>PIPAVAV DEFENCE & OFFSHORE

■ India's growing defense expenditure presents a huge opportunity: Given the ~USD200b expected allocation to defense capital expenditure for the period 2012-2017, India is set to ramp up its naval capabilities meaningfully. With its 'Buy Indian, Make Indian' initiative, the Ministry of Defense (MOD) is increasing stress on indigenization. The Ministry also envisages a greater role for the private sector, which should benefit established players like PIPV.


■ PIPV is suitably positioned - has first mover advantage, strong international tieups: PIPV enjoys first mover advantage and best-in-class infrastructure in the shipbuilding segment. It operates the second largest shipbuilding capacity in the world. PIPV uses modular construction technology, with two 600MT Goliath cranes, which enables it to reduce the construction and delivery time of vessels. Further, it enjoys strong strategic partnerships with several international players, which should aid robust warship order booking in the near future. MOD's growing stress on indigenization and its Mazgaon JV should boost order intake.


■ Capacity utilization increasing; expect revenue CAGR of 40% over FY12-14: PIPV's current capacity, which is currently USD1.7b (in terms of revenue potential), is likely to shoot up to USD2.5b once the second dry dock becomes operational by 2014. In FY11, capacity utilization stood at USD170m (10% of total capacity). We now expect capacity utilization of USD360m (22% of total capacity) in FY12. We expect revenue to grow at a CAGR of 40% over FY12-14. Our earnings estimates largely factor in execution of the existing order book of USD1.3b. We have not factored in possibilities of increased defense orders.


■ Initiating coverage with a Buy rating: We believe that PIPV is well placed to exploit the massive opportunity that India's defense sector offers in the next few years. It has global-sized assets and best-in-class tie-ups. Also, PIPV offers the only credible large-size exposure for investors to India's defense business. We estimate net profit at INR532m for FY12 and INR809m for FY13, translating into an EPS of INR0.8 for FY12 and INR1.2 for FY13. We value PIPV based on replacement cost method at INR67b (INR100/sh). Initiate coverage with a Buy.


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