News Analysis

CSL: For the ones with high risk-taking appetite

Muthukumar K | Updated on January 09, 2018 Published on August 01, 2017

Cochin Shipyard, a Mini-Ratna engaged in the business of shipbuilding and repairing, is currently tapping the primary market. About 83 per cent of the company’s revenue was generated by the shipbuilding business, with the rest coming from the ship-repair business in FY17. The company mainly caters to the Indian Navy and the Indian Coast Guard, which jointly contribute 85 per cent to the company’s revenues. Its other customers are ONGC, Shipping Corporation of India (SCI) and Dredging Corporation of India (DCI).

Investors with a high risk appetite can consider subscribing to this offer. At a price band of ₹424-432 a share, it is priced at a price-to-earnings multiple of 18.5-18.8 on trailing earnings. Comparison of the valuation with domestic peers is not possible since all the listed domestic shipbuilding companies are loss-making.

While the valuations look pricey compared to global shipyard companies, which are currently quoting at single-digit multiples, a stable business model with good revenue visibility, market leadership in the high-margin ship-repair business, robust balance sheet and plans for future expansion make it a good defensive bet.

Scaling up

The company has two docks at Kochi on the west coast of India. Dock one is primarily used for ship repairs with capacity to take vessels of up to 1.25 lakh DWT. Currently, it is the market leader in the Indian ship-repair industry with a market share of 39 per cent.

Dock two is a shipbuilding dock with capacity to manufacture vessels of up to 1.1 lakh DWT. It’s the largest in the public sector, ahead of Hindustan Shipyard (80,000 DWT) and next only to Reliance Defence & Engineering.

Part of the IPO proceeds will be used to construct a new dry dock and another facility for ship repairs.

Post expansion in 2021-22, it will be able to handle annual repairs of about 140 vessels, compared to the current capacity of 80. And from the new dry dock, which will be longer and wider, it will be able to build or repair a broader variety of vessels, including LNG carriers, semi-submersibles, jack-up rigs and drill ships.

Defence against downturn

The Indian shipbuilding order book has been declining since 2011, thanks to excess capacity and weak global trade. However, the company was able to tide over the downturn with the help of orders from the Indian Navy and the Indian Coast Guard.

It has built around 35 vessels in the last five years and has an order book worth ₹2,900 crore – about 1.3 times its FY17 sales. It includes phase – II of the Indigenous Aircraft Carrier (IAC) for the Indian Navy. The IAC order comprised 87 per cent of its shipbuilding sales in FY17 and is expected to continue to contribute significantly to revenues over the next few years.

Ship orders in the defence sector are expected to increase over the next decade with Indian Navy’s and Indian Coast Guard’s plan for a 200-ship fleet each by 2022. Currently, the Indian Navy has about 137 ships and the Indian Coast Guard about 120 vessels.

The PSU status and large manufacturing facility give the company an edge in the ₹11,000-crore (annual) naval fleet market. While the government have been modestly increasing defence budget (6.2 per cent in budget 2017-18), security concerns is expected to keep the budget growing to match the rivals.

The ship-repairs market is expected to grow at a CAGR of 8-10 per cent between FY16 and FY 21, according to Crisil estimates. It is strategically located along the west coast of India, that is, midway a busy international maritime route.

It also undertakes revamping and refurbishing work of oil rigs in almost all major offshore vessels and rigs of ONGC. In addition, it conducts regular repair works for SCI and DCI.

Robust financials

The company grew its sales by 5.3 per cent in 2016-17 to ₹2,208 crore. In the last five years, the company managed to weather the downturn in the shipping industry by growing its topline by about 4 per cent annually. However, during the period, revenues from the ship-repair business grew at a rapid 30 per cent per annum.

Operating and net profit margins were 18.5 per cent and 15.2 per cent, respectively, for 2016-17. During 2016-17, net profit was up 6.8 per cent y-o-y to ₹312 crore . Net profit grew at a compounded growth rate of 3.2 per cent in the last four years.

The company has negligible debt on its balance sheet (0.06:1) and has free cash to the extent of ₹1,600 crore.

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