Indian shipbuilder opens books for public float

Pipavav Shipyard yesterday started the bookbuilding for its initial public offering of between Rs4.7 billion and Rs5.13 billion ($96 million to $105 million), which looks set to become the first Indian listing of reasonable size outside the utilities and oil and gas sectors this year.

The company, which was set up in 1997 as a ship-dismantling facility, is in the process of constructing its first shipyard and is expected to complete the project in October. However, commercial operations started in April this year and the company has begun construction on four vessels, the first of which is due to be delivered in April 2010.

And investors seem to like the company's business plan, which is to focus not only on the building of commercial ships, but also on the construction of vessels for the defence industry; offshore equipment for the oil and gas industry, including platforms and rigs; and refitting and repairs. According to analysts, this will set it apart from other Indian shipbuilders that tend to focus primarily on commercial ships.

A source noted that the defence and offshore sectors in particular should offer good growth potential and also aren't as cyclical as the shipbuilding sector in itself, which has faced a decline in new orders since mid-2008.

At present, however, the company has firm order agreements with two different parties for a total of 10 Panamax bulk carriers of 74,000 dead-weight tonnes each. The contracts have a combined value of about $373 million and the vessels are scheduled for delivery between April 2010 and May 2012.

After the first day of online bookbuilding yesterday, the Pipavav offering was already 2.67 times covered, with virtually all of the orders being placed either at the top of the price range or at the cut-off price. High-net-worth individuals were particularly keen, subscribing for 7.5 times the shares set aside for them (about 10%) after deducting the employee tranched of 600,000 shares. Interest from this group of investors -- and retail punters -- typically don't materialise until the last day, so the early interest bodes well for the offering as a whole.

Qualified institutional buyers submitted orders for 2.8 times as many shares as had originally been earmarked for them (42%), after deducting the 15.27 million shares that were allocated to anchor investors the day before the bookbuilding opened.

Pipavav is promoted by SKIL Infrastructure, a developer of infrastructure projects with stakes in two special economic zone ports, and Punj Loyd, a designer, constructor and manager of energy and infrastructure projects. It is offering 85.45 million shares, or 12.8% of its enlarged share capital, at a price between Rs55 and Rs60. The books will be open until Friday.

The company offered 30% of the QIB tranche, or 15.27 million shares, to anchor investors on Tuesday this week, under new rules announced in June. Pipavav is was only the second company to make use of this option after Adani Power. The two companies that have completed IPOs since have both been controlled by the government, and may have felt that investors didn't need the additional support provided by anchor investors.

According to a statement, Pipavav successfully placed the entire amount with four investors - Batterymarch Financial Management, GI India, Marshal India Select Fund, and India Diversified - at Rs60 per share. This price agreed with the anchor investors will typically serve as a benchmark for the online bookbuilding and may explain why orders were place almost exclusively at the top of the range yesterday.

The key benefit for the anchor investors is that they are able to buy a more meaningful stake in the company than what they can typically do through the online bookbuilding where the shares are allocated on a pro rata basis. Under the anchor system, the bookrunners will be able to allocate the shares on a discretionary basis to achieve the best possible combination of quality investors and price. In return for getting the prioritised allocation, the anchor investors will have to put down a 25% deposit when they submit their orders (versus 10% if they subscribe through the regular online bookbuilding) and they will be subject to a 30-day lock-up.
 
Pipavav will use approximately Rs1.8 billion of the net proceeds from the offering to finish the construction of the shipyard and the remaining Rs2.44 billion as working capital.

The deal is being arranged by Citi, Enam Securities, JM Financial and SBI Capital Markets.