Cochin Shipyard – Strong Q4 and going to be very strong Fy22

Cochin Shipyard Ltd., incorporated in the year 1972, is a Mid Cap company (having a market cap of Rs 3990.94 Crore) operating in Defense sector.

 

 

CMP (25.06.2020)        :          Rs 303.40

Target (12 Months)       :           Rs 350.00 +

Potential Returns          :           13%

 

Cochin Shipyard Ltd. key Products/Revenue Segments include Indigenous Aircraft Carrier which contributed Rs 1756.76 Crore to Sales Value (59.30 % of Total Sales), Ship Repairs which contributed Rs 831.97 Crore to Sales Value (28.08 % of Total Sales), Vessels which contributed Rs 373.42 Crore to Sales Value (12.60 % of Total Sales), Other Operating Revenue which contributed Rs .00 Crore to Sales Value (0.00 % of Total Sales)for the year ending 31-Mar-2019.

For the quarter ended 31-03-2020, the company has reported a Consolidated sales of Rs 816.69 Crore, down -8.86 % from last quarter Sales of Rs 896.09 Crore and up 3.69 % from last year same quarter Sales of Rs 787.61 Crore Company has reported net profit after tax of Rs 137.53 Crore in latest quarter.

 

 

 

Q4 numbers tad better than expectations

Cochin Shipyard Ltd (CSL) reported a healthy set of numbers in Q4 with topline growing by 3.6% yoy, though on a qoq basis they fell by 9%. 

The material costs saw a contraction in Q4 as they stood at 48.3%. Subcontracting costs dropped by 18.4% yoy in the quarter. 

EBITDA margins saw a solid surge at 20% v/s 14% yoy as the company reported strong ship repair margins at 27% on a strong execution and delivery in this business. 

Other income fell to ₹450 mn over ₹643 mn yoy. PBT grew by 14.8% yoy to ₹1.8 bn, while reporting strong margins at 22.6%. PAT came at ₹1.4 bn , which has grown by 42.5% yoy, while margins came at 17%. 

The company delivered a 1000 MT Cargo vessel for A&N administration. The company also delivered 8 RoRo vessels (2 are remaining) and one fishing vessel to TN fishermen. 

Impact of COVID was very well felt in the quarter for last seven days and in Q1, as a result of which the delivery of IAC will be further delayed to FY 22 from the planned date of Feb 2021. 

The company has announced ₹15/share of final dividend, taking FY20 dividend yield to 6.2% at ~30% payout.

COVID to impact Q1 severely, CSL to get back on track from Q2 and see a surge in FY 22.

We believe that the delivery schedule of FY 21 will be impacted by COVID. The first two months of Q1 being totally impacted, we expect a lackluster performance in the current quarter. 

In Q2, slowly things are expected to be back on track with restrictions getting relaxed and employees (most probably including migrated labor) getting back to work at full strength. 

In the last week of April, all of the company’s plants started functioning. Currently the company is working in two shifts with 50% of employees working in each shift and is planning to operate at full time shortly. 

The delivery of company’s flagship IAC project (~65% of shipbuilding revenues) is expected to get delayed to FY22 due to COVID.

The company now has an order book of ₹146 bn (4.3x FY 19 revenues) which includes ₹128 bn of IAC and ASWC projects and 5bn of ship repair projects among others. On the back of COVID, management has guided for almost a flattish revenues growth in FY 21, while a dip in profitability in the same period. 

CSL also mentioned that they have not received any compensation from the government in Q1, which indicates that we may see a more than expected dip in FY 21 numbers. Although the company may come back on track from Q2, still the damage done in Q1 isirrecoverable. The important delivery of IAC will also be pushed to FY 22, thus lifting the numbers of FY 22. 

Hence on low base of FY 21, we expect FY 22 to be a strong year. Doubling of capacities through investing in a new dry dock (full commissioning by Dec 22) will ensure smooth and timely manufacturing of new businesses in the medium to long term. 

Additionally, the company has also bid for various other big projects from the MoD through RFPs for NGMV, MPV and Offshore Patrol vessels collectively worth between ₹130-150 bn. 

Any order win out of these projects will further elevate the financials. Furthermore, IAC will keep on adding to the top line through Phase 2 and 3 of IAC projects till FY 24. Also in Q4 the company acquired a smaller shipyard at Malpe (Karnataka) to manufacture fishing vessels, which may add some value to the company.

 

 

 

 

Margins to be impacted in FY 21, FY 22 to see a good improvement on higher ship repair revenues.

The company earns 17% of top line from the ship repair segment (25% margins in FY 20 and 27% in Q4 FY20) in which CSL is the market leader. Going forward, the company is investing a capex of ₹4.36 bn in ISRF (International Ship Repair Facility) which has a capacity of repairing 70 vessels (revenues capacity of ₹6.5 bn) will be fully operational by Dec 21. The Mumbai ship repairing capacity was functioning at full swing pre-Covid and was on track to add the initially targeted revenues of ₹1 bn in FY 21. However now, with severe lock down observed in Mumbai, CSL now targets a reduced target of ₹750 mn for FY 21. Mumbai facility added ₹510 mn to the topline in FY20. Kolkata facility is still at a nascent stage but will start adding meaningfully to the top line soon.

On lower operating leverage and top line, the margins in FY 21 will fall accordingly. However, with higher contribution coming from ship repair business in FY 22 and superior employee efficiency ratio, we expect strong recovery in margins in FY 22.

 

 

 

Outlook and Valuation:

Although Q1 is expected to post a very subdued performance, we expect a better performance from Q2. The company highlighted that they have not received any contribution from the government in Q1 yet, but they have promised to pay 80% of its Q1 receivables in Q2. This would provide a good boost in the ensuing quarters. The company has got a sizeable order book for the coming 2-3 years. The prestigious IAC project will continue to add to the topline till FY 24. ASWC project, FPVs, fishing vessels, RoRo vessels will continue to add to the top line hereon.

Any win at the RFP shall add significantly to the topline. COVID will push the delivery of IAC to FY 22 which will lift up FY 22 numbers while reducing FY 21 numbers. Higher contribution from the non-cyclical, high margin ship repair business will continue to contribute more to the margins.

Increase in capacity at this business at the high IRR (10-11%) ISRF facility should augur well to the profitability. In line with the expected severely impacted Q1 we are reducing our FY 21 numbers, and now expect a 12% fall in bottom line. We are however reducing our FY 22E estimates slightly in line with FY 21E and slight uncertainty from the receivables from the government. 

However, with highest margins in the industry, competitive moat in the ship repair business, robust employee efficiency ratios, comfortable financial leverage we still like the company and maintain a BUY rating though with a slightly reduced target price of ₹350.

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