Vallabh Bhanshali, Chairman of Enam Securities said that the company would see an upsurge in revenues by FY 11 or FY12 as it would have a range of possibilities in customers and contracts "this yard started getting orders while it was being built" So, how is Pipavav Shipyard different? Co-Chairman and Promoter, of the company Atul Punj, said Piapvav was not really a shipyard, it is a manufacturing and a fabrication facility that has applications in many different sectors, defense is one major sector and so is oil and gas, static equipment such as pressure vessels, heat exchanges, reactors, nuclear reactors and super critical boilers. The shipbuilding firm is looking to tap into a portion of the big projects lined up by the Indian Navy in the defense category and commenting on that Nikhil Gandhi, Chairman of Pipavav Shipyard said, " Post independence in the last six decades, Indian defense has been almost 80% dependent on the foreign companies and the countries and the facilities in India has not been built. So to the extent I would say the overall opportunity in this sector is extremely large, it's a humongous opportunity to get into these by building world class infrastructure." Here is a verbatim transcript of the exclusive interview on CNBC-TV18. Also watch the accompanying video. Q: Before I start talking about the business, the band is at Rs 55-60 we were hearing earlier that it might be Rs 60-70, has there been a little rethink after the NHPC and the Adani experience? Gandhi: Not really, but we had a very good conversation last evening amongst our share holders and other investment bankers and a fair amount of discussions took place with good advice from investment bankers. We thought that it is important to leave more money on the table of investors because this is not the last time we are coming to the market , we would probably come again and again and its important that the investors make money on the debut of Pipavav Shipyards. Q: As a banker was it your advice to them that maybe Rs 5-10 should be left on the table after the recent experience of the last couple of IPOs one of which you were engaged in? Bhanshali: I would say this is the totality of things. It is a shipyard company and it's different from others, yes we have to take the market conditions into account but I wouldn't say that there was too much of a weightage simply because of what happened in the past two issues. So I would say it is credit to the promoters who have a longer term plan for the company in the group and since they had the choice to work within the constraints I think it's a very good decision. Continued on next page ... _PAGEBREAK_ Q: You have also been making the point that in comparison with other listed players like ABG and Bharati are probably not fair can you take us through that from a business perspective why investors should look at Pipavav differently? Punj: This is not really a shipyard; it is a manufacturing and a fabrication facility that has applications in many different sectors, defense is one major sector and so is oil and gas, static equipment such as pressure vessels, heat exchanges, reactors, nuclear reactors, super critical boilers and other major components that can be done here, we also have a huge amount of opportunity that is popping up in the refit space and at the end of it, the smallest component I believe is the commercial shipping side. So effectively, I would really define this as a high quality world standard fabrication facility with a dry dock and that is how look at this investment. Q: Is that where your involvement comes in as well from Punj Lloyd because some people have made the sense that maybe those stretching the case a little bit that maybe it's a combination of an L&T or Punj plus an ABG shipyard rolled into one? Punj: This is a good way to put it because effectively we were looking to get into the fabrication space and for us the choices to make or buy and we ended up having a common shareholder who put us together and I think this has been a good one because it has got our cycle timing of getting our own yard if we were setting one up by about five years and anyone who starts today given the whole land acquisition and other clearances, we have got a head start in this facility and I believe we have got the best management in place as well. Q: How big is the contribution from defense going to be because today if you look at what is in store for the orderbook, it looks like its pretty much a regular off-shore kind of a business plus what ABG Shipyard does but defense hopefully will kick in, when do you see orders from Navy kicking in a big way? Gandhi: Post independence in the last six decades, Indian defense has been almost 80% dependent on the foreign companies and the countries and the facilities in India has not been built. So to the extent I would say the overall opportunity in this sector is extremely large, it's a humongous opportunity to get into these by building world class infrastructure. I would say that net-net, it's an opportunity that we realized together with Punj and that's how we built that infrastructure. Q: By when do you think that would kick in because right now this USD 1 billion kind of orderbook that you have is largely Panamax of offshore vessels, so by when is defense going to contribute? Gandhi: We have already put in some bids to the Indian Navy and it would take some time before this gets finalized. Also, one has to be competitive enough, we have world class technology and infrastructure players and the users be it Navy, or Coastguard, or Oil & Natural Gas Corporation (ONGC) or whoever it is, would recognize that we have got the infrastructure that the country was longing for sixty years. We have it all in place, we are just waiting for the right contracts to come in. Q: Your take? Punj: If we look at the Navy itself, it has all its programs that are running behind time because the existing shipyard, public or private sector are all overloaded. The Navy has approved a USD 40 billion spend over the next seven years and of that about USD 22 billon has been cleared by the acquisition committee as well. So if you look at the capacity that exists in the country, there are serious delays that are running on the existing program. The lack of any new capacity bar this one and not only this what Punj Lloyd brings on the table the fact that we work in so many countries, a lot these requirements we are finding are coming up from a lot of the other countries where its Asia or Africa, so I believe on the global level we are seeing a massive contribution that we can make and on to that the fact that a lot of European yards for pricing, union issues whatever are now being developed as real estate projects, so a lot of capacity has gone there out of the system and we are the only large capacity international sector facility just now coming online so defense whichever way we cut it would be a significant play and part of this business. Q: Come in on that because the first question when one looks at it because the business seems attractive but the inevitable thing is to find a benchmark in the listed space and try and compare it and then you say ABG is at 5 PE and this one is going at 30-40 PE, how do you come to realistic valuations for something like Pipavav? Bhanshali: Firstly, this company is still to get into full operations and therefore partial year comparisons may not be appropriate but if we were to look at the diversity of the capability that this yard has and has been repeatedly said by my other two panelists, the potential is very different and even on numbers I think the way investors have looked at it is that its not appropriate to talk those numbers in public domain but our sales people have found that when they do realistic numbers for the future the comparisons are pretty sound and this is a more sophisticated yard and it can expect a better PE multiple but that's not really 5 and 30 kind of a thing it's a lot more in a narrower range. Q: So you are saying that its not as if Pipavav should get an L&T kind of PE Multiple per say but the earnings of the next couple of years will be such that maybe if PE multiple needs to be so stretched to justify the IPO price? Bhanshali: Yes absolutely. Q: But you can't disclose the numbers because you can't make forward looking statements? Bhanshali: We cannot. Therefore I would say this with all the due caution about it but since you mentioned some numbers, I was just putting some perspective on it. Q: By when do these numbers start kicking in, what ever those numbers are justified when defense kicks in, the offshore business kicks in and in a bigger way oil and gas kicks in when do you see the big numbers coming in? Bhanshali: If you put things in perspective and say that look, this yard started getting orders while it was being built and the operations and activities have been started, so as the world economy improves, as the defense departments of various countries particularly our own country look at the facility and capability of this yard, obviously and it has to be done very carefully and cautiously and it will have a range of possibilities in customers and contracts and therefore in FY11 or FY12 or maybe some activity in FY09-10, I think they should start getting serious revenue. Continued on next page ... _PAGEBREAK_ Q: By when do you think the commercial aspects of it would be not such a significant contributor to your order book? Gandhi: This year is our first operational year we have started building ships from April 2009 and we also now have the contract of the ONGC and in this current year would see revenue coming in from building the Panamax vessels and this is the first time such large vessels are being built in the country. So this year we would have a revenue from largely the Panamax. Q: Do you think by 2011 you think Panamax will become a minority contributor to the revenue? Punj: I should think so because the amount of drilling activity which is happening on the offshore space itself is very significant right now, how many we win and how many we loose is just significant right now and in the next few months but offshore will definitely become a major contributor to what's going on and similarly the defense is also which I think would kick in by next year for sure, so I think 2010 and 2011 would be a significant year where the commercial side which at best is a commoditized business, it's a bunch of tanks with the propellers at the back but the complex stuff is really where we re focusing on, so oil and gas and defense again are really the drivers which we should see some definite contribution to numbers in the next financial year. Q: Oil and Gas is where Punj Lloyd will bring its expertise and probably help out the most which area specifically the big orders coming in from, would it be exports, would it be ONGC? Punj: The first round I believe would be ONGC because a lot of the replacement work for the Bombay High, South Basin and the new builds in the deep waters of the Krishna-Godavari (KG) Basin and a lot that would be happening in the next 1-2 years. So we are going to be seeing some serious activity which would go down to the shipyard also within the next I would say six to eight months within the next I would say six to eight months. Apart from that the overseas market is also looking pretty serious but I think we would start off with the Indian opportunity and then move it out. Q: In your initial discussions with investors, what is the closest likeness that they are seeing of Pipavav Shipyard because it's a combination of many types of businesses, like ABG, Aban, Punj, L&T, do people have a clear sense of what this business is because this is a combination of a few? Bhanshali: It's difficult to say what this beat is but I think a more appropriate comparison maybe with the yards abroad which are larger in capacity and they have a range of capabilities like this yard. The second thing is the defense potential coming not only from that this is the first one of its kind and also the fact that offset as a strategy is going to kick in big time. Q: What are the key risks like business in yours because the last couple of issues have been power and clearly the risk there is of execution, for you what is the key risk is it still the remaining bit of execution that you need to do, is it pricing, maintaining margins because of fluctuating margins going forward, what to your eyes is a key risk for the business like yours? Gandhi: In my mind the key risk would be if India's defense forces or private offshore companies and people like that and if they choose to buy the stuff only from the overseas market as has been the case in the last couple of decades, then that's the only risk I can see. Q: You want to come on this? Punj: What Nikhil said is quite appropriate that we are quite de-risked in terms of the number of sectors that we are playing in, for example we talked about power, the super critical boiler fabrication, we have its capacity over here, nuclear reactor fabrication we have the capabilities at this particular location, we have talked about enough on the defense side and also on the oil and gas side, so it's a quite spread between Power, Oil and Gas, defense as well as on the commercial side so we are playing in enough sectors to kind of de-risk us because I don't believe defense will totally fall away or we wont get any work, I refuse to believe that we will not get any work in the oil and gas space because there is so much that is to be done, its not conceivable to think that the existing manufacturers of the boilers are the only one who can feed the large demand of the boiler market alone in the power sector, so I think we are quite spread and we can take on to this, the Punj Lloyd approach by taking this overseas as well.
A lot of comparisons have been made of Pipavav Shipyard with other shipyard companies but that's not the fair way to look at this one because this is bigger and probably more diversified than some of the other existing listed shipyard companies. Valuations are too therefore more demanding from the existing peers in the listed space.
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