Will a global investor enhance Pipavav Defence's fortunes?

Even as the government dithers about framing its policy on allowing joint ventures in the defence sector, Pipavav Defence has gone ahead and roped in an international strategic investor.

The company did not mention the name of the investor, but revealed that up to 8.188 crore shares will be at a price of not less than Rs 110 a share on a preferential basis. In response, the stock jumped 9 percent on Tuesday as that price (Rs 110) is much higher than the current price of Rs 61.50.

The aforesaid investment will be a long-term strategic investment in the company. The investor will initially subscribe to 5 percent of the paid-up capital of Pipavav, and, within a specified time frame, will increase its share up to 10 percent.

The investor is a" leading and extremely reputed global conglomerate with a strong interest in the defence sector, and will bring critical technology required for manufacture of complex and critical equipments, systems required by armed forces".

Shares of the company reacted to this news and surges almost 9% at Rs 61.50 at 11.00 hours.

The announcement comes a day after promoter SKIL Infrastructure clarified neither has it sold any Pipavav Defence shares nor there is any shares held by it on margin funding. The clarification was in response to a 20 percent fall in the stock on Friday.

The company’s board also approved a propsal to increase the authorised share capital from Rs 800 crore to Rs 1,000 crore.

Pipavav was in the news recently for getting one of India’s top investors, Rakesh Jhunjhunwala, as a major investor. He, along with his wife and close friend Utpal Seth, were allotted securities worth Rs 81.9 crore in mid-November. Each warrant, issued at a price of Rs 78, is convertible into one fully paid-up equity share of Rs 10 each of the company at any time within 18 months from the date of allotment.

Soon after, Pipavav bagged an order worth Rs 2,900 crore from the Indian Navy for building five warships. This is a crucial win for Pipavav as it is the first time that a private-sector company received a contract for building warships from the Indian Navy.

The strategy of the company is clear. Defence is a capital-intensive business. With the government spending a hefty amount on the sector every year, competition is getting fierce as big players eye a larger share of the pie.

The major companies in the shipyard business are Mazagon Dockyards Limited (MD), Pipavav Shipyards,ABG Shipyard and Larsen and Toubro (L&T). All of them have their hands full and joint ventures need to be facilitated to increase the pace of work.

However, Pipavav’s joint venture with MD will also be crucial. MD has a pending order book of Rs 1,00,000 crore, which, at the current pace of execution could take at least 15 years to be completed.

While the government has said the JV process was transparent, Pipavav cannot share the order readily with Mazgaon as it would be unfair.

Pipavav itself has an order book worth Rs 7,000 crore, which gives revenue visibilty of two years. In an interview to CNBC Tv18, chairman Nikhil Gandhi said the company would have booked orders for five years by March 2012. In that case, adequate capital and the right technology to execute these projects will become crucial. From that perspective, the company is on the right track.

Watch video:Pipavav Defence sees order book improvement in two quarters