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Strong performance...margins to improve

• Cochin Shipyard Ltd. (CSL) is the largest public-sector shipyard in India and derives major revenue from the Navy. CSL core capabilities include Naval vessel construction, coast guard projects, commercial shipbuilding, and vessel repair services.

• In Q2FY24, reported PAT grew by 59% YoY, led by higher execution in shipbuilding and repairs, which grew by 33% & 62%, respectively. • EBITDA margin remained flat on account of higher expenses. But H2FY24 EBITDA margins are likely to see improvement led by execution of high margin orders.

• The order backlog is Rs.22,000cr, 6x FY24E projected sales will provide strong visibility in the next couple of years. While the order pipeline remains robust at Rs.13,000cr, which is expected to further boost earnings visibility.

• DAC (Defence acquisition council) is anticipated to approve a repeat order of IAC (Indigenous Aircraft Carrier), which will significantly boost earnings visibility upon confirmation.

• We value CSL at a P/E multiple of 26x on FY25E on account of higher execution and likely margin expansion. We maintain an Accumulate rating on stock , with a target price of Rs. 1,265.

Strong performance...H2FY24 execution to pick-up

Q2FY24 revenue was above our estimates; it grew by 40% YoY, led by a 33% YoY increase in shipbuilding and a 62% YoY jump in ship repairs. Reported EBITDA grew by 40% YoY to Rs.195cr. EBITDA margins largely remained flat at 20.4% on account of higher employee costs of 19% YoY and provision & other expenses. Net profit grew by 59% YoY to Rs.191cr, supported by a 42% YoY increase in other income. With overall pick-up order execution and higher repair orders, including IAC, we upgrade our EBITDA margin estimates by 420bps & 210bps, respectively, for FY24E & FY25E. Consequently, EPS estimates are revised upward by 32% & 10.4%, respectively, for FY24 & FY25E.

Order backlog healthy...pipeline remains strong

The current order backlog is healthy at ~Rs22,00cr, which has improved earnings visibility for the next 2-3 years. The order pipeline is expected to be further boosted by repeat orders from IAC, which are under active consideration by the DAC (Defence Acquisition Council). Other opportunities include hybrid electric catamaran passenger vessels, coastal carriers for European clients, tugs, and fast patrol vessels (FPV). The overall order opportunities amount to Rs.13,000cr. FY24 revenue is expected to be boosted by the launch of 3 ASW corvettes, while execution of 2 ASW corvettes will start in Q3. Further, IAC has docked for the guarantee refit, installation of MF-STAR, and concurrent work package agreed with the Indian Navy, and the unfinished order value on IAC will be fully executed, with 40% in FY24 and the remaining in FY25. The current repair order is at Rs.700cr.

Capacity expansion nearing completion...

CSL Dry Dock (Rs1,790cr) expansion and its ISRF (International Ship Repair Facility) (Rs970cr), is expected to be completed by December 2023, while commissioning will be in mid-2024. This is expected to double the operational capability of the yard by enabling it to construct and repair larger vessels like LNG carriers, new-generation aircraft carriers, etc. In the long term, we expect revenue to witness robust growth with healthy margins, aided by a diversified product mix (repair and shipbuilding).

Valuations

Given improvement in order book visibility, capacity expansion, and strong execution capabilities, we continue to maintain our positive view on the stock. We value CSL at a P/E multiple of 26x on FY25E, with a target price of Rs.1,265 and maintain Accumulate rating

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