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JM Financial Services
Cochin Shipyard (Buy)
CMP: ₹400.1
Target: ₹500
Cochin Shipyard Ltd (CSL) appears poised to benefit from several medium- as well as long-term growth drivers which are likely to enable a consistent growth in its profitability.
Medium factors include a sharp traction in sales growth over the next 7-8 quarters as IAC-1 approaches final stages of commissioning, growth in non-IAC shipbuilding revenues and ramp up of ship repair facilities in Mumbai, Kolkata and Port Blair, while long-term factors include a robust order pipeline, commissioning of new dry dock and ship repair facility and inflow of IAC-2 contract by 2023.
We maintain ‘buy’ with revised SOTP (sum of the parts) based target price of ₹500, as we roll forward by six months and value the company at 8x September 2021 EBITDA and 0.8x residual cash balance at end-September 2020. While we forecast moderate sales and EBITDA CAGR of 9 per cent and 7 per cent over FY19-22E, we maintain an optimistic outlook due to inexpensive valuations (PE of 9.5x FY21E and EV/EBITDA of 6.0x FY21E), healthy RoE of 16 per cent post buyback conducted in FY19 and a robust cash balance of ₹163/share at end-September 2019.
Key risks to our call are lumpy nature of order inflows and risks to curtailment of fixed price margins on IAC-2 order.
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