Pipavav Shipyard Limited (PSL) was established in 1997 as Pipavav Ship Dismantling and Engineering Limited to set up a ship dismantling facility in order to capitalize on benefits presented by International Maritime Organization (IMO) regulations which would have resulted in an increased rate of retirement of older tankers by shipowners.

The IMO regulations were expected to be implemented by 2002. However, later the implementation of IMO regulations was deferred. Subsequently, the Management then decided to convert its ship? dismantling facility into ship construction facility. Most of the company's existing infrastructure from the shipdismantling facility, including two wet docks of approximately 680 meters in length and 60?65 meters in width, were incorporated into the ship construction facility "Pipavav Shipyard".

Later in September 2007, Punj Lloyd Limited (Punj Lloyd) acquired stake in PSL to become the co? promoter with a view to carry Offshore business in India through PSL. PSL started its operations on 01 April 2009 and is currently constructing four vessels, the first of which is expected to be delivered in April 2010.

The company's shipbuilding, ship repair and offshore fabrication yard is located on the west coast of India, adjacent to major sea lanes between the Persian Gulf and Asia. Upon completion of construction, the Pipavav Shipyard will be capable of ship construction and repairs for a range of vessels of different sizes and types including the offshore vessels. The construction of Pipavav Shipyard is expected to be completed in October 2009 (excluding the offshore yard). The construction of the Offshore yard is expected to be completed in March 2010. Limited The Pipavav Shipyard is spread across 198.92 hectares comprising an SEZ unit spread over 95 hectares and EOU spread over 103.92 hectares. The two sites are connected by a dedicated corridor road of approximately 4.5 km length built by the company partly on land owned by its subsidiary and partly on land leased from Gujarat Pipavav Port Limited.

The current phase of the construction of the Pipavav Shipyard includes following facilities:

?? Conversion of one of the company's two existing wet docks into a dry dock measuring 662 meters in length and 65 meters in width. This dry dock would be capable of accommodating ships of up to 400,000 DWT and/or number of smaller vessels including offshore vessels.

?? Construction of a fabrication and block assembly facility for shipyard operations ?? Establishment of dedicated facilities comprising an offshore yard with load out facilities of company's Offshore Business Products.

?? Installation of two Goliath cranes, each having a lifting capacity of up to 600 tones, including fit out berths, for building and repairing vessels, including naval vessels and coast guard vessels.

Objects of the issue

The company intends to use the net proceeds from the issue for the completion of its shipbuilding and ship repairs facility at the Pipavav Shipyard plant. The proceeds will also be used to fund the construction of the Offshore yard. Earlier company has raised money through various investors including Infrastructure Leasing & Financing Services Limited (IL&FS), Trinity Capital (Nine) Limited and 2i Capital PCC.

Downtrend in the shipbuilding industry to continue in near future

The demand for new vessels depends on growth in international trade and scrapping of older ships. Growth in international trade is driven by global economic growth and changing patterns of supply of raw materials and regional demand. The shipbuilding industry witnessed a flood of new orders in 2006 and
2007 due to longer voyages and increased tonnage per mile primarily in dry? bulk segment resulting into shortage of ships and steep increase in the freight rates. However, as the economic crisis unfolded the shipping industry witnessed a rapid decline in demand for vessels owing to lower international trade and the Baltic Dry Index crashed more than 95% within a span of 6 months. Going forward, we expect the freight rates to remain low on expectation of lower trade until the major importing economies in world completely recover and flood of new vessels over next two three years. Consequently, we do not expect a significant increase in the industry order book impacting the future growth potential for PSL. Moreover, Indian Government has not renewed the subsidy scheme for shipbuilders which expired in August 2007. Therefore, PSL will not get the subsidy on new orders which it will receive in future making it less competitive than against international players.

Renegotiation / Cancellation of orders to impact top? line and margins

The company has an order book of 34 vessels (including options to take delivery and vessels under re? negotiation or arbitration) worth US$931.6 mn (Rs 4,458.7 crs) which is executable over next 4?5 years. PSL expects to deliver 10 Panamax vessels (under firm order book) between April 2010 ? May 2012 and if fully executed will lead to a revenues of Rs 1,788 crs to the company over next three years. The table below provides a detailed break? up of the company's order book.

However, PSL is in the arbitration process with Setaf as to ascertain whether Setaf has the right to cancel one or more of four firm order agreements for Panamax bulk? carriers. Moreover, PSL is in negotiation with another customer AVGI for 6 Panamax vessels. Under the negotiations AVGI will get the unilateral rights to terminate its obligation to take delivery of one or more of these 6 vessels if it is unable to arrange funding for these vessels. Furthermore, order of
2 vessels from Golden Ocean remains under negotiation under which Golden Ocean has the option to take delivery of these vessels by December 2010. Therefore, out of 34 vessels in the order book, order for 12 vessels can be cancelled or renegotiated in future which may have negative impact on revenue of PSL in future.

Dependence on a few major customers PSL has recently started its operations and have very limited operating history. So far company has obtained orders from only four customers namely: Golden Ocean, AVGI Maritime, Setaf SAS and ONGC and is highly dependent on them. If company losses out any of these customers, its operations and financial performance will be significantly impacted. o Lack of experience PSL started its operations of shipbuilding on 1 April 2009 and is relatively newer player in the market. Although company has strong support from its copromoters
(SKIL Infrastructure and Punj Lloyd), it still lacks experience in the shipbuilding industry which is highly competitive and a global industry dominated by China, Korea and Japan. These three countries capture approximately 88% of market share as of 2008. (Source: BRS) o Dependence on Punj Lloyd for order of Offshore vessels Punj Lloyd became co? promoter of PSL in September 2007 with an understanding that it will carry out its offshore business in India through the PSL and thereby expand its business to include offshore fabrication and construction. Going forward, PSL will bid for offshore vessels construction and fabrication orders through Punj Lloyd. Therefore, PSL depends heavily on Punj Lloyd for getting orders in offshore space. Moreover, company's offshore yard is still under construction and is expected to be completed in March 2010. Any significant delay in the construction schedule could result in additional funding requirements, cost overruns, increased debt service obligations and additional financing and operating covenants which would limit company's operations.

Increased demand for offshore vessels

The Indian offshore market is expanding rapidly. The demand for oil is expected to remain firm in the long term in India. To reduce its dependence on oil and gas imports, Indian government has to adopt and implement measures to promote exploration efforts within the country. Oil & National Gas Corporation Ltd
(ONGC) has projected a capital expenditure of US$21 bn during the Eleventh Plan. The offshore construction industry is further expected to benefit when offshore blocks under the Government's New Exploration Licensing Policy
(NELP) reach development stage. Estimated capital expenditure for this segment is approximately Rs. 400 bn (US$ 10 bn). Consequently, this increase in offshore activities will lead to increased demand for offshore vessels which in turn would lead to higher demand for shipbuilding vessels. IPO Note Pipavav Shipyard Limited Diversified product mix to enhance growth opportunity

The PSL intends to pursue construction of various types and sizes of vessels going forward. Upon completion of construction of Pipavav Shipyard, the company will be capable of ship construction and repairs for a range of vessels of different sizes and types within the Tankers and Bulk? carriers segment. Moreover, Pipavav Shipyard will also be equipped to build naval vessels and coast guard vessels, as well as the fabrication and construction of products such as offshore platforms, rigs, jackets and vessels (but excluding sub? sea pipelines).

We have compared PIL with ABG Shipyard. PIL is the largest dockyard in India as of now with a capacity that accommodates ships of up to 400,000 DWT. Moreover, upon completion of fabrication facility at the Offshore yard, PIL will be highly diversified yard with capacity to build defense, naval and offshore vessels.

ABG Shipyard is trading at a P/BV of 1.59x based on price of 15 September 2009 while PSL will be trading at 2.26x (assuming the upper end of the price band). Moreover, based on EV/Order Book also, PSL looks costly as compared to ABG Shipyard.

Considering the downturn in shipbuilding industry, lack of experience of PSL in shipbuilding, low order book as compared to the size of shipyard and higher valuation as compared to its peers we recommend to AVOID the subscription for this IPO.