 "Shipbuilders stock at new peaks; Here's what triggered the rally on May 23")
Shares of shipbuilding stocks rallied up to 18 per cent backed by heavy volumes on the BSE in Thursday’s intra-day trade in an otherwise subdued market after Garden Reach Shipbuilders & Engineers (GRSE) reported strong earnings for the March quarter (Q4FY24).
Among individual stocks, GRSE zoomed 18 per cent to Rs 1,410.15, followed by Cochin Shipyard stock (9 per cent to Rs 1,777.90) and Mazagon Dock Shipbuilders stock (7 per cent to Rs 3,074.85). All these stocks were trading at their respective record high levels. In comparison, the S&P BSE Sensex was up marginally by 0.04 per cent at 74,253 at 09:25 am.
Thus far in the current calendar year 2024 (CY24), Cochin Shipyard stock has skyrocketed 161 per cent, while GRSE and Mazagaon Dock Shipbuilders surged 60 per cent and 34 per cent, respectively. The benchmark index has gained 2.6 per cent so far in CY24.
In Q4FY24, GRSE’s revenue increased by 69 per cent year-on-year (YoY) to Rs 1,015.7 crore, led by strong execution of the order backlog. Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin improved significantly by 552 bps YoY (+364 bps QoQ) to 8.9 per cent. The company’s profit after tax was up 101.8 per cent YoY to Rs 111.60 crore.
Backed by a strong order book and with ongoing projects at a maximum revenue recognition phase, and also with more orders on the anvil, the management of GRSE is confident of sustained growth in the coming years too.
GRSE’s revenue growth of 40 per cent YoY for FY24 was better than the provisional revenue growth of 33 per cent reported by the company. Order backlog is estimated to be at Rs 22,500 crore (6.3x FY24 revenue) which includes key contracts like P-17A frigates, anti-submarine warfare corvettes and survey vessels.
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Revenue growth is expected to remain strong for FY25E & FY26E as the P-17A contract (~55 per cent of total backlog) would be going through maximum revenue recognition phase. Timely placement of other large projects in pipeline (like next generation corvettes, patrol vessels etc) would be the key for sustainable strong growth in the longer term, ICICI Securities said in a note.
The board of Cochin Shipyard is scheduled to meet on May 24 and Mazagon Dock Shipbuilders on May 29 to consider Q4 and FY24 results.
Meanwhile, the defence shipbuilding segment continues to look promising on account of ambitious acquisition plan of Indian Navy and Indian Coast Guard which is quite encouraging for the Indian Shipbuilders and the entire eco-system. A number of request for proposals (RFPs) for various shipbuilding projects have been floated by the Ministry of Defence (MoD) during last one year and some more are expected to come out in the near future, according to analysts.
The emphasis of the Government on the coastal shipping/ inland waterways space as also in developing ship repair clusters in the country, all augurs well for the shipbuilding companies.
The large spending plan by the Indian Navy is expected to drive the order book of the Indian shipbuilding companies and more so for the CPSU shipyards. The capital budget for the Indian Navy has been forecasted at about Rs 4.5 trillion crore (until 2027), which comprises a mix of various vessel categories, viz., submarines, destroyers and frigates, aircraft carriers, corvettes, landing platforms, etc. With large-sized capex plans by the government, the order book of shipyards is expected to remain strong, said Care Ratings in its ratings rationale on Cochin Shipyard.