Investor interest in this ship and submarine manufacturer has been piqued with the stock rallying close to 60 percent in just one month. In a span of three months, the share price of Mazagon Dock Shipbuilders has spiralled over 80 percent. Over a year, it has generated returns of close to 400 percent. And from Rs 168 in October 2020, the scrip has climbed to Rs 1,218 today.
During this period, the buying has been largely driven by FII and retail interest in the stock. This is evident from FIIs raising their stake to 3.3 percent as of March 2023 from nil in September 2020, while public shareholders have hiked their stake from zero to 11.6 percent.
Yet, some analysts believe there are more legs to the ongoing rally. Antique Stock Broking is of the view that the stock is still under-valued. The brokerage firm has retained its ‘buy’ rating with a target price of Rs 1,308, which is 20 times its FY24-25 EPS (earnings per share). Even HDFC Securities says ‘buy’ the shipbuilder’s stock.
About the company
One of the leading companies among the four public sector shipbuilding undertakings, this warship company is under the administrative control of the Ministry of Defence.
Mazagon Dock Shipbuilders operates in the domains of ship and submarine manufacture, and heavy engineering. It also builds cargo ships, passenger ships, supply vessels, multipurpose support vessels, water tankers, tugs, dredgers, fishing trawlers, barges, and floating border outposts for both national and global clients.
The shipbuilding division is engaged in building and repairing naval ships, while the submarine and heavy engineering division builds, repairs, and refits diesel-electric submarines.
About 97 percent of the company’s turnover is on account of the construction of warships for the Indian Navy and Coast Guard.
During the quarter ended March 2023, net sales jumped 49 percent year-on-year (yoy) to Rs 2,078.59 crore, whereas net profit soared 105 percent on-year to Rs 326.19 crore.
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Robust order book
Mazagon Dock Shipbuilders has an order book of about Rs one lakh crore, led by five new generation destroyers of around Rs 50,000 crore, and six conventional submarines worth Rs 43,000 crore.
According to HDFC Securities, the company had a strong order backlog of Rs 38,754 crore as of March 31, 2023, which is 4.95 times its FY22-23 revenues, led by three major projects for frigates, destroyers, and submarines.
Besides, other projects like a hospital ship, six high-speed landing craft, seven Next Generation fast attack craft, six offshore patrol vessels, four fast patrol vessels, 12 air cushion vessels and a polar research vessel are in the pipeline. The orders could be executed in the next 3-3.5 years, it added.
Moreover, the Defence Acquisition Council has approved the procurement of eight next-generation corvettes. The RFP for the same is expected to be issued in 2023. The contract value is expected to be Rs 36,000 crore (which will be divided between two shipyards).
Strong industry outlook
A number of Requests for Proposals (RFP) for various shipbuilding projects have been floated by the Defence Ministry during the last one year, and some more are expected to be out in the near future. Further, the Ministry plans to increase the export of defence products to $5 billion by the end of FY24-25, from $1.5 billion as of March 6, 2023.
And Mazagon Dock Shipbuilders could be one of the beneficiaries, say analysts. The shipbuilder plans to participate in the upcoming RFPs for next-generation corvettes, and patrol and interceptor boats.
Additionally, with growing geo-political tensions across the world, the global market for ship repair and maintenance is also witnessing significant growth.
Revenue visibility
Mazagon Dock Shipbuilders is India’s only shipyard that builds destroyers and submarines for the Indian Navy, and the upcoming RFPs from the Defence ministry could improve the order book and revenue visibility of the company, say analysts.
HDFC Securities is of the view that the growth momentum will continue in the coming quarters. The company is currently working on seven projects, for the Navy, Coast Guard, and others, it highlighted.
Antique Broking’s peak revenue estimate for the company is Rs 12,000 crore during FY24-25 to FY26-27.
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Buybacks, dividends, and cash chest
The company has sufficient money for further investment to expand its business. As on March 31, 2023, the company had cash and cash equivalent of Rs 13,286 crore.
The shipbuilder has always been generous in declaring dividends and buybacks and has been paying dividend consistently for the past 17 years. Over the past five years, the company has announced two buyback offers for its shareholders.
In FY22-23, the board had approved a dividend of Rs 8.7 per share, resulting in a yield of 1.1 percent. The company has recommended an interim dividend of Rs 9.1 per share for FY23-24.
Valuation
The expectation of an improvement in the company’s book-to-bill ratio considering the bids in the pipeline, along with timely execution of the current order book, could lead to its re-rating, pointed out HDFC Securities.
“It scores better than its two public sector peers in terms of profit after tax and return on equity, while its valuation is lower,” the brokerage firm said.
HDFC Securities suggested that investors buy the stock in the range of Rs 1,009-1,050, and add more on dips to the Rs 923-941 band. Over the next two to three quarters, the base case fair value of the stock is Rs 1,131, which is 17 times its FY24-25 EPS, while the bull case fair value is Rs 1,231, which implies a valuation of 18.5 times FY24-25 EPS.
On June 19, the stock settled at Rs 1,218, up 2.6 percent on the BSE.
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