Top Stocks Poised to Gain from Defence Ministry's Rs 700 bn Warships Contract

If you ask any rational investor about the one thing that could help you understand how well a particular company might perform in the future, they will likely agree that it's crucial to know how much of the company's revenue turns into profits.

Simple things are often overlooked in any field. People tend to avoid simplicity because they think it's boring and too common.

However, in investing, the simplest approach often yields the best results. Today, we'll be discussing one such simple yet effective approach to investing.

The most important metric for equity investors to track is the net earnings that the company generates.

Now, the question is: How can one predict or expect the earnings that the company could generate going forward?

Today, we will be examining some companies that could potentially receive a significant order from the defence ministry worth Rs 700 bn.

While details will emerge after the defence ministry clears the project, there is a possibility that it could be split between the two yards, Mazagon Dock Shipbuilders and Garden Reach Shipbuilders & Engineers.

If executed, this could be a game-changer for the profit and share price growth of these companies.

Moreover, Garden Reach Shipbuilders has also announced winning an order worth around Rs 8.4 bn from the National Centre for Polar and Ocean Research (NCPOR) on Tuesday. The contract involved the construction and delivery of an ocean research vessel (ORV).

Let's understand the operations of these companies and how this massive order from defence ministry could turn their fortunes around.

#1 Mazagon Dock Shipbuilders

Mazagon Dock Shipbuilders builds and repairs warships, submarines, and other vessels for the Indian Navy, Coast Guard, and ONGC.

The company's diverse portfolio encompasses cargo ships, passenger liners, water tankers, fishing vessels, destroyers, submarines, and corvettes.

From starting a small shipbuilding dock to manufacturing submarines, Mazagon Dock has established itself as a warship giant in India.

The company, owned primarily by the Indian government, makes everything from cargo vessels to offshore platforms and destroyers, frigates, corvettes, and submarines.

Mazagon Dock Shipbuilders Financial Snapshot (2020-24)

	FY20	FY21	FY22	FY23	FY24
Revenue Growth (%)	6.30%	-17.50%	41.60%	36.50%	20.90%
Gross Profit Margin (%)	50%	54%	53%	43%	46%
Operating Profit Margin (%)	5%	6%	8%	10%	15%
Net Profit Margin (%)	9.60%	12.70%	10.70%	14.30%	20.50%
Return on Capital Employed (%)	24%	23%	21%	33%	44%
Return on Equity (%)	15.40%	15.00%	15.80%	23.50%	31.00%

Data Source: Screener.in

Over the past five years, Mazagon Dock has demonstrated strong financial performance with a compounded annual growth rate (CAGR) of 15% in sales and 29% in profit.

The company's five-year average return on equity (RoE) and return on capital employed (RoCE) have been 24% and 29%, respectively.

In FY24, Mazagon Dock's sales increased by 21% YoY, while net income surged by 73% compared to the previous year.

The company has planned a capital expenditure (capex) of approximately Rs 25-30 bn over the next 3-4 years.

It has acquired a 15-acre land for expansion and is investing in increasing its capacity to build larger vessels and enhance its ship repair facilities.

Mazagon Dock is also engaged in discussions for next-generation destroyers, follow-on frigates, P-75I submarines, and additional submarines.

However, most orders are on a nomination basis, which affects revenue recognition, and there is uncertainty regarding the timing and specifics of future orders.

Looking ahead, management remains optimistic about future projects and revenue growth, focusing on project execution, cost management, and capacity expansion to drive growth.

The company has pending orders totalling approximately Rs 380 bn for destroyers, frigates, submarines, coast guard vessels, and other projects, which are expected to generate significant revenue in the coming years.

Over the past year, the company's share price has increased by 185%. Currently, the stock is trading at a price-to-earnings (PE) ratio of 55.6x, which is at a premium to its long-term median PE ratio of 11x.

For more details, please refer to the Mazagon Dock Shipbuilders' company fact sheet and quarterly results.

#2 Garden Reach Shipbuilders & Engineers

Garden Reach Shipbuilders and Engineers is a leading shipbuilder that caters to the needs of the Indian Navy and the Indian Coast Guard.

The company boasts a diverse portfolio and a notable achievement as the pioneer shipyard in India to export warships. It has successfully delivered a tally of 100 warships to the Indian Navy and Indian Coast Guard.

Garden Reach Shipbuilders & Engineers Financial Snapshot (2020-24)

	FY20	FY21	FY22	FY23	FY24
Revenue Growth (%)	3.40%	-20.40%	53.80%	46.00%	40.30%
Gross Profit Margin (%)	93%	58%	46%	37%	37%
Operating Profit Margin (%)	3.00%	7.00%	8.00%	6.00%	7.00%
Net Profit Margin (%)	11.40%	13.40%	10.80%	8.90%	9.90%
Return on Capital Employed (%)	22%	21%	20%	20%	28%
Return on Equity (%)	15.70%	13.40%	15.10%	16.10%	21.30%

Data Source: Screener.in

Regarding its financials, the company has achieved a sales CAGR of 21% and a profit CAGR of 26%. Its five-year average RoE and RoCE are 17% and 22%, respectively.

Revenue from operations for FY24 increased by 40% YoY, while profit after tax grew by a staggering 57%.

As of 31 March 2024, the company's order book is approximately Rs 226 bn, with Rs 225 bn from the shipbuilding sector.

Its other order books include, contract secured on 22 June 2024, to construct and deliver four multi-purpose vessels, each with a capacity of 7,500 deadweight tonnes.

Additionally, it entered a contract with the Bangladesh Inland Water Transport Authority (BIWTA) for one trailing suction hopper dredger and received a purchase order for a 1 kW HF system.

Garden Reach Shipbuilders has also announced an Rs 8.4 bn order from the National Centre for Polar and Ocean Research (NCPOR) for an ocean research vessel.

As a one of the leading contenders for the Rs 700 bn warship order, the company is well-positioned for future success.

Looking ahead, the company anticipates a strong future with on the back of a strong order book for the company.

Over the past year, the company's share price has increased by 318%. Currently, the stock is trading at a price-to-earnings (PE) ratio of 82.9x, which is at a premium compared to its long-term median PE ratio of 15.6x.

For more details, please refer to the Garden Reach Shipbuilders & Engineers' company fact sheet and quarterly results.

Conclusion

For investors seeking promising returns, Mazagon Dock Shipbuilders and Garden Reach Shipbuilders & Engineers represent significant growth opportunities.

Both companies are well-positioned to benefit from a substantial Rs 700 bn order from the defence ministry, tapping into expanding market demands and demonstrating strong growth trends.

However, such stocks can be volatile, testing investor patience during market fluctuations.

By staying aware of market changes and taking advantage of opportunities, investors can make the most of positive trends while protecting their investments from potential risks.

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...