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  • Stock recommendation: Cochin Shipyard Ltd – BUY – TP Rs.610

    Publish date: August 16, 2018


    Result Update

    Strong order book, strong outlook - Stable performance in the shipbuilding segment, strong performance in the ship-repair segment, marginal weak operational performance and strong order-book were the highlights of the performance of COSH in Q1FY19.


    Key Highlights

    • Total sales was reported at Rs 6.6 Bn (+9.7% QoQ and +16.5% YoY) with increased contribution of high margin ship-repair business in the total revenues which is healthy for the company. Share of ship-repair was reported at 31% in total revenues (from 28.4% YoY)
    • Execution remains strong in the shipbuilding segment, while the ship-repair business remains strong with over 100% utilization of the current facilities.
    • EBIDTA margin was under pressure and was reported at 17.5% (down 170bps QoQ and down 430 bps YoY) which is a cause of concern despite shipbuilding contracts having cost escalation clause. Even though the margins have fallen, we believe the current level of operating margins to be healthy for a shipbuilding company with significant government orders.
    • Depreciation and interest cost remains low for the company. Both these elements of cost are estimated to increase as COSH constructs a new shipyard and an international ship-repair center.
    • Consequently PAT was reported at Rs 1.06 bn (+15.8% QoQ and +16.4% YoY), marginally above aggressive estimate of Rs 1.02 bn. We interpret the results as strong and expect the strong performance to continue in future quarters as well.

    Valuation & Outlook

    • We believe that COSH is well placed and is ahead of the curve to exploit the massive opportunity that India's defense sector offers in the next few years. Commercial shipbuilding, offshore vessels and ship-repair helps the company beat the cyclicality associated with any one sector. It also has the requisite and best-in-class tie-ups. Also, COSH offers the only credible shipyard for investors to India's defense business. We are positive on the company for 1) Recurring orders from Navy and Coast guard and 2) Improvement in the prospects of commercial shipbuilding segment.
    • However, high bureaucracy/slowness in awarding defense orders from the government, continued weakness in the commercial shipbuilding space, higher commodity prices, INR depreciation and healthy correction in defense stocks in the last 6 months prompt us to lower the multiple awarded to COSH from 21x to 18x on FY20 earnings. Maintain estimates and BUY rating with a revised TP of Rs 610 (from Rs 715).

          

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