Strong order pipeline positive for listed shipyards; prospects 'promising'

Upsides higher on Cochin Shipyards and Garden Reach Shipbuilders than Mazagon

Newsflow about contracts on building submarines has led to a surge of investor interest in Mazagon Dock Shipbuilders (MDSL). Other listed shipyards such as Cochin Shipyards and Garden Reach Shipbuilders & Engineers could also benefit from various naval orders. L&T has, for example, signed a Master Ship Repair Agreement and Cochin Shipyard is expected to benefit from it. In addition, non-defence overseas projects are visible in the pipeline.

A Memorandum of Understanding (MoU) has been signed between ThyssenKrupp Marine System (TKMS) of Germany and MDSL to bid jointly for the P-75I submarines project. Hanwha Ocean (South Korea) has expressed interest in participating in the Request for Proposal for P-75I project. The proposal is to construct six advanced submarines, offering to integrate the BrahMos missile system. The submarines, with India-specific customisation, will come equipped with an air independent propulsion system and a vertical launch system for long-range submarine-launched cruise missiles (SCLM). Of these six submarines, four may be integrated at MDSL while two may at L&T’s Kattupalli shipyard.

Hanwha Ocean intends to offer a customised version of the Korean KSS-III Batch-II submarine. Additionally, it is considering offering its 1,400t submarine, which is also based on KSS-III Batch design. The bidding is expected to be completed by August this year and evaluation will take around 18 months more.

MDSL has also announced that the indigenously developed midget submarine prototype (MS-X02A) is scheduled to be commissioned by December of 2024. The Ministry of Defence (MoD) has also signed a contract for Medium Refit and Life Certification (MRLC) of the SSK Class submarine - INS Shankush worth Rs 2,725 crore with MDSL.

Meanwhile, GRSE launched the fourth largest survey vessel and the third largest anti-submarine warfare shallow watercraft in June this year and laid the keel for the seventh anti-submarine warfare shallow watercraft.

L&T’s Kattupalli Shipyard has signed a Master Ship Repair Agreement (MSRA) with the US Navy. News reports suggest similar pacts with the US Navy will happen for Mazagaon and Goa Shipyards for service and repair of ships.

Cochin Shipyard is the largest Indian ship-repair facility and revenues could recover to te 2-18-19 financial year (FY19) peaks of Rs 850 crore in FY24 given the strong order pipeline from the Indian Navy. Cochin’s International Ship Repair Facility of CSL is 78 per cent complete and would be commissioned by June next year, doubling CSL’s capacity. The shipyard has Rs 21,000 crore of orders in hand and Rs 3,500-Rs 4,000 crore of annual revenues. Another Rs 600 crore green tug order is expected from four major ports and it is estimated that there is a replacement demand for 2,000-2,500 short-sea vessels from the EU over the next decade.

Cochin Shipyard is also the lowest bidder for a Rs 300-crore contract with the Indian Navy for support vessels. Cochin Shipyard has also secured an order worth Rs 580 crore for six new generation diesel electric general cargo vessels from a Norwegian company with an option for eight more such vessels.

According to management guidance, Garden Reach has an order book of Rs 25,110 crore and earnings will improve through FY24 to FY27 and the order book could be boosted some more if it becomes a preferred bidder for an order of next-generation corvettes. GRSE has also moved into guns and ammunition supplies with an order for 10 Naval Surface Guns (NSG) in May, earlier this year

Defence contracts are notorious for overrunning costs and schedules and are lumpy in that there are big bulges in revenue and bottomlines when vessels are commissioned. But the prospects seem to be promising and target prices for these PSUs could be upgraded.