Cochin Shipyard Ltd has been able to successfully ride the recent traction in defence stocks, gaining 108% over the past six months. A healthy order pipeline and better-than-anticipated Ebitda margin in the first half of FY24 has further fuelled sentiment for the stock. The growth trajectory of the state-owned shipbuilder hinges on defence orders, especially those from the Indian Navy.
Defence orders formed 79% of Cochin Shipyard’s order book as at the end of September. For now, investors’ attention is focused on a potential repeat order for an indigenous aircraft carrier (IAC). The Indian Navy is said to have submitted a proposal to the Defence Ministry seeking approval for the production and procurement of a second IAC. Following the order of IAC-1, the Indian Naval Ship (INS) Vikrant, a subsequent order for IAC-2, named INS Vishal, is highly likely. Factoring this in, Kotak Institutional Equities said Cochin Shipyard’s track record places it in a pole position and remains a key catalyst for the stock.
The reason why IAC orders are crucial for the company is that unlike other defence orders that have slim profit margins, IAC orders benefit from higher margins, explained Rohit Natarajan of Antique Stock Broking. But he cautioned that going ahead this tailwind benefit could come to an end with margins moderating, simply because of Cochin Shipyard’s focus on conventional defence orders such as ASW Corvette and Next Generation Missile Vessels, which have relatively lower margins.
In the first half of FY24, standalone Ebitda margin expanded to 19.81% from 15.4% a year ago due to high-margin orders. The company now expects aftertax profit margin for the full year in the range of 16-17%.
As of September-end, the company’s order book stood at about ₹22,000 crore. According to Antique Stock Broking, Cochin Shipyard ideally should have an execution schedule of over ₹4,000 crore in revenue till FY25. In H1FY24, the company’s revenue stood at ₹1,398.3 crore. Cochin Shipyard anticipates an order pipeline of around ₹13,000 crore.
Meanwhile, the sharp rally in shares means valuations are not exactly cheap. Based on Antique’s FY25 earnings per share estimates, the stock trades at 27 times. Cochin Shipyard’s board has recommended a 2:1 stock split. Potential execution delays are risks investors need to track.
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