LKP Securities

Cochin Shipyard (Buy)

CMP: ₹244.25

Target: ₹356

Cochin Shipyard Ltd (CSL), a public listed company, incorporated on March 29, 1972, is a pioneer in defence shipbuilding and repairing, with a standalone ship repairing facility unlike any other competitor. Due to its expertise in shipbuilding & shiprepairing and strong, long lasting relations with its key clients, the company is benefitted to provide important warship products in the coming years.

The order book size of these projects is at a healthy ₹15,300 crore to be delivered over the next 2-3 years. This visibility is enough for the long-term and will lead to a good growth in revenues and profitability. Considering its strong order book with IAC and ASWC projects at the helm in the shipbuilding business, expectations of more order wins through RFP bidding, we expect a significant escalation of topline, margins and bottomline from FY21E over an elongated period of 2-3 years.

On profitability front too we expect solid movement driven by higher contribution from competitively bid projects, positive operating leverage, zero LD provisions, higher contribution from the ship repairing projects & capacity expansion, superior efficiency ratios and balance sheet strength. We anticipate stable return ratios with maintenance of healthy dividend payouts and yield.

CSL came out with its IPO in August 2017 at ₹432 and was oversubscribed by a whopping 76 times despite being a PSU. At 4.7x the valuations for such a goliath in defence shipbuilding industry seems quite attractive. Hence, we initiate ‘buy’ call with a target of ₹356 (valued at 6.5x FY 22E earnings).

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