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Investing in capacity and capability for next leg of growth
Weak operating performance led by increased provisioning
Cochin Shipyard’s (CSL) Q4FY19 revenues were up 31% yoy led by 31.4%/29.7 growth in the Ship building (SB)/ Ship repairing (SR) segments respectively. CSL reported EBITDA margin of 14% in Q4FY19, down 520bps yoy as SR segment reported EBIT loss of Rs71mn vs Rs175mn in Q4FY18. SB segment reported EBIT margins of 27.4%, up 40bps yoy. Weak operating performance in SR segment was due to provisions of ~Rs300mn pertaining to projects such as Sagar Bhushan, Sagar Dhwani and Nireekshak. Mumbai Port facility repair business operation was still in nascent stage so CSL had a loss of Rs50mn due to fixed cost associated with this facility. However, it expects profitability turnaround in FY20 as the business and operations matures.
CSL has a robust order book of Rs188bn as on Mar’19 which includes signed contracts of Rs85bn (ASW vessels ~Rs63bn, Cargo vessels ~Rs11bn, Floating Border Outposts ~Rs3.5bn, SR orders of ~Rs2.7bn & TDV vessels for DRDO ~Rs1.3bn). CSL is likely to sign order for phase III of IAC by 1HFY20, which could be worth ~Rs103bn (Rs30bn as fixed price contract and Rs73bn as cost-plus contract). This translates to 6.4x TTM sales, providing a huge long‐term visibility on revenues. CSL has ~Rs100bn opportunity pipeline of new orders which are likely to be finalized over FY19-21, which comprise pollution control vessels, 225 coastal security boats, large floating docks, multipurpose vessels and next-gen missile vessels. CSL expects incremental SR revenues of Rs3- 4bn/year once ISRF becomes operational in Aug’20. We retain BUY rating with TP of Rs503, valuing the core business at 8x FY21E EBITDA (Rs443) and 0.8x FY21E cash balance of Rs 10 bn (Rs60). Implied PE at our target price stands at 11.6x FY20E and 10.6x FY21E earnings.
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