Cochin Shipyard’s IPO success shows investor appetite for defence sector

The resounding success of the initial public offering (IPO) of state-owned Cochin Shipyard shows that investors across categories have bought into the defence play of shipbuilders, a segment with government-funded defence contracts estimated to be worth ₹2 lakh crore over the next decade.

On August 11, the day Cochin Shipyard was listed on the Bombay Stock Exchange, the stock closed at ₹522 a share, a gain of 20 per cent over the issue price of ₹432.

Despite the global headwinds facing the commercial shipbuilding industry for close to a decade, the company’s IPO was subscribed 76 times — the highest in over a decade for an IPO and that, too, without any anchor investor.

Cochin Shipyard tapped the market to raise money to part-fund an expansion plan involving the construction of a new dry dock and boosting its ship-repair capacity. For investors eyeing heavy engineering firms, the biggest draw to firms such as Cochin Shipyard is the order book.

The yard, which is in the heart of Kochi, is currently executing orders worth a little over ₹3,000 crore comprising six ships. The second phase of India’s first locally made aircraft-carrier alone accounts for ₹1,315 crore of this, with the rest coming from four passenger-cum cargo ships for the Andaman and Nicobar administration and a technology demonstration vessel for the DRDO. Interestingly, all these orders were given to the company by government outfits without any tenders.

The overwhelming response was all the more creditable in the backdrop of the financial troubles facing two listed shipyards — ABG Shipyard and Bharati Defence and Infrastructure.

Ashish Kumar Chauhan, MD and CEO of the BSE, said the success of the Cochin IPO was an indication that the planned IPOs of yards such as Mazagon Dock Shipbuilders and Garden Reach Shipbuilders and Engineers “would also witness increased demand from investors”.

Mazagon Dock and Garden Reach, controlled by the Defence Ministry, are sitting on defence orders worth over ₹1 lakh crore, making the order book of Cochin, a PSU administered by the Shipping Ministry, look insignificant.

Unlike the earlier practice of awarding contracts on a nomination basis without a tender, defence agencies such as the Navy and Coast Guard have started placing orders through tenders to secure competitive prices. Local yards, both public and private, acknowledge that there is fierce competition to win orders. In fact, Cochin Shipyard and L&T have separately bid for defence orders worth ₹12,000 crore.

But, given the small number of financially sound yards in India — a key factor in evaluating bids — there will be a big pie for everyone to chew on for years. This is what investors will be betting on.