The draft Defence Production and Export Promotion Policy, 2020, which was released in August 2020 as one of the key strategies for Atmanirbhar Bharat, was impacted by the ongoing pandemic. Subsequently, the MoD listed 101 defence items to be placed under an import embargo. The embargo on the import of defence items is planned to be implemented over 2020-24. According to defence ministry estimates, of the Rs 4 trillion worth of contracts planned to be awarded to domestic manufacturers over the next five to seven years, contracts worth around Rs 1.3 trillion each will be for the army and air force, providing significant opportunities to indigenous manufacturers.
In this regard, MDSL is well positioned to take advantage of the upcoming opportunities in the domestic defence shipbuilding segment. While its future growth is limited due to the high dependence on the MoD and its current infrastructure capacity, any major order will propel the company’s growth.
Garima Arora