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Significant margin surprise on absence of LD

Mazagon Dock Shipbuilders Limited (MDL) reported EBITDA of Rs2020mn, up 119% YoY and ~137% QoQ. Margin print surprised positively with 13% EBITDA margins (6.3% YoY). This has been possible mainly on account of nil provisions in Q3FY22 (no LD recorded in the current quarter). Top-line performance was stable as Q3FY22 revenues were up by ~6% YoY. FY22E revenue performance looks set to cross previous management guidance (of matching FY20 print). 5th submarine of the P75 series has started sea trials, with scheduled delivery in CY23E. FY23E revenue growth has been assumed at 10%, in line with previous management guidance. We expect execution to peak at >Rs80bn in FY24E. Orderbook remains at ~ Rs475bn. Maintain ADD with a revised target price of Rs300/share (Rs330/share earlier). Delay in order accruals (P75 I in particular) poses execution as well as working capital risks for MDL.

Resilient sales and collections: SRIN’s Q3FY22 sales bookings of Rs3.5bn were flat YoY and were driven by continued momentum in ODC, Goregaon, Naigaon and other projects. SRIN also achieved healthy quarterly collections of Rs2.7bn in Q3FY22 (up 7% YoY). In Sep’21, the company also did a soft launch for its Vasind project christened “Sunteck Forest World”. In 9MFY22, the company has clocked Rs8bn of sales bookings (up 23% YTD) and expects to clock overall FY22 sales bookings of Rs13bn on the back of the Feb’22 launch of Phase 3 in Naigaon of 1.25msf vs. FY21 sales bookings of Rs10.2bn.

All eyes on upcoming FY23E launches: SRIN has given a formal guidance of Rs18.0bn for FY23E sales bookings which is largely expected to be driven by 3.35msf of planned launches during the year across new phases of ODC, Goregaon (0.6msf), Naigaon (1.0msf), Kalyan/Vasind (1.0msf) and Vasai (0.75msf). Of these, the Vasai launch is targeted in H1FY23 subject to approvals coming through. For its Borivali project of 0.5msf, the company is targeting an early FY24 launch subject to the land owner getting approvals (this is a JDA project).

Indian Navy (IN)’s utilisation of budget is highest among three forces at 138%. Naval fleet budget (BE vs BE) has increased 84% YoY. This is a combination of orderbook execution by GRSE, Mazagon, Cochin. But also we feel certain budgetary commitment has been kept for SSBN (3rd ship has been recently launched at the shipbuilding centre in Vizag) and P75 (I) (We remain hopeful for the same, can be a positive for Mazagon or LnT). Naval other equipment budget is also up 9% YoY and this would have earlier included predator drones, more P81 allocation – but the import component would be substantially lower now.

Order potential. The order book was ~Rs479bn as on Sept’21 end. The order book comprises i) 4 Project-15 Bravo Destroyer, ii) 4 Project-17 Alpha stealth frigates, iii) 6 Scorpene Submarines and besides that a medium refit life certification of a submarine which is pegged at about ~Rs13bn. Out of these, MDL have delivered four Scorpene submarines and one 15-Bravo Destroyer to the Indian Navy. The potential order book includes i) 7+4 next generation of offshore patrol vessels with an estimated 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 which is for the National Center for Polar and Ocean Research, One Survey Training Vessel, and Acoustic Research Ship for NPOL Kochi, these all are roughly pegged at ~Rs210bn-Rs220bn. Whilst the response to RFPs amounting to Rs100bn has already been submitted and the bid for the Rs250bn is expected in the horizon in the next 1-2 years.

Sea trails for fifth submarine of Project 75 have started. Sea trials for the fifth submarine of Project 75 have commenced. The trials will include testing of the propulsion systems, weapons and sensors of the warship. The submarine is scheduled for delivery to the Indian Navy in the year 2022 after the completion of the trials.

Mazagon Dock delivers Destroyer (Visakhapatnam) ship to Indian Navy. MDL has delivered first ship of Project 15B Class Destroyer i.e. Yard 12704 (Visakhapatnam) to the Indian Navy in Oct’21. The ship is constructed using Indigenous Steel DMR 249A and is amongst the largest Destroyers constructed in India, with an overall length of 164 meters and a displacement of over 7500 tons. The ship is a potent platform capable of undertaking a variety of tasks and missions, spanning the full spectrum of maritime warfare. It is armed with supersonic Surface- to-Surface 'Brahmos' missiles and 'Barak-8' Long Range Surface to Air Missiles. Towards undersea warfare capability, the Destroyer is fitted with indigenously developed anti-submarine weapons and sensors, prominently the Hull mounted Sonar Humsa NG, Heavy weight Torpedo Tube Launchers and Rocket Launchers. Further, the second ship of the P15B or Visakhapatnam Class Destroyers (Mormugao) commenced sea trial in Dec’21.

Clarity on P75I order awaited. RFP for construction of 6 in number P75I (conventional submarines fitted with Air Independent propulsion) was taken out of 28th, July, 2021 and the bid submission date was November 9, 2021 and there was a pre-bid meeting on September 21, 2021. It is a very large value project with a small timeline for bid submission (three months and 19 days). There were five OEMs supposed to be collaborating 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 which is 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. Clarity is awaited.

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