Shipbuilding shares sink; Mazagon Dock, GRSE, Cochin Ship tank up to 10%

Cochin Shipyard, Garden Reach Shipbuilders & Engineers and Mazagon Dock Shipbuilders have corrected up to 51% from their respective 52-week highs touched in July 2024.

Shares of shipbuilding companies were under pressure, falling up to 10 per cent on the BSE in Tuesday’s intra-day trade amid  growth concerns.

Mazagon Dock Shipbuilders (MDL) tanked 10 per cent to Rs 4,206.55, while, Garden Reach Shipbuilders & Engineers (GRSE) plunged 9 per cent to Rs 1,643 and Cochin Shipyard (CSL) was locked at the 5 per cent lower circuit at Rs 1,453.80. In comparison, the BSE Sensex was down 0.53 per cent at 80,717 at 02:14 pm. 

These three stocks, CSL (51 per cent), GRSE (42 per cent) and MDL have corrected up to 51 per cent from their respective 52-week highs touched in July 2024.

 

Among individual stocks, CSL was locked at 5 per cent lower circuit on the BSE. Last week, the government sold a 5 per cent stake or 13 million shares in CSL via offer for sale (OFS). The share sale was to fetch about Rs 2,000 crore to the exchequer.

CSL in its FY24 annual report dated September 7, 2024 said that Fitch Ratings maintained its negative outlook for the shipping sector on the earnings, mainly reflecting the continuing challenges for the container shipping, which could lead to year-on-year (YoY) worsening of the results. 

The main risks include the potential for weaker-than expected global GDP growth or geo-political developments causing adverse dislocations. A potential increase in trade protectionism (or “friend-shoring”) could also see changes in trade flows and limit demand across a few high-margin or critical products.

However, shipbuilding activity is likely to show robust performance due to the present healthy order book and the need for new tonnage meeting new rules and regulations, replace an ageing fleet (above 14 years), the need to cope with additional ton miles that exploded in 2023, the need to reduce speed to comply with intermediate requirements (CII for instance) and the potential for a new super cycle in the shipbuilding industry to replace all the ships that were delivered in large numbers between 2005 and 2010, suggest a very similar global figure to last year. New building prices increased across segments in 2023 and is likely to see further increases in 2024, the company said.

According to analysts at ICICI Securities, the margins of MDL have improved in recent times led by ahead-of-time delivery of vessels leading to lower cost being incurred compared to budgeted. The brokerage firm expects 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, EBITDA margin could taper off to 12-15 per cent.

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 our view, while EPS is likely to be range bound at Rs 95-120/ share from FY28-32E, there are risks to ordering/ execution timelines, the brokerage firm had said in Q1FY25 result update.

Meanwhile, analysts at Elara Capital reiterated ‘Sell” rating on GRSE , due to deferment of a large order in Next Generation Corvettes (NGC) to FY26 from FY24, which may advance revenue growth beyond FY26, and given stock outperformance versus the Nifty. The brokerage firm pares FY25E/26E EPS 22 per cent/19 per cent on lower gross margin and drop in other income (on delayed ordering for NGC).