Better than expected Q1FY23 print; order inflow visibility likely to improve
Mazagon Dock Shipbuilders’ (MDL) Q1FY23 print was better than our estimates with revenue growth of 83.7% YoY. EBIDTA margin was 7.8% in Q1FY23 vs 5.8% in Q1FY22 and 5.5% in Q4FY22. MDL has achieved ~37% of its guided revenue for FY23 in Q1FY23 (10% revenue growth guidance for FY23). The percentage of indigenisation in the ships built by MDL has been steadily increasing from ~42% in P15 Delhi Class Destroyers (built in 1990s) to 75% in P17A Nilgiri Class Frigates (under construction). We expect execution to peak at >Rs80bn in FY24E. Orderbook remains at ~Rs460bn as at FY22-end. Maintain HOLD. Delay in order accruals (particularly in P75I) poses execution as well as working capital risks.
* Order potential. Orderbook was at ~Rs460bn as at Mar’22-end. Potential orderbook includes: i) 7+4 next-generation offshore patrol vessels with an estimated total value of ~Rs100bn, ii) eight fast patrol vessels for the coast guard valued at ~Rs8bn, iii) seven next-generation Corvettes, iv) six high-speed landing craft, v) polar research vessel for National Centre for Polar and Ocean Research, one survey training vessel and acoustic research ship for NPOL Kochi. All these orders are valued at ~Rs210bn-Rs220bn. Response to RFPs amounting to Rs100bn has already been submitted and the bid for Rs250bn is expected over the next 1-2 years.
* Trying to diversify revenue base in absence of visibility of concrete orderflow. MDL has bagged two orders from Concor for manufacturing 2,500 shipping containers. Also, it received MbPT order for repair of launch boat. MDL has initiated design & development of indigenous midget submarine. Further, it has developed six Pax hydrogen fuel cell powered electric vessel, in collaboration with TATA Advanced Systems
* Export opportunities at MDL. In the past, MDL exported 243 vessels to various international clients. It has approached potential clients in friendly countries for export and has been carrying out promotional activities in various international locations
* Indigenisation at MDL. MDL’s efforts towards indigenisation are evident from the fact that percentage of indigenisation in the ships built by it has increased from 42% in P15 Delhi Class Destroyers (built in the 1990s) to 75% in P17A Nilgiri Class Frigates (under construction). MDL has indigenised 20 items/equipment and currently indigenisation of 9 major items/equipment through Indian Industries is in progress. Out of 9 items, 2 items are being indigenised under MAKE II process. Management sees potential scope of participation in Rs500bn next-gen destroyers manufacturing order.
* Clarity on P75I order awaited. RFP for construction of 6, P75I (conventional submarines fitted with Air Independent propulsion) was taken out of 28th July 2021 and the bid submission date was 9 th November 2021, and there was a pre-bid meeting on 21st September 2021. It is a very large value project with a small timeline for bid submission (three months and 19 days). Five OEMs were supposed to collaborate in the construction of these submarines – three European OEMs (Navantia, Spain, TKMS, Germany and Naval group, France), one from Russia (Rubin or the ROE) and one from South Korea (DSME). RFP necessitated that the OEM should already have a technology to transfer and that they should have a submarine fitted with this particular system (AIP) or under fitment, and by April or May 2022 they should be able to demonstrate this product to the visiting field evaluation team of the Indian Navy and the shipyard and the Ministry of Defence. This condition has come in the way of a possible alignment with any foreign OEM for domestic players like MDL. Recently, French company Naval Group said it is unable to participate in India’s P-75I project due to conditions mentioned in the request for proposal (RFP) related to air independent propulsion (AIP) system. More recently, the earlier RFP deadline of 30th June 2022, which was already an extension, has now been extended by another six months till December 2022.
Valuation methodology and key risks
We value Mazagon Dock Shipbuilders Limited (MDL) using the DCF methodology. We maintain HOLD with a target price of Rs295/share.
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