Cochin Shipyard Ltd – Budget Tailwind


Company Name – Cochin Shipyard Ltd (Cochin Shipyard)


Current Share Price – INR 314 (June 23, 2022)


Market Cap – INR 4,136 cr


 

[Updated for Q4FY22/FY22 results]

1. What is interesting about the stock?

Have you watched Rustom (starring Akshay Kumar, and Ileana D’Cruz)? What was the core reason for the plot? Indian Navy wanted to buy an aircraft carrier to augment its fighting capacity – but on inspection, it was found by Rustom that the carrier’s hull was corroded, and it would have to be repaired and modified before the carrier could be transferred to India. Indian Navy has been looking for an aircraft carrier for the following reasons:

  • The first is the support of a conventional war against Pakistan, which would involve strikes against Pakistan's naval assets and land bases.

  • Second, the carriers make the Indian Navy the preeminent force in the Indian Ocean, better able to command the area than any foreign competitor.

  • The third prong involves geopolitical competition with China.

So, who is designing and building the first indigenous aircraft carrier, INS Vikrant, for India – Cochin Shipyard. INS Vikrant is scheduled to be commissioned into service in July/August 2022.


Cochin Shipyard Ltd was incorporated in 1972 as a Government of India company, with the first phase of facilities coming online in 1982. The company has Miniratna status.


Cochin Shipyard is one of the leaders in the Indian Shipbuilding Industry. It can build ships of 1.1 lakh Deadweight Tonnage of DWT while it can repair ships of 1.25 lakh DWT. The Government of India owns 73% of the company.


As of March 2021, Cochin Shipyard has built and delivered:

  • 16 Large Vessels

  • 35 Offshore Support Vessels

  • 83 Small & Medium Vessels

  • 20 Defense Vessels

Cochin Shipyard has also exported over 47 vessels to clients from Norway, Netherlands, Cyprus, USA, Germany, Denmark/ Bahamas, Saudi Arabia, and UAE.


Its domestic clients include the Indian Navy, the Indian Coast Guard, the Shipping Corporation of India, Lakshadweep Government, various Port Trusts, Inland Waterways Authority of India (IWAI), A&N Administration, Directorate General of Lighthouses and Lightships (DGLL), and Jindal Steel Works (JSW) group.


The Company has a total of 3 shipyard facilities in Kochi, Kolkata, and Malpe. It also has 4 ship repair facilities in Kochi, Mumbai, Kolkata, and Port Blair.


The major offerings of the company are:


A. Shipbuilding:

B. Ship Repair:

  • Maintenance and repairs of Aircraft Carriers and other Defense Vessels

  • Repairs and maintenance of Tankers, Bulk Carriers, and all kinds of Commercial and Specialized vessels

  • Oil Rig Upgradation, Repair Projects, and Conversions

Shipbuilding contributed to ~80% of revenue in FY22 with the remaining coming from ship repair. Company had a shipbuilding order book of around INR 11,260 cr (~3.5x of FY22 revenue) as of March 31, 2022. Further, Cochin Shipyard has been declared L1 by the Indian Navy for the Next Generation Missile Vessels worth about INR 10,000 cr.


Industry overview


The shipbuilding industry in India is very small with a market share of less than 1% in the global shipbuilding segment. To build up this critical industry in India and to push India to the forefront of the global maritime sector, the Government of India has formed Maritime India Vision (MIV) 2030 which is a long-term plan to develop the maritime sector in India.


This MIV 2030 plan envisions investments of INR 3.5 lakh cr to be made in the sector across ports, shipping, and inland waterways categories.


The defense shipbuilding industry is expected to remain driven by the evolving requirements of the Indian Navy and other government agencies. This is also expected to accelerate in the future, with the push to develop the defense sector in India and become Atmanirbhar for all our defense requirements.


The ship repair industry in India has good potential due to increasing shipping volumes to India and the advantage of skilled labor available at low wages compared to international competitors. The MIV 2030 is also expected to address the issues in this industry and help develop it further in India.


The main competitors of Cochin Shipyards in India are:

  • Mazagon Dock Shipbuilders

  • Garden Reach Shipbuilders & Engineers

Key MOATs

  • Cochin Shipyard is the 1st shipbuilder to design and build an indigenous aircraft carrier in India. This is a big differentiator as it not only highlights the company’s technological and design capabilities but also its project sourcing capabilities.

  • The company has facilities on the west coast in Kochi, on the east coast in Kolkata, and in Andaman & Nicobar in Port Blair which showcases their capability to service different projects at different locations simultaneously.

2. Key Historical Financials

  • Company revenue growth has been impacted by COVID-19 and execution challenges. Cochin Shipyard delivered 13% YoY revenue growth in FY22

  • Management expects flat revenue for FY23 and 16-18% growth in FY24

  • Ship repair has a higher margin than shipbuilding so the overall margin depends on the business mix. Going forward, the ship repair revenue mix is expected to increase which would lead to higher EBITDA margins

  • Cash flow convertibility (CFO/EBITDA) has been exceptional in FY22 (similar to HAL) showing the strong cash flow position of the Government of India

  • Return ratios (ROCE/ROE) have fallen in FY22 to 18%/13% vs 21%/16% in FY21

3. What is my view on company valuation?


Cochin Shipyard did its IPO in August 2017 at an issue price of INR 432 with an oversubscription of ~76x. However, the current market price is at a ~28% discount to the IPO price in the period even when the Nifty50 index has appreciated by ~55%. Company has significantly underperformed the market.


The Company trades at a P/E (TTM) ratio of 7x vs Mazagaon Dock of 8x and Garden Reach of 13x. Additionally, the long-term P/E ratio of the company is 8x.


The stock looks interesting in long term along with Mazagon Docks and should be evaluated further by investors.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • The Indian Government is the biggest customer of the company and thus it is vulnerable to political and economic risks that arise from policy and regime changes.

  • The domestic shipbuilding industry is very small as compared to the global sector and thus a lot of money and effort will be required to bring the sector up to global standards.

  • The ongoing pandemic and other natural disasters can have a big detrimental impact on the company and the industry in general (especially causing a delay in the capex plans)

  • The high difficulty of securing project finance for private and commercial shipbuilding in India acts as a big stumbling block for the industry demand and its growth prospects.

 

About the Author


I have over 6 years of experience in the Investment sector and have been an active prop trader in European Bond Futures in the past. Currently, I am working as head of Research at Smart Sync Services where we are working on simplifying and expanding financial and investment knowledge to make the investment world as accessible for everyday investors as much as possible.


I graduated from the Master of Finance Program at Cambridge University in 2016 after completing my Bachelor of Engineering program at Jadavpur University, Kolkata in 2011.


I am an insignificant public investor & have an avid interest in following emerging trends both in technology and other fast-evolving sectors. I am also a lifelong learner and relish the chance to learn something new all the time.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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