Multibagger Defence Stock Announces Stock Split and Interim Dividend

Stock splits are all hype these days.

In 2022, giants like Google and Amazon announced a 20:1 stock split sending the market into a frenzy.

Shares of both these companies spiked after the announcement.

In Indian markets, one of the highly priced stocks Nestle India also recently decided to encourage more retail participation in its stock.

The MNC company announced in October 2023 that it would do a stock split in the ratio of 1:10.

Shares of Nestle spiked the very next day and currently, they're trading near record-high levels.

One thing is certain with stock splits. After spending years trying to study the ins and outs of the corporate action, we do know that stock splits do not affect the underlying business in any way, but it is undeniable that there is price movement around stock split announcements and execution of the same.

So, in this week's analysis, let's deep-dive into a shipbuilding company's announcement of stock split and its future growth prospects.

Cochin Shipyard Stock Split

Cochin Shipyard is a government-owned company and India's largest public-sector shipyard by capacity. Even though it is registered as a commercial shipyard, it derives most of the revenues from building and repairing defence ships.

It's not just a unique player to ride the potential in India's defence manufacturing space, but the company is towering strong performance in a difficult sector.

While announcing its quarterly results earlier this week on Tuesday, Cochin Shipyard approved a stock split of one equity share of face value of Rs 10 into two shares of face value of Rs 5 each.

The company is yet to finalise the record date for the stock split. The authorised share capital will remain unchanged at Rs 2.5 bn post the stock split.

As you would expect, shares of the company spiked over 6% following its announcement of stock split.

That's not all though. Along with the stock split, the company also declared an interim dividend of Rs 8 per share for the financial year 2023-24.

Cochin Shipyard fixed 20 November 2023 as the record date for the interim dividend.

Solid Q2 Numbers

In its Q1 report card, the company had posted solid numbers. The leading shipbuilding company's EBITDA surged 152% to Rs 790 million (m) while net profit for the quarter more than doubled to Rs 1.1 billion (bn).

In its Q2 report card, the company did not disappoint.

Revenue grew by 48% to Rs 10.1 bn while EBITDA grew by 41% to Rs 1.8 bn.

For the September 2023 quarter, it reported a net profit of Rs 1.8 bn, a growth of 61% compared to the same period last year.

The company's ship-building segment saw a good growth of 44% in its revenue to Rs 7.6 bn.

Meanwhile, the ship repair segment performed much better in terms of revenue, up 62% at Rs 2.5 bn.

Strong Growth Prospects

In July 2023, the company was upgraded from schedule B to schedule A CPSE by the government of India.

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

The upgradation of Cochin Shipyard to Schedule A will now help the company operate the larger senior management bandwidth required for effectively managing its seven units spread across the country.

Meanwhile, the government finally cleared the long pending project of over Rs 190 bn in August this year to indigenously build five advanced fleet support ships.

These specialised vessels are designed to provide essential logistical support to warships while they operate in the far seas. These vessels will be equipped to replenish warships with critical supplies such as fuel, water, ammunition, spares, and other essential stores.

Cochin Shipyard, being a lead player in the domain, is expected to see some orders for building fleet support ships. The company already has plans to launch three vessels by end of November 2023.

Last month, the company bagged a Rs 3.1 bn order from the Ministry of Defence for a ship upgrade.

As of September 2023, the company had an order book of over Rs 220 bn. This is around 10x its FY23 revenues of around Rs 23 bn.

Out of this, a major chunk of around Rs 160 bn is for two large naval projects - the anti-submarine warfare shallow-water craft corvette and the next-generation missile vehicles.

The strong order book that it enjoys now was not the case until few years back. In fact, about five years ago, its order book was in the region of just Rs 50-60 bn whereas its revenues were almost at the same level as right now.

According to the company's management, the pipeline looks strong for the next two years.

Cochin Shipyard may not have a very strong moat but there is definitely some sort of moat present for the company. Otherwise, the company wouldn't be debt free and wouldn't have a solid track record of being consistently profitable over the long term.

The company's long term average return on equity (ROE) of 14-15% isn't bad.

In 2023 so far, shares of the company have rallied 100%.

At the current price, the company trades at a PE multiple of 31.9x and a price to book value multiple of 3.1x.

This compares with its 5-year average PE and P/BV of 9.4x and 1.3x, respectively.

Here's a table comparing Cochin Shipyard with its peers.

Comparative Analysis

Company	Cochin Shipyard	Knowledge Marine	Garden Reach	Mazagon Dock
ROE (%)	6.9	52.1	17.1	24.3
ROCE (%)	10.2	56.7	21.2	32.8
Latest EPS (Rs)	32.7	43.1	22.2	59.9
TTM PE (x)	31.9	28.5	34.9	32.9
TTM Price to book (x)	3.1	9.9	5.9	7.9
Dividend yield (%)	1.6	0	0.8	0.8
Industry PE	34.6
Industry PB	5.6

Data Source: Ace Equity

For a detailed and in-depth analysis of its valuations, check of Co-head of Research at Equitymaster Rahul Shah's video on Cochin Shipyard.

Conclusion...

Going by the past data, it seems that as soon as a stock split is announced, there is a lot of buying and selling activity.

Considering that a stock split is supposed to indicate growth prospects, investors usually buy shares of the company during the split announcement.

It gives investors more confidence if the company is a fundamentally strong one like Cochin Shipyard.

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...