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Stock Recommendation | COCHIN SHIPYARD LTD (COSH) – BUY – Target Price : 520
Publish date: NOVEMBER 2, 2018
Stable performance in the shipbuilding segment, strong performance in the ship-repair segment and improving outlook were the highlights of the performance of CSL in Q2FY19
■ Total sales was reported at Rs 8 Bn (+21.4% QoQ and +30.8% 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 42% in total revenues (from 27.6% YoY)
■ Execution remains stable in the shipbuilding segment, while the ship-repair business remains strong with over 100% utilization of the current facilities.
■ The company has reported its highest ever EBIDTA margin of 23.5% (+350 bps YoY)
■ Depreciation and interest cost remains low for the company. Both these elements of cost are estimated to increase as CSL constructs a new shipyard and an international ship-repair center.
■ Consequently PAT was reported at Rs 1.48 bn (vs. expectation of 1.02 bn). We interpret the results as strong and expect the strong performance to continue in future quarters as well.We believe that CSL 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, CSL offers the only credible shipyard for investors to India's defense business. Maintain BUY rating with an unchanged TP of Rs 520.
Cosh currently has a shipbuilding order book of Rs 19.62 bn which gives investors revenue visibility of only one year. Almost 80% of the order-book involves complex work refurbishment of an aircraft carrier, which is a high margin business, estimated to be completed by December 2020.
The company is also a L1 bidder for an order worth Rs 54 bn for 8 Anti-Submarine Warfare- Shallow water vessel from the Indian navy. Management of Cosh expects to convert this L1 bid to actual orders within FY19 post completion of formalities with the Indian Navy. This would give revenue visibility upto FY22 for Cosh. We estimate any additional flow of fresh orders, especially from the Navy and Coast guard to come to Cosh post the general elections in CY19. We believe this to be a political risk for the company.
Cosh currently has an order-book of Rs 3.5 bn in the ship-repair segment. The company intends to expand in ship-repair segment with an international ship-repair center and increased geographical reach. It has signed up MOUs with various port trust for creation of captive ship-repair facilities in the respective ports with a revenue potential of Rs 16 bn.
COSH currently has two docks – dock number one, primarily used for ship repair (Ship Repair Dock) and dock number two, primarily used for shipbuilding (Shipbuilding Dock). The Ship Repair Dock is one of the largest in India and is capable of accommodating vessels with a maximum capacity of 125,000 DWT. While the Shipbuilding Dock can accommodate vessels with a maximum capacity of 110,000 DWT.
The company had raised Rs 9.8 bn through fresh issue of shares leading to 17% dilution. The company would be ramping up its capacity with a third dry-dock (measuring 310 x 75 x 13 Meters) and an international ship-repair center at Kochi. The capacity addition will enable the company to construct bigger and complex vessels as well as undertake repairs of vessels like LNG carriers, semi-submersibles, jack up rigs, and drill ships. We estimate the new facilities to come-up in the 3 to 5 years and double the capacity of the company. We have drawn a capex plan of Rs 13 bn for the company over FY18 to FY20E for the same. We estimate the balance capex to spill-over beyond FY20E.CSL has just completed a buyback of 3.23% of its equity or 43.96 lakh shares at a price of 455 per share aggregating Rs 2 bn, in which the government of India also participated (record date was 31st October 2018). We believe that this buyback was to support the disinvestment programme of the government and not as a stock price supportive event for investors.
CSL is one of the best companies to invest to play in the India’s defence sector. We estimate company to report sales CAGR of 8.1% over FY18 to FY20E to Rs 27.9 bn and report earnings CAGR of 3.3% over the same period to Rs 4.26 bn.
However, we are concerned with the high bureaucracy/slowness in awarding defense orders. For instance, CSL is still L1 for eight anti-submarine shallow water craft ships worth Rs 54 bn (since October 2017) and still awaiting final confirmation on the order from the government. Diversified offering, recurring orders from the defence, focus on ship repair segment and strong BS gives us comfort with the stock. Recommend BUY with an unchanged TP of Rs 520. Upside to the stock would come from conversion of L1 order and fresh orders.Cochin Shipyard (CSL) is wholly-owned Government company, incorporated on March 29, 1972 and were conferred the 'Miniratna' status in 2008, by the Department of Public Enterprise. It is the largest public sector shipyard in India in terms of dock capacity. The company caters to clients engaged in the defence sector in India and clients engaged in the commercial sector worldwide. In addition to shipbuilding and ship repair, CSL also offer marine engineering training.BUY - We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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