Shipbuilding stocks trade weak; Mazagon Dock, Cochin, GRSE down up to 9%

Shares of state-owned shipbuilding companies were under pressure falling by up to 9 per cent on the BSE in Tuesday’s intra-day trade amid heavy volumes in an otherwise strong market on valuation concerns.

Mazagon Dock Shipbuilders (MDSL) (down 9 per cent at Rs 4,278.80), Garden Reach Shipbuilders & Engineers (GRSE) (down 9 per cent at Rs 1,751.60) and Cochin Shipyard (down 5 per cent at Rs 2,039.50) fell in the range of 5 per cent to 9 per cent in intra-day trade. These stocks have corrected between 27 per cent and 38 per cent from their respective all-time high levels touched in July. In comparison, the BSE Sensex was up 0.5 per cent at 80,862 at 12:26 PM.

In the past two years, these stocks zoomed up to 2,000 per cent on back of strong order inflows.

Despite healthy order books, analysts at ICICI Securities have maintained ‘Sell’ rating on MDSL, while, Elara Capital reiterates ‘Sell’ rating on GRSE as margins to remain elevated in the near-term, and they believe the stocks are overvalued at the current market price (CMP).

The margins of MDSL have improved in recent times led by ahead-of-time delivery of vessels leading to lower cost being incurred compared to budgeted. Analysts at ICICI Securities expect high margins to sustain until FY27E as major deliveries are planned over the next 2-3 years.

“However, once MDL starts executing new orders, its revenue recognition is likely to be milestone based, and hence, earnings before interest, tax, depreciation and amortisation (Ebitda) margin could taper off to 12-15 per cent. It is noteworthy that we are still expecting higher margin than FY17-FY23 phase due to cost efficiencies and internal competencies that the company has built over a period of time,” the brokerage firm said.

Despite factoring in the potential orders of P75 (three additional submarines), P75I and next-gen destroyers, and margins at an elevated level in the near-term, analysts believe the stock is overvalued at the CMP. In brokerage view, while earnings per share (EPS) is likely to be range bound at Rs 95-120 per share from FY28-32E, there are risks to ordering/execution timelines. “We maintain Sell on MDL with a revised target price of Rs 1,165 (earlier Rs 900 per share), as per discount cash flaow (DCF) methodology,” ICICI Securities said in report dated August 16, 2024. In past three trading days, the stock price of MDSL has dropped 14 per cent.

Meanwhile, analysts at Elara Capital reiterate Sell rating with a higher target price of Rs 1,370 on GRSE, due to deferment of a large order from ONGC to FY26 from FY24, which may advance revenue growth beyond FY26, and gave 91 per cent stock outperformance versus the Nifty in the past three months.