With the planned joint venture with government defence shipbuilding company Mazagon Dock, Pipavav Defence & Offshore Engineering (earlier called Pipavav Shipyard) may be able to strengthen its position in the defence segment.
The company's Board on Monday, approved setting up of joint venture company Mazagon Dock Pipavav Ltd to cater to domestic defence orders as well as opportunities abroad.
Mazagon Dock is the flagship defence shipyard under the Defence Ministry and builds warships and offshore platforms. Through this joint venture and earlier technical agreements with foreign players for defence equipment related technology, Pipavav has signalled that its primary focus lies in the opportunity-laden defence space, rather than the uncertain and volatile commercial shipbuilding segment. The stock ended 11.3 per cent higher to close at Rs 91 on Monday.
The joint venture would afford better utilisation of Pipavav's shipyard, the largest and said to be among the most modern in India. Mazagon Dock will now use Pipavav's facility in Gujarat to build orders that it has on hand.
The venture will also seek opportunities in the export market. This too may not be too challenging a proposition, given that Pipavav has been focussing on agreements that equip it with superior technology in the defence space and also been signing protocol with Defence Ministries of nations such as Russia.
On the defence track
After a lull in activity in 2010, as a result of delayed completion of its shipyard (completed in December 2010), Pipavav Shipyard has been making a series of announcements, all strategic in nature in 2011. Following clearance from the FIPB for foreign direct investments, Pipavav forged technical agreements with international defence players such as Babcock Group of the UK and Northrop Grumman of the US. Simultaneously, it received domestic license to build warships from the Indian Navy and followed this with a large order of Rs 2,975 crore from the Navy.
The Mazagon Dock tie-up, therefore, appears to be a fall-out of the license and qualification. This tie-up also provides the company with a clear edge over peers such as ABG Shipyard, which recently started bagging orders in the defence space.
While defence orders may not necessarily be lucrative in terms of margins (given the high import component in defence ships) it will help smooth the volatile nature of business in the commercial shipyard segment. Defence orders, unlike commercial ship orders are also seldom subject to cancellations. The defence business may also soon justify the premium valuation of three times the book value (as against 1.5 times for ABG Shipyard).
The company has already seen a jump in its profitability with EBITDA margins in the June quarter moving to over 20 per cent as against 13 per cent a year ago.
The company moved to the profit zone for the first time in the quarter ending December 2010. It had orders worth Rs 6,750 crore as of June.
Recent issue of warrants worth Rs 82 crore, besides the likely inflows post the FDI approval may provide some funding for the upcoming projects.