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Pipavav Shipyard – SELL by Citi

November 26, 2009

Citi has initiated coverage on Pipavav Shipyard (PSL) at Sell / High Risk (3H) rating. The risk / reward remains unfavorable at current levels.

PSL is constructing a shipbuilding, shiprepair, and offshore fabrication complex at Pipavav which will have the capability to build and repair vessels of up to 400,000 DWT and provide offshore construction facilities.

Order Book Down:The shipyard is expected to be completed in FY10 vs. FY09 earlier, a delay of nearly a year. PSL has firm orders of US$485m for 10 Panamax bulk carriers and 12 OSVs, down from US$1.1bn for 26 Panamax bulk carriers last year, due to cancellations and amendments.

Global shipbuilding has suffered from overcapacity as well as a supply/demand mismatchs owing to the economic downturn. PSL intends to tackle this by targeting the domestic offshore and defence segments, though orders from these segments are yet to materialize. On the other hand, technical agreements with SembCorp and KOMAC and the induction of Punj Lloyd as co-promoters are material positives.

Citi has set a target price of Rs 45 based on 1.2x P/B, a 5-10% discount to global peers. We had recommended a AVOID during the IPO due to the shady promoters Mr. Gandhis.

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