Cochin Shipyard IPO - Should you buy?

Cochin Shipyard, makes and repairs ships. It is wholly owned by the Government of India and caters primarily to India's defence sector (from which it gets about 80% of its orders). Cochin Shipyard is India's largest public sector shipyard in terms of dock capacity and is building India's first indigenous aircraft carrier. It was conferred 'Miniratna' status in 2008. Shipbuilding is a slow, capital intensive business. Cochin Shipyard's government ownership allows it to muster the necessary financial muscle for this business. Its revenues have grown at a CAGR of 5.7% over the past five years and its profits have grown at 4.05%. These numbers are not spectacular but look respectable compared to the dire state of the industry as a whole. Its EBIT profit margin at 20% look solid and its margins on the ship repair business are especially strong. The icing on the cake? If you're a retail investor in this IPO, you also get about 5% off. Cochin Shipyard has about 2000 crores of its of cash and equivalents on its books. It is deploying most of this money and a large chunk of its IPO proceeds (Rs 672.5 crores) for the construction of a dry dock and a ship repair facility. This combined amount at about 2700 crores is 35 times its five year average annual operating cash flows. If this bet goes awry, the company stands to a lose great deal. The shipbuilding sector is in poor shape with many of Cochin's private sector listed peers such as Reliance Defence, ABG Shipyard and Bharati Defence and Engineering struggling to stay afloat. A cyclical revival when the new facilities go live will give investors a substantial payoff but this may not materialise. The projects themselves, as is common with government works can get delayed or exceed their cost estimates. Where the money will go Roughly 67% of IPO proceeds (984 crores) will be used for building a dry dock, a ship repair facility and general corporate purposes. The balance 33% (484 crores) will go to the Government of India. The Government's stake will fall from 100% to 75%. The split among investors 15% of the IPO is being offered to HNIs and 35% is being offered in the retail category. A discount of Rs 21 (about 5% of the issue price) per share will be given to retail investors. The Verdict The comp