Alpha | Mazagon Dock Shipbuilders Ltd. – Equity Research Desk

Mazagon Dock Shipbuilders Ltd – Ship & Submarine Builders to the Nation

Operating under the aegis of Ministry of Defence, Mazagon Dock Shipbuilders Limited (MDL), Mumbai, is one of the leading shipbuilding yards in India. Incorporated in 1934, the company has established a tradition of skilled and resourceful service to the shipping world, with the Indian Navy & Coast Guard being their key marquee clients. After its takeover by the Government in 1960, Mazagon Dock grew rapidly to become the premier war-shipbuilding yard in India, producing warships for the Navy and offshore structures for the Bombay High. It is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy; one of the initial shipyards in India to manufacture Corvettes (Veer & Khukri Class) in India. As of 31 March 2023, the company had a total workforce of 5914 employees.

Products and Services

The company’s current portfolio of designs spans a wide range of products for both domestic and international clients. Since 1960, MDL has built total 801 vessels including 27 warships, from advanced destroyers to missile boats and 7 submarines. MDL had also delivered cargo ships, passenger ships, supply vessels, multipurpose support vessel, water tankers, tugs, dredgers, fishing trawlers, barges & border outposts for various customers in India as well as abroad. It also fabricates and delivers jackets, main decks of wellhead platforms, process platforms, jack-up rigs etc.

Subsidiaries: As of FY23, the company does not have any subsidiary, but has one associate company.

Key Rationale

• Healthy order book – MDL has a robust order book worth Rs.38,755 crores as of 31 March 2023. The company has recently signed an agreement with Ministry of Defence (MoD) for the construction of a training ship for the Indian Coast Guard (ICG) at a cost of Rs.310 crores. Additionally, the company inked another agreement with MoD for 6 next generation offshore patrol vessels for ICG at a cost of Rs,1600 crores. It has also signed Letter of Intent with a European client for construction of 6 firms and 4 optional units 7500 DWT (Deadweight Tonnage) MultiPurpose Hybrid Power Vessels, providing the company with a significant foothold in export market. In collaboration with a foreign OEM, the company is bidding for 6 submarines for the Indian Navy.  

• Capacity to execute large orders – MDL plans to set up a green field shipyard at its Nhava Yard in a phased manner with short term and long-term development plans based on better visibility with respect to large ticket orders. It is building a new Floating Dry Dock of 12000T capacity to undertake the construction of advanced and next generation vessels. The company has a Dead Weight Tonnage (DWT) Capacity of ~40,000 as of 31 March 2023. It has three Dry Docks, two Wet Basins, three Slipways and 300T Goliath Crane allowing simultaneous handling of multiple shipbuilding projects. The Submarine Division has an onsite dry dock for swift maintenance and repair, and a specialised Shore Integration Facility for rigorous system testing.

• Q2FY24 – MDL reported a revenue of Rs.1828 crores marking an increase of 7% compared to the Rs. 1702 crores revenue of Q2FY23. Operating profit stood at Rs. 177 crores against the Rs.118 crores of FY23, a surge by 50% YOY. The profit after tax stood at Rs.333 crores which is a robust growth of 56% as compared to the Rs.214 crores of same period in the previous year. The PAT margin was reported to be 18%.

• Financial performance – The 5-year revenue and profit CAGR stands at 12% and 19% respectively between FY18-23. Average 5-year ROE and ROCE is around 19% and 26% for FY18-23 period.

Industry

Capacity constraints in leading countries and lower shipbuilding costs (cheap labour) in emerging countries prompted a gradual shift of shipbuilding activities from Europe to Asia since the early 90s. This has thrown open opportunities for the Indian shipbuilding industry. Given the inherent labour-intensive nature of the shipbuilding industry, India has a natural advantage by virtue of its lower cost of labour and availability of skills. India also enjoys a long coastline of around 8,000 km long with several deep-water ports serving as good locations for setting up shipyards. Identifying the shipbuilding industry as a strategically important industry due to its role in energy security, national defence, and the development of the heavy engineering industry, the Economic Survey 2022-23 noted that it has the potential for increased contribution from the industry to the national GDP. With its immense direct and indirect linkages with most other leading industries and its huge dependence on the infrastructure and services sectors of the economy, the shipbuilding industry has the potential to strengthen the mission of an ‘Aatmanirbhar Bharat or Self-Reliant India Initiative’, the survey said.

Growth Drivers

In Union Budget 2023-24, the defence budget was increased to Rs 5.94 lakh crores for 2023-24 from previous year’s allocation of Rs 5.25 lakh crore. A total of Rs 1.62 lakh crore has been set aside for capital expenditure that includes purchasing new weapons, aircraft, warships, and other military hardware. To promote “Make in India” policy and to support shipbuilding industry in India, Ministry has brought in Shipbuilding Financial Assistance Policy (SBFAP) scheme for Indian shipyards to procure orders from domestic as well as international market and to be competitive in international market for securing global orders. The scheme offers financial assistance to Indian Shipyards for shipbuilding contracts signed between April 1, 2016 and March 31, 2026 with rate of financial assistance starting from 20% in 2016 and diminishing to 11% in 2026. The SBFAP scheme has played a crucial role in securing various orders both domestically and internationally by public and private Shipyards at competitive values.

Competitors: Cochin Shipyard, Garden Reach Shipbuilders & Engineers Ltd etc.

Peer Analysis

Among the above competitors, with a reasonably steady revenue growth, MDL has better return ratios and robust earnings potential, indicating the company’s financial stability and its efficiency to generate income and returns from the invested capital.

Outlook

We believe MDL has strong growth prospects given its operational linkage with Government of India (GoI) and its position as one of the key defence public sector undertakings which produces warships and submarines for MoD. The Indian defence manufacturing industry is likely to accelerate with rising concerns of national security. The company with its robust order book and projects in pipeline, is a market leader in its industry.

Valuation

Given the strategic significance of the industry in which the company operates, coupled with the large-scale product execution capability and strong entry barriers to new entrants, we believe that Mazagon Dock Shipbuilders Ltd has potential to continue its robust growth streak in the coming years as well. We recommend a BUY rating in the stock with the target price (TP) of Rs. 2506, 18x FY25E EPS.

Risks

• Longer delivery period – The inherent nature of industry wherein the construction commences only after the order is received, unlike other manufacturing industries before taking the orders. Given the delay between a shipbuilding contract being signed and the ship delivered, there is considerable scope for the market to change dramatically during this period, affecting the dynamics of ship building contract in several ways.

• Cyclical industry – This risk is heightened by the cyclical nature of the global shipping industry, which has historically been one of the global industries most affected by market cycles.