Cochin Shipyard’s FV at Rs 520 on weakness in execution

Transient issues impact execution. Limited labor availability and travel restrictions impacted 2QFY21, even while margin and cash flows were better than expected. An MoU with Italian shipbuilder brings some assurance while the wait for new orders for the under-construction dry dock continues. The order pipeline has grown to RS 200 bn and would support execution from FY2023. We factor weakness in execution and ordering in 1H in our near-term estimates. We tweak our FV to Rs 520 (from Rs 530).

CSL reported 32%/39% yoy decline in revenues/EBITDA. Travel restrictions delayed completion of the technology demonstration vessel and 500 pax cargo vessel for the Andaman Nicobar administration. EBITDA came ahead of our estimates on sharp improvement in ship repair margin. Limited availability of labor impacted construction of ISRF and dry dock. Cash flow from operations improved yoy on the release of Rs 15 bn of payment from Navy and customer advances of Rs 18 bn from IAC and ASW order. Order backlog declined yoy to Rs 139 bn with IAC and ASW corvette forming ~86% of backlog. During the quarter, CSL paid `800 m to acquire Tebma Shipyard through IBC and expects to resume its operations by Jan 2021.

CSL shared the recent tendering of the next generation offshore patrol vessels project. This takes the order pipeline to ~Rs 200 bn. Of the six prospects, bidding has taken place for five with three at advanced stages of award. These would support shipbuilding revenues from FY2023 as contribution from IAC order begins to wane. In the interim, CSLwould benefit from an increase in the ship repair business and existing backlog to report RS 40 bn of revenues in FY2022 (versus rS 34 bn reported in FY2020). Capex on the key facilities is slow though CSL expects commissioning of ISRF by Dec 21 and dry dock in Dec 22.

CSL has signed a MoU with M/s Fincantieri, Italy, one of the world’s largest shipbuilding groups and a leader in cruise ship design and construction, for co-operation in the areas of design, ship building, ship repair, marine equipment manufacturing, along with training & skill development.