Winning spree puts Mazagon Dock Shipbuilders stock on the warpath
Warship building company Mazagon Dock Shipbuilders Ltd (MDSL) has been on an order-bagging spree of late. On 20 December the company signed a contract worth ₹1,600 crore with the Ministry of Defence – its third order win just this month.
MDSL is among the key beneficiaries of indigenisation in the defence sector and its robust order prospects are attracting investors, causing its stock to jump 186% just this year. The sharp rally has been driven by momentum in the Indian defence sector and the company’s huge order backlog of ₹37,500 crore as of the end of September, which is nearly five times its FY23 revenue.
According to Rohit Natarajan, an analyst at Antique Stock Broking, MDSL is in in the running for a contract to build three P75 add-on Scorpene-class submarines – an estimated ₹250 billion opportunity. It is also eyeing an order for six units of P75(I) which is expected to be worth around ₹500 billion, he added.
“If MDSL wins the contract for all nine submarines, it is easily staring at an order backlog of ₹1 trillion, which gives revenue visibility for more than five years,” he said.
It’s so surprise then that MSDL revised its FY24 revenue growth guidance from 8-10% (in June) to 12-15%. The company’s earnings in Q2FY24 beat analysts’ expectations. “MDSL’s revenue rose from ₹3,530 crore in FY17 to ₹7,827 crore in FY23, at a 9.2% CAGR over the period. We expect that the company could increase revenue at around 21% CAGR from FY23 to FY26E and Ebitda margin at 10.5-11.5% from FY24E to FY26E,” HDFC Securities wrote in a report dated 26 December.
As things stand, the odds are in MSDL’s favour but downside risks loom. A sudden surge in prices of raw materials, such as steel and energy, is a potential risk that could hurt the company’s profits.
Besides, MSDL relies heavily on defense orders from the government, so any changes to India’s defence procurement and manufacturing policies could affect its business. Although the company has a healthy cash balance, any delay in receiving cash may extend its receivables period in the future.
Meanwhile, the stock trades at a forward price-to-earnings (PE) multiple of 30.5 times expected FY25 earnings, according to Bloomberg data. “Compared to its two PSU peers, it scores better in terms of PAT margins and RoE,” read the HDFC report. A further re-rating would require an improvement in the book-to-bill ratio due to bids in the pipeline and timely execution of the current order book.
