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India naval shipbuilder debuts on stock market amid China's rise

Mazagon Dock lists at 49% premium on solid track record and 'Make in India' boom

The Indian Navy's INS Karanj submarine was launched from Mazagon Dock's shipyard in 2018. The company has been consistently profitable thanks to government defense orders.   © Reuters

MUMBAI -- Mazagon Dock Shipbuilders on Monday made a strong debut on Indian stock exchanges, opening at 216.25 rupees, up 49% from its IPO price of 145 rupees as India's only shipyard capable of building and repairing military submarines benefited from a confluence of factors, including China's increasingly aggressive defense posture.

The government-owned company's 4.44 billion rupee ($61 million) initial public offering was oversubscribed 157.4 times between Sept. 29 and Oct. 1, the highest demand for any IPO so far this year. Its shares ended their first day of trading at 173 rupees, 19% above the IPO price, after some profit-taking during the session, giving the company a market capitalization of 34.9 billion rupees.

The resounding welcome of the company's shares reflects investor confidence in the company's shipbuilding capabilities as well as Prime Minister Narendra Modi's 'Make In India' initiative.

Investors are also acknowledging India's need to strengthen its military, including its maritime forces, to check China's expansionism in the South China Sea and Indian Ocean.

India and China this year have engaged in deadly skirmishes along India's northern border in the Himalayas. India reacted by imposing bans on Chinese companies and popular Chinese mobile phone apps.

If New Delhi decides to join forces with the U.S. and other allies to thwart China's claim of most of the South China Sea, or should the Himalayan situation escalate, it will need to take stock of its military infrastructure.

The Indian Navy's first Scorpene-class submarine was undocked from Mazagon Dock's shipyard in 2015.   © Reuters

"Mazagon Dock is the most important state-run enterprise for the defense of India as it is the only submarine builder for the navy," said N.C. Bipindra, a New Delhi-based defense and strategic affairs analyst. "Mazagon Dock arms the Indian Navy with the most modern warships and submarines, which enables India to defend and protect its maritime interests not only in the Indian Ocean region but also beyond, in the South China Sea."

The Mumbai-based shipyard's build capabilities are enough to take care of nearly 50% of the Indian Navy's warship and submarine requirements, according to Bipindra, who is also the editor of the Defence.Capital website. Three other government-owned warship builders cater to the rest of the Indian Navy's needs.

"The shipyard has also created an ecosystem of Indian suppliers that it plugs into to build a domestic defense-industrial capability," Bipindra added.

Mazagon Dock is also likely to be a beneficiary of Modi's 'Make in India' policy and of the Atmanirbhar Bharat, or self-reliant, plan, which encourages Indians to buy local.

Its order book as of July 31 includes four P15B Destroyers, four P17A Stealth Frigates, four P75 Scorpene Submarines and other equipment worth a combined 540 billion rupees. All of the orders came from India's Ministry of Defense.

Prime Minister Modi's Make In India and other initiatives are a boon to just-listed Mazagon Dock Shipbuilders.   © Reuters

The government since 2016 has introduced specific provisions in its defense procurement procedure meant to help the domestic defense industry grow as well as to promote indigenous design, development and manufacturing of defense equipment.

The IPO is part of the government's push to release shares in state-owned companies. The government had held all of Mazagon Dock's outstanding shares until now. Through the IPO, it has sold 15% of its stake. The public issue received bids for over 4.8 billion equity shares against an offer size of 30.6 million equity shares, according to local reports.

Mazagon Dock's financials and execution capabilities have played a part in attracting all the investor interest.

The company has been consistently profitable for the past four years, though its net profit slid around 19% to 3.8 billion rupees in the year ended March on revenue of 49.8 billion rupees, according to the company's prospectus. Mazagon Dock has been under India's Defence Ministry and has a maximum shipbuilding and submarine capacity of 40,000 dead-weight tons.

India's shipyards are mainly controlled by the Indian government and run by state-owned companies such as Mazagon Dock, Hindustan Shipyard, Goa Shipyard and Garden Reach Shipbuilders & Engineers. Several private players -- Bharati Defence & Infrastructure, ABG Shipyard, Reliance Defence and Engineering, and Larsen & Toubro -- also operate in the sector.

"[Mazagon Dock] is a well-managed company," said Avinash Gorakshakar, head of research at Profitmart Securities. "If you see their cash flow, profitability, they are virtually debt-free.

"They are going to receive more orders from the government because of the Atmanirbhar Bharat focus as the government is unlikely to outsource defense manufacturing and [is] encouraging domestic players.

"An important factor is that not many players have [the necessary] infrastructure and technical staff. From a long-term perspective, this is not the kind of business that just any player can enter, so they have a virtual monopoly."

Additional reporting by Kiran Sharma in New Delhi.

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