Top 8 Stocks Associated with the Shipbuilding Ecosystem. How Many Do You Own?

A shipbuilding ecosystem is a complex network that integrates various industries and technologies involved in the design, construction, and maintenance of maritime vessels.

It's a diverse and evolving sector encompassing various components crucial for the construction, repair, and maintenance of vessels.

It features several prominent shipyards, such as Mazagon Dock Shipbuilders, Cochin Shipyard, and Hindustan Shipyard, which handle the design and construction of a range of ships including commercial, naval, and specialised vessels.

The ecosystem also includes suppliers and manufacturers of ship components, from engines and navigation systems to steel and equipment.

These companies play a crucial role in keeping global trade afloat, literally.

As countries ramp up their maritime fleets for both commercial and defence purposes, companies in this space are seeing growing demand.

Keeping that in mind, here are the top 8 stocks associated with the shipbuilding ecosystem.

• MTAR Technologies - Propulsion Systems
• Bharat Dynamics - Brahmos Missile
• Mazagon Dock - Warships
• L&T - Damage Control Systems
• Garden Reach Shipbuilders - Patrol Vessel
• Lloyds Engineering - Steering and Navigation Systems
• Bharat Electronics - Defence and Radar Systems
• Cochin Shipyard - Aircraft Carrier

Now, let's look at them in detail and understand their growth prospects...

#1 MTAR Technologies

MTAR Technologies is a leading precision engineering firm specialising in the manufacture of high-precision components for the aerospace, defence, and nuclear sectors.

The company's product range includes propulsion systems and advanced engineering solutions that require meticulous design and execution.

In shipbuilding, MTAR's expertise is crucial for producing high-precision components and systems that integrate into naval vessels, ensuring performance and reliability.

Recently, MTAR has expanded its manufacturing capabilities and diversified into new defence and aerospace projects, which could enhance its contributions to advanced shipbuilding technologies.

While the company's efforts in shipbuilding segment are only getting noticed now, over the years, it has played a vital role in several notable Indian missions in the aerospace field. For instance, MTAR was involved in supplying core parts for rocket engines and cryogenic engines in missions like Chandrayaan-3 and Aditya L1.

Coming to its financials, for FY24, the company's revenue rose slightly by 1.2% to Rs 5.8 bn. However, the net profit for the year declined 26.8% to Rs 1.1 bn.

Notably, MTAR Technologies missed its revenue guidance for the financial year 2024, which was projected at Rs 6.1 bn.

The management attributed the lower-than-expected results to the deferment of orders in the clean energy segment and delays in the execution of projects in the space vertical.

Despite this setback, the company is banking on new businesses to proper its future growth.

MTAR's management has expressed a positive outlook for FY25, emphasising that the company is anticipating its highest-ever revenue in Q2FY25 and expects a stronger execution in the second half of the year compared to the first half.

It has ambitious plans for capital expenditure, intending to establish new manufacturing units in Europe and the US.

This expansion will increase the company's total manufacturing facilities from seven to nine, demonstrating its commitment to growth despite recent challenges.

#2 Cochin Shipyard Ltd

Cochin Shipyard Ltd is a major Indian shipbuilding and repair company known for constructing various vessels, including tankers, cargo ships, and naval ships.

The company also offers repair and maintenance services for ships and offshore platforms. Its extensive experience and modern facilities make it a key player in the shipbuilding industry, supporting both commercial and military maritime needs.

The company is currently in the process of expanding its capacity and banking on new projects, such as building large LNG carriers, which highlight the company's growing role in the global maritime sector.

It recently inaugurated a new dry dock with a capacity.

Apart from this, it is focussing on building new products such as zero-emission green vessels and hydrogen-based passenger ferry boats to expand its product portfolio.

For FY25, the company aims to increase its top line by 20-25%. This growth will come from both shipbuilding and ship repair. The EBITDA is expected to remain stable at 18-19%, despite higher depreciation costs from new projects.

Several ongoing projects are in progress. These include the construction of anti-submarine warfare corvettes and hybrid electric catamarans for Kochi Metro. The new shipbuilding facility will be operational by August 2024, enhancing production capacity and efficiency.

The company is also exploring new opportunities. A significant step forward has been made with the US Navy, which could bring substantial orders in the ship repair space. Additionally, involvement in projects with other state governments could lead to further growth.

With strong growth in international orders, Cochin Shipyard is inching towards its goal of increasing export orders.

#3 Bharat Electronics

Bharat Electronics is a prominent manufacturer of electronics and communication equipment for the defence, aerospace, and civil sectors. Its products include radar systems, communication equipment, and avionics.

In the context of shipbuilding, Bharat Electronics provides essential electronic systems that are integral to the operation of modern naval vessels. The company has been advancing its capabilities in defence electronics, contributing to the development of sophisticated naval systems.

As of June 2024, Bharat Electronics boasts of an order book value of Rs 760 bn, which includes an export order book of US$ 407 million (Rs 339.9 bn).

The company heavily relies on the Indian defence sector for now, constituting about 87% of its revenue.

Further, its pipeline of fresh orders remains healthy, supported by the government's growing capital budget allocation and continued focus on rolling out reforms to increase India's defence product manufacturing capability and gradually reduce imports.

#4 Lloyds Engineering Works

Lloyds Engineering Works specialises in engineering and construction services, including the design and manufacture of shipbuilding components. The company supports the shipbuilding industry by providing critical engineering solutions and components necessary for building and repairing ships.

Its role in supplying and manufacturing essential shipbuilding components makes it a valuable part of the maritime infrastructure.

Some of the products the company manufactures are pressure vessels, heat exchangers, rolling mills, steel melting shops, fin stabilisers, and electro-hydraulic steering gear.

It has five manufacturing facilities in Maharashtra that are close to each other, bringing significant cost savings.

The company's clientele includes reputed names such as Cochin Shipyard, Bharat Petroleum, Indian Oil, HP, and Finolex.

Lloyds Engineering Works is currently investing in expanding its capacity to cater to the growing demand for its products.

It is also adding new channel dealers, adding new branches, offices, and sales workshops to improve its sales.

#5 L&T (Larsen & Toubro)

Larsen & Toubro (L&T) is a major engineering and construction conglomerate with significant operations in the shipbuilding sector. The company provides comprehensive engineering, procurement, and construction services, including shipbuilding and repair facilities.

L&T's extensive expertise and infrastructure support the construction of a wide range of vessels, from commercial ships to naval warships. Their focus is mainly on damage control systems.

L&T's management has guided for a 12-15% growth in order inflows in the coming decade.

With a favourable government tender conversion ratio (to orders) and a five-year low quantum of domestic share of order backlog at 73%, the company is expected to have a reasonable share of revenues coming from pending order book in the next decade.

With the traction in order book and higher margins in the new revenue segments, the company also sees its return on equity nearly double in the next 5 years.

#6 Garden Reach Shipbuilders & Engineers

Garden Reach Shipbuilders & Engineers (GRSE) is a state-owned Indian company specialising in the construction of warships, naval vessels, and specialised ships.

GRSE plays a crucial role in enhancing India's naval capabilities by building advanced naval ships and providing repair services. Its focus on defence and strategic ships makes it a key player in national security and maritime defence.

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.

Coming to 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.

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

#7 Mazagon Dock Shipbuilders

Mazagon Dock Shipbuilders is a leading Indian shipbuilding company involved in constructing warships, submarines, and commercial vessels. The company is known for its expertise in building complex naval vessels and submarines, contributing significantly to the country's defense and shipbuilding capabilities.

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.

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.

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.

#8 Bharat Dynamics Ltd.

Bharat Dynamics Ltd is a defence public sector enterprise that manufactures missiles and defence equipment, including systems for naval applications.

The company's missile systems and defence technologies are crucial for modern naval vessels, providing advanced capabilities for maritime defence.

The company's management remains optimistic about its ability to deliver robust operational performance. The easing of supply chain challenges, combined with the company's proactive measures, positions Bharat Dynamics well for achieving strong revenue growth in FY25.

The company's future strategy includes leveraging its solid order book, which stood at Rs 194.3 bn at the end of March 2024. Additionally, it has orders worth approximately Rs 200 bn in the pipeline for the next 2-3 years, indicating a secure revenue stream.

In Conclusion

Shipbuilding acts as a catalyst for overall industrial growth due to spin-offs to other industries, including steel, engineering equipment, port infrastructure, trade, and shipping.

With its immense direct and indirect linkages with many other leading industries, the shipbuilding industry has the potential to strengthen the mission of an 'Aatmanirbhar Bharat'.

However, there are plenty of checks that need to be undertaken before considering the above stocks involved in shipbuilding ecosystem to be investment worthy.

Unforeseen environmental costs could pose a challenge, impacting not only the company's future earnings but also the affordability of its products and services.

Before evaluating any company for investment, investors should always conduct extensive research and use their own judgment.

Happy Investing!

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