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Strategic shipbuilder; will continue to draw big orders

Mazagon Dock Shipbuilders Limited (MDL) reported in-line EBITDA of Rs851mn, up 17% YoY. Top-line performance was impressive with Q2FY22/H1FY22 revenue up 43%/88% YoY, respectively. EBITDA margin performance is normalised at 5.4% for Q2FY22 given that there is no exceptional classification of employee and other expenses linked to Covid-19. Favourable working capital performance (release of ~Rs1.6bn in H1FY22) allowed for 2x EBITDA to OCF (pre-tax) conversion in H1FY22. Orderbook at Rs493.3bn (as of June’21 end) implies a ‘book to bill’ ratio of ~12.3x and is to be executed over next few years. We expect execution to peak at >Rs80bn in FY24E. Maintain ADD with a revised target price of Rs330/share (Rs270/share earlier). Delay in order accruals poses execution as well as working capital risks for MDL.

* Order potential. MDL has already submitted bids for about Rs5bn for 8 fast patrol vessels (Q1FY22). Management has previously guided for possibility of ~Rs350bn in RFP submission over next two to three years comprising of i) 11 next generation offshore patrol vessels (was expected by Aug 28th), ii) 7 next generation Corvettes and iii) some high-speed landing crafts and other vessels. MDL has a plan for diversification of revenue stream into exports where RFP of ~Rs60bn is being pursued, which essentially comprises offshore patrol vessels for Argentina Coast Guard; one floating dry dock for Suez Canal authority and corvette facilities for Navy.

* Medium Refit cum upgradation (MRCU) of first SSK going on. MDL has achieved expertise in submarine refits by successfully executing the Medium Refitcum-upgradation of all the four SSK class submarines of the Indian Navy. It is presently carrying out the Medium Refit and Life Certification of INS Shishumar, the first SSK submarine. The important benchmark will be to continue sourcing the MRCU orders from the Indian Navy.

* 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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