Cochin Shipyard to witness significant YoY growth in revenues & profitability. Buy for target price of Rs 1340: ICICI Direct

Execution pick-up, strong order backlog to aid recovery…

About the stock: Cochin Shipyard (CSL), incorporated in 1972 as a Government of India company, is one of the leading ship-building & ship-repair yard in India

• Company has built and delivered 180 vessels as of Mar-23 including large, medium & small vessels, offshore support vessels and defence vessels

• During FY23, ship-building segment contributed ~74% to total revenues of ₹ 2364.6 crore while ship-repair segment contributed balance ~26%

• Order backlog stands at ~₹ 22000 crore as of Sept-2023, including ~₹ 700 crore worth of contracts in ship-repair segment

Investment Rationale:

• Execution pick-up of strong order-backlog: With advanced state-of-theart infrastructure, CSL is adept with execution of diversified projects in both ship-building and ship-repair segments. Order backlog of ~₹ 22000 crore as of Sept-23 (8.4x TTM revenues) with pick-up in execution, provides strong revenue growth visibility in the coming years. Capex in new dry-dock and ISRF (International Ship Repair Facility) projects to be completed by Q1FY25, would further expand manufacturing capacities. Large scale contracts for India Navy like ASW-SCW corvettes (balance order value of ₹ 5542 crore), Next Gen Missile Vessels (balance order value of ₹ 9803 crore) with post commission works of Indigenous Aircraft Carrier (pending order value of ₹ 1340 crore) are expected to witness meaningful execution during FY24 and FY25. Moreover, on commercial vessels front, all the domestic & export contracts in hand, are under execution as per schedule

• Order pipeline remains healthy in ship-building and ship-repair segments; provides longer term growth visibility: Order pipeline remains strong in defence and commercial ship-building and ship-repair segments including exports. About ₹ 13000 crore worth of ship-building contracts are in pipeline; tenders expected to be floated in medium term. Apart from these, ₹ 84000 crore worth of orders are in RFP stage as per the management. In defence segment, we believe that India Navy’s future plan of warships procurement presents a strong prospects for CSL. Discussions on another aircraft carrier are also in advanced stages and offers additional order opportunity of ₹ 40000 crore. In commercial segment, electric vessels opportunity emerges from Europe as 2500 vessels are scheduled to be replaced with green vessels. In ship-repair segment too, company sees sizable opportunity in both defence & commercial industries

Rating and Target Price

• We expect CSL to witness significant YoY growth in revenues & profitability over FY24-25E, led by execution pick-up in both the segments and increasing share of margin accretive ship-repair segment. We estimate revenue, EBITDA and PAT to grow at ~34%, ~78% and ~52% CAGR respectively over FY23-25E as against the de-growth seen over FY20-23

• Valuations look attractive considering the multiple growth drivers. We value CSL at ₹ 1340 i.e. 25x FY25E P/E