Shares of Mazagon Docks Shipbuilders Ltd (MDL) have gained 42 percent in the last seven trading sessions on a fourfold jump in trading volume as investors seek to capitalise on its strong pipeline of orders.
Delivery volume climbed by 5.48 percent over the previous month, indicating a strong pricing momentum, and the stock touched a record high of Rs 607.9 in the early hours of trading on October 7. At 11.49 a.m., the stock was trading at Rs 593.5, down marginally by 0.3 percent.
The stock has generated multi-bagger returns of 130 percent over the past one year and 113 percent on a year-to-date basis. The stock has jumped close to 128 percent in the past three months.
Why the rally?
In the last few days, Mazagon Dock Shipbuilders has outperformed not just the Nifty 50 but also the defence sector, which on the whole has done very well. Experts suggest the outperformance stems from the fact that there is an element of valuation catch-up for Mazagon Dock vs other defence stocks.
“In the last few days, there has been noise around the delivery of a Rs 8,500 crore destroyer in October and the potential delivery of a submarine by year-end,” said Nishit Master, Portfolio Manager, Axis Securities PMS.
Generally, a significant amount of profit and revenue gets recognized when delivery of orders is given to customers, he added.
The stock has seen a good volume breakout as “the company has bagged two orders from Container Corporation of India for manufacturing of 2,500 containers recently, there is one order from Mumbai Port Trust for the repair of a launch boat while it has initiated the design and development of indigenous Midget Submarine,” said Manoj Dalmia, founder and director of Proficient Equities Limited,
The company is currently sitting on a giant order book of Rs 43,300 crore and it has a potential order pipeline worth more than $7-8 billion, which can be realised in the next 12-24 months.
MDL is one of India's leading defence public sector undertaking shipyards, operating under the ministry of defence, and is primarily engaged in building and repairing of ships, submarines and various types of vessels and related engineering products that are used primarily by the Indian Navy.
It is the only shipyard to have built destroyers and conventional submarines for the Indian Navy and also one of the initial shipyards to manufacture Corvettes in India.
The company reported strong results for the quarter ended June 2022, its best ever. It reported consolidated revenue of Rs 2,366.46 crore, up 55.13 percent quarter on quarter and 81.71 percent on year. MDL reported a 134 percent year on-year jump in net profit of Rs 217.02 crore in the latest quarter.
Over the last 10 years, the company’s revenue has increased at a compound annual growth rate (CAGR) of 10.5 percent. Its earnings before interest, tax, depreciation and amortization (EBITDA) has increased at a CAGR of 3.6 percent and net profit at a CAGR of 3.9 percent during the same period.
“The company has an order backlog of Rs 43,343 crore as of August 2022, which is approximately 6.4x its trailing twelve month (TTM) revenues,” said a report by ICICI Securities.
What should investors do?
The defense procurement budget is expected to rise significantly in FY24E and imports are expected to decline further.
“Its strength in conventional and stealth submarines, frigates and destroyers, makes it unique and important for the Indian Navy which has huge plans for acquisition across these products and The TAM (Total Addressable Market) is likely to be upwards of $20 billion over the next 5-7 years,” said Vikas Gupta, CEO & Chief Investment Strategist, OmniScience Capital.
Besides, numerous indigenization opportunities exist given the Government of India’s push for Atma Nirbharta (self-reliance) in defence. Thus, “Mazagon Dock will have ample opportunities for growth over the decade,” added Gupta.
Over the last five trading sessions, the company's stock has formed a strong bullish candle on the daily charts and is trading higher than the 5-day, 20-day, 50-day, 100-day and 200-day moving averages as well.
“Trading above all key moving averages suggests that the short to long-term trend is positive and a daily momentum indicator Stochastic shows positive crossover which adds more bullishness to the price,” said Om Mehra, technical associate at Choice Broking.
His advice to investors who already own MDL shares is to take a partial profit at the present market price. Those who are interested in opening new positions can wait for the Rs 530-540 zone to arrive, Mehra said. He continues to be bullish on the stock, which he believes could test Rs 660-670 in the coming month.
Vaishali Parekh, Vice President - Technical Research, Prabhudas Lilladher Pvt. Ltd, concurred.
“With the indicators at their highly overbought zone, it would be advisable to book partial profits and wait for further confirmation but the overall trend remains strong and only a breach below Rs 520-515 levels would weaken the bias,” Parekh said.
She added that some consolidation or even a short correction till Rs 530-540 zone would be healthy for the stock.
The entire defence sector has been on a roll recently and is likely to be a huge growth vector in the coming months as well. MDL is not the only company benefitting from this and investors can look at investing in a portfolio of companies that operate under the defence umbrella, analysts said.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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