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Smooth sailing in windy sea…

Cochin Shipyard exited FY21 with an outstanding performance in Q4 wherein revenue and operating margins were a beat to our estimates. Ship repair segment, which was lagging since Covid, has now kicked in strong revenue and margins adding thrust to Cochin’s overall performance. The company declared a dividend of | 2.5 per share during the quarter. Revenue for the quarter came in at | 1080.3 crore (vs. I-direct estimate of | 975 crore), up 32.3% YoY, 44.3% QoQ. Gross margins contracted ~411 bps YoY, 2150 bps QoQ (YoY being a higher base, QoQ being a one-off exception). However, on a broader perspective, GMs were in their median range. EBIDTA increased 58% YoY to | 257.5 crore (I-direct estimate of | 187 crore). Ensuing EBIDTA margins came in at 23.8% vs. 20% YoY (I-direct estimate: 19.2%). Ensuing PAT came in at | 236.2 crore, up 70.2% YoY, 5.6% QoQ.

Higher execution from IAC leads to better margins…

Ship building revenues came in at | 888 crore, up 24.6% YoY, with EBIT margin of 28.9%. Margins were exceptionally high led by execution of IAC portion, which had better margins. Ship repair contributed | 192.3 crore entailing an EBIT margin of 30.8%. The company suffered setbacks from the Mumbai ship repair operations led by the ongoing pandemic but we believe, ship repair revenues should bulk up from FY22 onwards.

Margin profile to change, going ahead...

Hitherto, margins for CSL were cushioned by superior margins carried by IAC, which is expected to peak out by FY23 and start fading out post that. The new orders viz. the NGMV (Next Gen Missile Vessels) & ASW Corvette, which would be core revenue drivers for Cochin, carry relatively lower margins (NGMV-low double digits, ASW Corvette-High single digit). Hence, the margin profile should deplete, going ahead but we expect growth in revenue to curtail the impact on profitability.

Order pipeline remains strong...

Cochin has shared | 4500 worth of order prospects of which two are from Coast Guard and another one from Navy. Further, the current order book of | 12217 crore along with a L1 position for NGMV places CSL in a comfortable position in terms of revenue visibility. Combining it with a strong free cash balance of ~| 1000 crore, execution should not be an issue.

Valuation & Outlook

CSL continues to be one of the top-tier shipyards in the country with ample capacity, capability and the orderbook to support it. Newly embedded vision for 2030, upcoming facilities and strong order book augur well for the company. CSL at the CMP trades 11% earnings yield on FY21 EPS. We roll over to FY23E numbers and value CSL at 9x FY23E EPS to arrive at a target price of | 500/share. We maintain our BUY rating.

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