We are starting a New Series where we will discuss Mid/Small Caps stocks based on Both Fundamentals and Technical for Short and Long term Investment. Last time we have covered MSTC This week we will Analysis Mazagon Dock.
Mazagon Dock, a Mini-ratna public sector undertaking (PSU) under the Ministry of Defence, specializes in building warships and submarines, with 40,000 DWT capacity shipyard on India’s west coast. Company has 2 business divisions:
- Shipbuilding for defence needs, for customers such as India Navy and Coast Guard. This segment accounted for 70% of FY20 revenue of Rs. 4,978 crore.
- Submarine and heavy engineering: Only public sector defence shipyard constructing conventional submarines. Accounted for 30% of revenue.
Mazagon Dock Shipbuilders Ltd. was incorporated in the year 1934.It is listed on the BSE with a BSE Code of 543237 , NSE with an NSE Symbol of MAZDOCK.
Mazagon Dock Shipbuilders Limited (MDL), Mumbai is India’s leading defence public sector undertaking shipyard under the MoD. Since it was acquired by the government in 1960, MDL has played a key role in the IN’s quest for blue water capability, delivering projects like the Nilgiri, Godavari, Delhi and Shivalik class frigates, Khukri class corvettes, and Project 15A. MDL’s main facilities are in Mumbai and Nhava (under development)—these two can undertake construction of vessels upto 40,000 DWT. The shipyard’s infrastructure consists of three dry docks, four slipways, and three wet basins. In July 2016, the shipyard completed the augmentation of infrastructure through the Mazdock Modernisation Project (MMP) which comprises of a new Wet Basin, a second Heavy Duty Goliath Crane, a module workshop, a cradle assembly shop, and associated ancillary structures. Major ships under construction by MDL include the P17A (Frigate) class, four ships of P15B (Destroyer) class, and six Scorpene class submarines.
Company has increased production capacity from 8 warship in 2014 to 10 and from 6 submarines in 2016 to 11 now. Order book (31-7-20) is very healthy at Rs. 54,000 crore, mainly for 4 P15B Destroyers and 4 P17A Stealth Frigates for the Ministry of Defence, to be executed over the next 8 years.
Company’s future growth areas
(ii) indigenization under government’s ‘Make in India’ initiative and
(iii) ship repair, where revenue is healthy with quick turnaround. Company aims to increase share of ship repair in its revenue to 15-20% in 5 years, from current 3.5%.
Its today’s share price is 188.9. Its current market capitalisation stands at Rs 3809.92 Cr. In the latest quarter, company has reported Gross Sales of Rs. 49776.5 Cr and Total Income of Rs.55666.5 Cr. The company’s management includes Narayan Prasad, Narayan Prasad, Jasbir Singh, Anil Kumar Saxena, Thoppil Verghese Thomas, Kamaiah Bandi, Sanjeev Singhal, Vundru Lakshmi Kantha Rao, Mailareshwar Jeevanna Jeevannavar, Devi Prasad Pande.
Company wins most of its orders on nomination basis, where profit margins are 7.5-8%. Balance accrues from interest income. FY20 EPS stood at Rs. 21.4 and RoE at 15.5%.
Q1FY21 financials are not reported by the company, but April and May its operations were completely shut, which resumed from 8thJune 20. Currently it is operating at 50-60% capacity, implying FY21 financials will be adversely impacted due to covid-induced lockdown. Since the revenue peaks in the middle of a typical contract duration of 6-7 years, profitability and cash flows are dis-proportionate, with debtors and inventory outstanding very high at 3.5 months and 11 months respectively. Net worth (31-3-20) stood at Rs. 3,069 crore, translating into BVPS of Rs. 152. While it has cash and equivalents of Rs. 287 per share, nearly double the BVPS, there are related to business operations and not really surplus profits.
Company is required to pay a minimal annual dividend of 30% of its PAT or 5% of its net worth, whichever is higher. For FY20, it paid Rs. 11 per share as dividend, translating into 61% payout ratio, including dividend distribution tax.
Mazagon valuation is attractive on all 3 parameters – revenue multiple, PE, dividend yield, both in relation to shipbuilding PSUs and other defence PSUs.
Negative for the company
Working Capital. A shipyard’s requirement of working capital stands at around 25-35 percent of the cost of the ship during the entire construction period. The interest rates on working capital in India average 10-11 percent.In contrast, the interest rates offered to shipbuilding yards overseas are significantly lower at 5-6 percent in Korea and 4-8 percent lower in China. In India, financing costs are higher because the shipbuilding relies heavily on imports of critical raw materials.
Foreign Investments. The Indian shipbuilding industry suffers from a lack of Foreign Direct Investment (FDI). Countries such as Korea have taken active measures to stimulate FDI in the sector such as cutting corporate taxes, providing tax incentive packages, along with low-cost plant sites and rent-free land lease in Foreign Exclusive Industrial complexes. India’s system insists on obtaining multiple clearances covering land acquisition, environmental clearance, power and water and other utilities, from various departments, thereby creating a deterrent for investors. Foreign companies like Saab have investments in RNEL, others like DCNS and more recently the Russian state-owned shipyard United Shipbuilding Corporation have expressed interest in acquiring RNEL. However, unless there is a clear path to develop profitable businesses, FDI is unlikely to come in.
Mazagon Dock has strong resistance zone at 200 as highligted in Gann Angles, Also its approaching important time cycle suggesting next week we can see a big move once it starts trading above Rs 200. Any close above 216 which is open Price on IPO day stock can quickly move to 240-270 odd range.
Supply Demand Analysis
Traders can go long in range of 184-188 with SL of 160 for a target of 216/240/270/299/323