Pros and Cons of Investing in Cochin Shipyard Right Now

Did you know that Cochin Shipyard built India's first indigenous aircraft carrier, INS Vikrant?

The company's stock is one of the hottest in the market right now. Retail and institutional investors have made it a part of their portfolio.

In this editorial, we will look at the pros and cons of investing in this stock.

Please note this is not a stock recommendation.

Indian Shipbuilding and Cochin Shipyard

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 orders for various shipyards in the country have increased. 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 have been the primary beneficiaries.

Among these, Cochin Shipyard Ltd (CSL) stands tall in terms of fundamentals.

CSL is India's first greenfield shipbuilding yard. It's also the only shipyard with a shipbuilding capacity of 110,000 deadweight tons (DWT) and a repairing capacity of 125,000 DWT.

Strategically situated along the west coast of India, its shipyard occupies a pivotal position on the primary sea route connecting Europe, West Asia, and the Pacific Rim, a significant international maritime thoroughfare.

The shipyard enjoys close proximity to the Kochi port and offshore oil fields on the western coast of India, as well as relative proximity to the Middle East.

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

It's a leading player in the construction repair, and refits of all types of vessels including periodic upgradation and life extension of ships.

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).

The Indian government owns 72.86% of the company. It was granted 'Miniratna' status in 2008. In July 2023, CSL was upgraded from schedule B to schedule A CPSE by the government.

The upgradation to schedule A recognises the company's strong financial performance and operational efficiency and contribution to national security.

It will help the company operate with the larger senior management bandwidth required for effectively managing its seven units spread across the country.

Now let's consider the positives and negatives of investing in the company.

Pros

#1 Growth

In its annual results, revenue increased by 62% to Rs 38.3 billion (bn) and net profit increased by 157% to Rs 7.83 bn in FY24 compared to FY23.

As far as the last quarter of the year was concerned, the company delivered a blockbuster performance. Revenue increased 103% and net profit increased a stunning 558% compared to the last quarter of the previous year.

The company's order book stands at about Rs 220 bn. In addition to this, the company has a pipeline of orders with a possible size of Rs 100 bn.

There is clear revenue visibility for the next few years. As long as the company can execute its orders on time, it should not have a problem delivering 20%+ growth in both revenue and profits over the next few years.

#2 Government's Renewed Focus on Defence

After assuming charge of the defence ministry for a second consecutive tenure, Rajnath Singh set an ambitious annual target for defence exports of more than Rs 500 bn by FY29.

The defence minister also reiterated the government's focus on achieving self-reliance in defence manufacturing and modernisation of the armed forces. This opens up avenues of strong growth for defence companies.

Indian Navy's forthcoming warship procurement plans offer promising prospects for the company. CSL has talked about constructing another aircraft carrier. Talks in this regard between the defence ministry and the Navy are in advanced stages.

Such a big decision, if taken, could result in an order of Rs 400 bn for the company.

#3 Electric and Hybrid Vessels

The company has jumped on the bandwagon of electric and hybrid vessels. Many European shipping companies are making a transition form conventional fuels to electric or hybrid power and CSL is at the forefront of this trend.

The company sees a huge new profit opportunity here because there are thousands of ships in Europe of all sizes that are to be replaced with environmentally friendly electric or hybrid vessels over the next several years. This is a megatrend in itself and CSL is looking to grab the opportunity with both hands.

The company bagged an order from a European client for the design and construction of a hybrid service operation vessel (SOV) with an option for two more such vessels.

Cons

#1 Defence Dependence

In the company's order book of about Rs 220 bn, more than Rs 152 bn (almost 45%) is from defence contracts. The market looks at this as a positive because defence is booming in India.

However, this also makes the company reliant on one sector, specifically the government's defence budget. In fact, the dependence could grow in the future if the Navy's second indigenous aircraft carrier is given a green light.

Any slowdown in defence spending will hit the company hard.

#2 High Valuations

The stock is trading at a PE of 76 and a PB of 12. This certainly makes CSL an expensive stock.

While the company's fundamentals are strong, the stock's high valuations present a challenge for potential investors.

If bought at these levels, investors would be taking on significant risk as much of the future profits have already been factored into the current market price.

Thus, any negative surprise on growth will take a toll on the stock.

To know more, check out Cochin Shipyard's factsheet and quarterly results.

Happy Investing!

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...