Defence orders propel Cochin Shipyard to new highs

Share price surges 11% as firm emerges as lowest bidder for Rs 5,400 cr order to build anti-submarine vessels for Indian Navy

In a capital-intensive industry, the trend in order inflow and hopes of future flows are among key drivers of market sentiment, and it was no different for India's largest ship maker, Cochin Shipyard. Its share price surged nearly 11 per cent on Tuesday as the company emerged as the lowest bidder for a Rs 5,400 crore order to build eight anti-submarine warfare, shallow-water vessels, for supply to the Indian Navy. Since these vessels are to be delivered over the next five years, revenue visibility improves significantly. The order also strengthens faith on the already strong prospects of the company, which listed on the bourses in August.

The company derives almost three-fourths of its revenue from shipbuilding, and rest from ship repairing. Its order book stood close to Rs 3,000 crore at the time of listing. While the latest order announcement is positive, the company's order bidding pipeline is also close to Rs 11,900 crore. And, analysts at ICICI Securities say that the company is likely to receive order for phase III of indigenous aircraft carrier, which is likely to be Rs 10,900 crore. These should further add to the company's existing strong revenue visibility.

Analysts at Kotak Securities estimate the company to continue receiving orders across segments (primarily from Navy and Coast Guard) with the order book growing at a compounded annual rate (CAGR) of 20 per cent perennially. With the defence budget of the Navy on an increasing trend, it would continue to be a regular source of orders for the company. In this backdrop, analysts estimate company's earnings to 13 per cent annually during FY17-FY20 with improvement in return ratios thereafter post full utilisation of IPO money.

Cochin Shipyard is utilising its public offer proceeds for setting up a larger shipbuilding dry dock and an international ship repairing facility with both expected to be operational over next four years and doubling the company's capacity. Post completion, it would not only help handle higher order flows, but also help fulfil more repair orders.
 

Analysts at IIFL say that due to capacity constraints in the past, the company had been forced to let go 20-25 orders per year. The new capacities will also allow the company to repair broader range of vessels and consequently boost ship-repairing revenues by 60-70 per cent. The growth in ship-repairing revenues bodes well as it is twice more profitable than shipbuilding.

Overall, as defence may be the mainstay for order flows, improving prospects of the commercial segment is also positive. Improving freight rates boosting shipping industry can push commercial shipbuilding orders too.

Analysts at Kotak Securities value the stock at 25x FY19 estimated earnings, which is at a discount to the mean one-year forward PE of major international ship-building companies, and arrive at a target price of Rs 740 while ICICI Securities has given a sum-of-the-parts based target price of Rs 724. The stock closed at Rs 562.75 on Wednesday.