Best Defence Stock: Mazagon Dock vs Cochin Shipyard

"First ever US Navy Ship, 'Charles Drew' arrived in India for repairs."

"L&T entered into a five-year Master Ship Repair Agreement (MSRA) with the US Navy."

"India's first Indigenous Aircraft Carrier, Vikrant, has been made by the country's largest shipbuilding company, Cochin Shipyard."

These recent headlines prove that India is making great strides in the shipbuilding sector.

India currently has 28 shipyards and contributes only 1.3% of the global vessel fleet, one-eight of China's share.

Despite having a vast coastline of 7,516 kilometres (km), India has limited shipbuilding capabilities.

However, this changed after the government aimed to reboot the industry and launched the Shipbuilding Financial Assistance Policy (SBFAP) scheme.

This scheme gives shipbuilders financial assistance for orders domestic and international orders procured between 2016 and 2026.

As a result, the domestic and export orders for various shipyards in the country have increased.

Moreover, sentiment got a boost after the government announced funding for green fuelled and hybrid ships.

With the government promoting shipbuilding and ship repairing activities in the country, several top shipbuilding companies will be primary beneficiaries.

Out of these, we are comparing two of the biggest players in the industry today - Cochin Shipyard and Mazagon Dock Shipbuilders.

Business Overview

# Cochin Shipyard

Cochin Shipyard is India's first greenfield shipbuilding yard and the only shipyard with a shipbuilding capacity of 110 thousand deadweight tons (DWT) and a repairing capacity of 125 thousand DWT.

It has a wide product portfolio, including tankers, product carriers, bulk carriers, passenger vessels, and air defence ships, through which it serves its reputed clientele.

The company recently also developed India's first indigenous aircraft carrier, Vikrant.

Some of its clients are the Indian Navy, the Indian Coast Guard, the Shipping Corporation of India, and the National Petroleum Construction Company (Abu Dhabi).

# Mazagon Dock Shipbuilders

Established in 1774 as a small dry dock, Mazagon Dock Shipbuilders has emerged as a renowned shipbuilding company.

It builds vessels, warships, submarines, cargo and passenger ships, and offshore platforms.

The company also offers ship repair services to its clients.

It benefits from its strategic location in Mumbai, which is well connected with Europe, West Asia, and Pacific Rim.

Some of its major clients are the Indian Navy, Indian Coast Guard, and Container Corporation of India.

Particulars	Cochin Shipyard	Mazagon Dock Shipbuilders
Market Cap (in Rs billion)*	101.9	465.6
Order Book (Rs bn)**	210	375

Source: Equitymaster, company presentation|*as on January 11, 2024|** as of September 2023

Between the two, Mazagon Dock Shipbuilders has a larger marketcap of Rs 465.6 billion (bn) as compared to Cochin Shipyard, which has a marketcap of Rs 101.9 bn.

Moreover, Mazagon Dock Shipbuilders also has a higher order book, almost 1.7 times that of Cochin Shipyard.

This is primarily because the company has a monopoly in building and repairing submarines and destroyers.

 

If we compare the performance of both companies on the stock market over the last year, both companies have outperformed the Nifty 50 and delivered multibagger returns.

However, Cochin Shipyard clearly outperformed by giving a 226.4% return as against the 192.4% return of Mazagon Dock Shipbuilders.

# Revenue

In terms of revenue, Mazagon Dock Shipbuilders has outpaced its competitor.

In the last five years, its net sales have grown at a compound annual growth rate (CAGR) of 11.1%, whereas Cochin Shipyard's net sales saw a degrowth of 4.4%.

Revenue

Net Sales (in Rs m)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
Cochin Shipyard	29,656	34,225	28,189	31,909	23,646	-4.40%
Mazagon Dock Shipbuilders	46,140	49,048	40,478	57,333	78,272	11.10%

Data Source: Equitymaster

A healthy order book, with the majority of orders from the Ministry of Defence, has pushed the company's revenue upwards.

To add to this, Mazagon Dock managed to deliver five submarines between 2017 and 2022 despite Covid.

Cochin Shipyard, on the other hand, has witnessed a fall in sales in the last five years. The company's revenue was affected during the pandemic, but it is recovering from the aftereffects of the lockdown.

In the financial year 2023, the slow execution of orders and change in revenue recognition for a major order led to a fall in net sales.

However, the company started receiving large orders from the Ministry of Defence, which boosted the company's order book.

Moreover, the company is foraying into small and mid-sized commercial segment vessels through its subsidiaries, which will support the company's revenue growth.

# Profitability

In the last five years, the earnings before interest tax depreciation and amortisation (EBITDA) of Mazagon Dock Shipbuilders has grown at a CAGR of 25.2%, as against the EBITDA of Cochin Shipyard, which saw a degrowth of 10.7%.

The profit after tax for Mazagon Dock Shipbuilder grew by a CAGR of 17.3%, whereas Cochin Shipyard witnessed a degrowth of 8.6%.

Profitability

EBITDA (in Rs m)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
Cochin Shipyard	5,712	7,115	7,354	6,243	3,236	-10.70%
Mazagon Dock Shipbuilders	2,613	2,503	998	4,285	8,025	25.20%
PAT (in Rs m)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
Cochin Shipyard	4,778	6,320	6,087	5,640	3,047	-8.60%
Mazagon Dock Shipbuilders	4,704	3,772	4,535	5,631	10,461	17.30%
Gross Profit Margin	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
Cochin Shipyard	19.30%	20.80%	26.10%	19.60%	13.70%
Mazagon Dock Shipbuilders	5.70%	5.10%	2.50%	7.50%	10.30%
Net Profit Margin	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
Cochin Shipyard	16.10%	18.50%	21.60%	17.70%	12.90%
Mazagon Dock Shipbuilders	10.20%	7.70%	11.20%	9.80%	13.40%

Data Source: Equitymaster

Clearly, Mazagon Dock Shipbuilders is ahead of Cochin Shipyard in terms of profitability.

The primary reason behind this is the diversified revenue profile of the company, which includes shipbuilding, sale of spares, and ship repair activities.

Moreover, the company is using Artificial Intelligence (AI) for quality checks, which can reduce man-hours significantly and also lead to higher efficiency.

Cochin Shipyard's profits, on the other hand, have fallen drastically.

A fall in revenue due to slow order execution, the pandemic, and an increase in the prices of key raw materials such as steel, engines, and pipes have led to a fall in profit.

To add to this, the company changed its revenue recognition method for a project, which also its margins.

However, with faster order execution, the company is able to improve its profit margins. The same can be seen in the rising margins in the last two quarters.

# Debt Management

Both Mazagon Dock Shipbuilders and Cochin Shipyard are zero-debt defence companies.

Mazagon Dock Shipbuilders expects to invest Rs 4 bn in capex annually to develop a greenfield shipyard in Navi Mumbai.

Cochin Shipyard has already invested Rs 35 bn in capex and plans to invest more to augment its capacity.

Despite such high capex plans, both companies have sufficient cash balance to meet the capex requirements comfortably.

In addition to this, the companies have a high-interest coverage ratio, which indicates their liquidity position.

Mazagon Dock Shipbuilders' interest coverage ratio in the financial year 2023 was 127.6x, whereas Cochin Shipyard's interest coverage ratio was 10.7x.

# Financial Efficiency

The Return on Capital Employed (RoCE) indicates a company's ability to generate profits from the capital invested, whereas the Return on Equity (RoE) indicates its ability to generate profits from equity financing.

The RoCE and RoE of Mazagon Dock Shipbuilders have been expanding continually owing to rising profits.

On the other hand, the ratios of Cochin Shipyard have fallen continuously due to falling profits.

Financial Efficiency

ROCE	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
Cochin Shipyard	22.10%	23.60%	20.80%	18.10%	10.40%
Mazagon Dock Shipbuilders	24.50%	24.20%	17.90%	19.80%	29.70%
ROE	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
Cochin Shipyard	14.40%	17.00%	15.10%	12.80%	6.90%
Mazagon Dock Shipbuilders	14.60%	12.30%	13.20%	14.60%	22.00%

Data Source: Equitymaster

# Dividends

A company distributes its profit in the form of dividends to its shareholders. A company that continuously pays dividends is considered stable by investors.

Dividend

Dividend Per Share (Rs)	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	5-Year CAGR
Cochin Shipyard	13	16.6	15.5	16.8	17	5.50%
Mazagon Dock Shipbuilders	5	10.8	7.2	8.7	16	26.30%
Dividend Yield	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
Cochin Shipyard	3.00%	4.80%	4.80%	4.70%	3.50%
Mazagon Dock Shipbuilders	0.00%	0.00%	3.60%	3.40%	2.70%
Dividend Payout Ratio	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23
Cochin Shipyard	35.80%	34.60%	33.50%	39.10%	73.40%
Mazagon Dock Shipbuilders	21.30%	57.60%	32.20%	31.30%	30.80%

Data Source: Equitymaster

In the last five years, the dividend paid by Mazagon Dock Shipbuilders has grown at a CAGR of 26.3%, whereas Cochin Shipyard's dividend payment grew at a CAGR of 5.5%.

In terms of dividend per share, dividend yield and dividend payout ratio, Cochin Shipyard is ahead of Mazagon Dock Shipbuilders.

The five-year average dividend payout of Cochin Shipyard is 43.3%, whereas Mazagon Dock Shipbuilders' average payout is 34.6%.

The dividend yield of Cochin Shipyard is 3.5%, as opposed to the 2.7% of Mazagon Dock Shipbuilders.

This indicates that Cochin Shipyard rewards its shareholders better than Mazagon Dock Shipbuilders.

# Valuations

To know what the right worth of a share is, it is important to look at its valuations. Two important ratios to consider are the price-to-earnings (P/E) ratio and the price-to-book value (P/B) ratio.

These ratios tell us whether a stock is overvalued or undervalued.

A company is considered overvalued if it has a higher valuation than its peers or industry and is considered undervalued if it has a lower valuation.

Valuations	Cochin Shipyard	3-Year Average	Mazagon Dock Shipbuilders	3-Year Average
P/E (x)	24.2	12.1	38.4	9.9
P/B (x)	3.7	1.2	8.5	1.6

Data Source: Equitymaster

In terms of P/E, the Mazagon Dock Shipbuilders is slightly overvalued when compared to Cochin Shipyard. Its P/B is also higher than Cochin Shipyard.

When compared to their three-year average, both companies are considered overvalued. When compared to the industry average, Mazagon Dock Shipbuilders and Cochin Shipyard are overvalued. 

Mazagon Dock vs Cochin Shipyard: Which Defence Stock is Better?

Mazagon Dock Shipbuilders is leading in terms of revenue, profitability, financial efficiency and valuations, whereas Cochin Shipyard pays higher dividends to its shareholders.

Being the only shipbuilding company in India manufacturing submarines and destroyers, Mazagon Shipbuilders has a competitive advantage over other shipping-building companies.

It has an order book of Rs 375 bn, which will be executed in 4-5 years, providing revenue visibility until 2029.

The company has also raised revenue guidance to 12-15% for the financial year 2024 on account of faster order execution.

Mazagon Dock Shipbuilders is also diversifying its activities by increasing its presence in underwater marine, heavy engineering equipment, and offshore platforms.

Moreover, it is planning to develop a greenfield shipyard at Navi Mumbai with a ship lift, wet basin, workshops, and ship repair facilities.

Despite lagging behind in financials, Cochin Shipyard is executing several plans that will grow its revenue.

It is building a new dry dock and a 600-ton gantry crane for handling vessels to expand its shipbuilding and repair capabilities.

It is expanding the International Ship Repair Facility (ISRF) at Cochin by adding a ship lifting facility to undertake more complex ship repair orders and improve its ship repairing revenue.

The company is also setting up a modernised shipbuilding facility in West Bengal to build ships and vessels.

Its CRUISE 2030 plan aims to focus on defence sector, coastal, and small vessel segments by tapping emerging technologies and building autonomous vessels, hybrid or battery-operated vessels, and vessels that run on alternate fuels.

As a part of this plan, it recently acquired Temba Shipyards, which specialises in deep-sea fishing vessels.

With India aiming to become Atmanirbhar Bharat, the government promoting indigenisation, and growing export orders, the Indian shipbuilding industry is likely to be the primary beneficiary, and both Mazagon Dock Shipbuilders and Cochin Shipyard stand to benefit from it.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...