We had sensed Pipavav Shipyard takeover threat

Written by MG Arun | Nikita Upadhyay | Nikita Upadhyay | Updated: Apr 1 2010, 04:47am hrs
Delhi-based engineering and offshore construction company Punj Lloyd on Sunday sold its 19.43% stake in Pipavav Shipyard to its promoter SKIL Infrastructure for Rs 650 crore. The deal will be now followed by an open offer for an additional 20% shares of Pipavav by its promoter. Post-deal, Pipavav shares rose to an all-time high on the stock exchanges on Monday. Pipavav Shipyard chairman & co-promoter of SKIL Group Nikhil Gandhi explains the reasons behind the deal and the potential from the defence and oil & gas sectors for his company in an interaction with FE's MG Arun and Nikita Upadhyay. Excerpts:

What made Punj Lloyd exit at a low price What prompted SKIL Infrastructure to go in for the acquisition

When a partnership is built, it has to suit both the parties. Punj Lloyd, with an investment of Rs 350 crore in Pipavav, made a profit of Rs 300 crore and that too, before March 31 which every corporate would like to do. While they opted to focus on their core business, for us it was a strategic buy. Also Punj sold its stake at a lower price as it did not comply with the three year lock-in period and hence it had a discount element attached.

Moreover, Pipavav Shipyard had been a very good candidate for takeover. We had sensed this threat and could see it coming. This made us consolidate our stake in the company, which also suited Punj Lloyd. SKIL had a 20.5% stake in Pipavav, which made us really uncomfortable when compared to the kind of development we envisage in the company in the short to medium term.

I think people have been waiting for us to come up with an initial public offering (IPO). So, there was a silent support which was not too visible as we had not tested the market. However, on Monday, high market sentiments only showed that SKIL has a standing and stature of its own and that we are a very focused group.

How are you planning to raise Rs 1,500 crore for this deal

SKIL group has a strong balance sheet. A year back, we had investors like AIG, amongst others, who bought our stake for $3.5 billion. SKIL is a debt-free company as we are very conservative borrowers. Pipavav has a debt to equity ratio of 0.7:1 which shows that the balance sheet is underleveraged. We have worked all our life with private equity (PE) investors and hence, never went to the public for raising money, until last year. We will be doing some deals with the PE players in the coming few months and is also looking at listing SKIL Infrastructure by the end of December. Together with an IPO, we are looking at raising close to $300-$400 million. After raising Rs 1,500 crore for the transaction, SKIL's debt to equity ratio will be 0.2:1.

What is your expectation about the market reaction to the open offer

If investors have belief in our vision and strategy, they may not tender their shares. However, if someone wants to sell their stake, we will be happy to buy it as our target is to attain a minimum of 51% in Pipavav. The open offer price of Rs 61.5 is in accordance with the Sebi regulations and guidelines. They take the average of last 15 day,s prices and that is how the price has been fixed. With the kind of facilities that we have created, we will break even on our investments by the next fiscal (FY 11-12). We have an order book of about Rs 1,000 crore and production is in full swing.

Without the Punj Lloyd brand equity, how do you foresee future orders in ONGC and defence segments

So far, we only have one order from ONGC for supplying offshore supply vessel, which was due to company's core competency. We have laid the skill for constructing all 12 offshore supply vessels several months ahead of time and this was completed last week. For future contracts, which we have already submitted bids for since we have pre-qualified for them, we have people and partners with global knowledge and expertise. Punj's strengths lay in engineering, procurement and construction (EPC) and not in building assets. For building assets, we have always relied on Sembcorp of Singapore and our own in-house capabilities. Within the next three years, I presume our order book will consist 75% of defense orders and nearly 25% orders from the oil and gas segment.