The IPO of Mazagon Dock Shipbuilders (Mazagon) — a defence PSU — joined the listing gains club today. The stock listed at ₹216.25 — about 49 per cent premium to its offer price.
The company’s shares touched an intra-day high of ₹216.65 on the Bombay Stock Exchange and an intra-day low of ₹176.5.
At the issue price, Mazagon was valued at about 6.8 times its FY20 earnings (post issue). Post the healthy listing gains, the stock now trades at nearly 10 times its FY20 earnings. Its listed defence PSU peers — Garden Reach Shipbuilders & Engineers (GSRE), and Cochin Shipyard — currently trade at 18 and 7.8 times their trailing twelve-month earnings, respectively.
In our view, Mazagon seems over-valued, given its mediocre financial metrics and weak earnings growth visibility in the near term.
However, investors seemed to have attached value to its dominance and expertise in the warship-building space, strong outstanding order book and healthy cash reserves. Assured returns (in profit making years) to stakeholders in the form dividends by CPSEs, could also be a contributing factor.
Weak premium despite healthy subscription
However, the listing gains on the stock seem tepid when compared to other recent IPOs, that garnered much less subscription when compared to Mazagon.
Playing on the themes of ‘AatmaNirbhar Bharat’ and the recently formulated ‘draft Defence Production and Export Promotion Policy 2020’, the IPO of Mazagon was subscribed by a whopping 155.5 times.
Other recent IPOs, such as those of Happiest Minds technologies, Route Mobile and Chemcon Speciality Chemicals, which were oversubscribed by 82, 52, and 150 times respectively, saw the stock prices, more than double on the date of their listing.
With Mazagon having broken the records, in terms of subscription, the listing was expected to be on par with IRCTC — which emerged as an IPO hero, last year.
The IPO of the state-run railway ticketing and catering company, launched in September 2019, was subscribed by 109 times. The stock saw listing gains of over 101 per cent and has been on a dream run ever since. The stock of IRCTC has rallied by more than 300 per cent over its IPO offer price.
However, the two companies operate in different industrial segments and hence cannot be compared.
In terms of listing gains, Mazagon seems to be better off when compared to its peers — GSRE and Cochin Shipyard, that were listed in 2018 and 2017, respectively. While the former listed at a 12 per cent discount to its offer price, Cochin Shipyard fetched its IPO investors a one per cent gain on listing.
The Centre’s conservative pricing strategy for IPOs of State-run firms seems to have worked well for Mazagon.