Midhani, Mazagon Dock, Cochin Shipyard rally up to 10% in a weak market

The defence procurement budget is likely to increase considerably for FY24E with the share of imports coming down further, according to analysts.

Shares of defence and its related companies continued their northward movement on the bourses. These select stocks rallied up to 10 per cent on the BSE in Friday’s intra-day trade on the back of strong business outlook.

Mishra Dhatu Nigam (Midhani), Mazagon Dock Shipbuilders (MDL), Cochin Shipyard, Garden Reach Shipbuilders & Engineers and Bharat Dynamics have surgd in the range of 5 per cent to 10 per cent. In comparison, the S&P BSE Sensex was down 1 per cent at 59,338 at 10:47 am.

According to analysts, the total defence equipment procurement budget stood at Rs 1.24 trillion for FY23E of which Rs 84,598 crore (68 per cent of procurement budget) has been kept for purchasing locally produced weapons and systems to boost self-reliance in the defence sector. The defence procurement budget is likely to increase considerably for FY24E with the share of imports coming down further.

Among the individual stocks, Midhani has soared 10 per cent and registered a 52-week high at Rs 223.40 on back of four-fold jump in trading volumes. The stock surpassed its previous high of Rs 214.35 touched on April 25, 2022. The company is engaged in the business of manufacturing of superalloys, titanium, special purpose steel and other special metals.

Shares of MDL hit a record high of Rs 457.40, on rallyin 9 per cent on the BSE. The stock surpassed its previous high of Rs 437.80 touched on September 8. In the past four weeks, the stock has zoomed 50 per cent from a level of Rs 307 on August 19, on the back of strong order book position.

MDL is engaged in the construction and repair of warships and submarines for the Ministry of Defence (MoD) to be used by the Indian Navy along with other vessels for commercial clients. MDL is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy.

The company has an order backlog of Rs 43,343 crore as of August 2022 (6.4x TTM revenues), of which Rs 19,795 crore of backlog is in Project-17A (Nilgiri class frigates), Rs 18,897 crore in Project-15B (Visakhapatnam class Destroyers), Rs 4,400 crore in Project-75 (Kalvari class submarines).

According to analysts at ICICI Securities MDL’s execution capability is set to improve in the coming period led by increasing indigenisation of platforms and sub-systems. Next two year’s revenue CAGR is expected at 18.2 per cent vs. 7.5 per cent CAGR in FY19-22. FY24E margin is set to improve substantially led by positive operating leverage.

Meanwhile, shares of Garden Reach Shipbuilders & Engineers too hit a new high at Rs 368.80, as stock rallied 8 per cent in intra-day trade. In the past one month, the stock of the state-owned company, engaged in producing defence platforms, has soared 33 per cent, as compared to 1 per cent decline in the Sensex.

While the overall Indian shipbuilding industry witnessed healthy growth in the recent past, defence shipbuilding segment looks promising on account of the ship acquisition plans of the Indian Navy and the Coast Guard.

The defence shipbuilding segment continues to look promising on account of ambitious acquisition plan of Indian Navy and Indian Coast Guard which is quite encouraging for the Indian Shipbuilders and the entire eco-system. A number of Requests for Proposals (RFPs) for various shipbuilding projects have been floated by the MoD during last one year and some more are expected to come out in the near future. Further, the MoD plan to increase export of defence products to $3.59 billion by the end of 2024-25 augurs well for all of us, the company said in its FY22 annual report.