Get Your Investiment On Board CSL!

GET YOUR INVESTMENT ON BOARD CSL!

COCHIN SHIPYARD LTD (CSL) 

Cochin Shipyard Ltd (CSL), India's largest state-owned ship maker, made a strong debut on the bourses two months ago. The RS.1450 crore initial public offer (IPO) got an overwhelming response from investors, receiving bids for 258.9 crore shares as against 3.39 crore shares on offer, thus getting oversubscribed by 76.19 times. Here at DSIJ, we dig deeper into the success of CSL and try to analyse the company. 

COMPANY OVERVIEW 

Incorporated in 1972, CSL is engaged in shipbuilding and ship repairing. It can build ships up to 1,10,000 DWT (Dead Weight Tonnage) and repair ships up to 1,25,000 DWT. CSL's product range includes tankers, product carriers, bulk carriers, passenger vessels, high bollard pull tugs and air defence ships. 

It has successfully undertaken repairs of more than a thousand ships belonging to a variety of clients, including Shipping Corporation of India, Indian Navy, ONGC and vessels belonging to various ports of India. In addition to shipbuilding and ship repair, it also offers marine engineering training. CSL's yard is built up in 170 acres, out of which 60 acres is set aside for offshore construction and future expansion. It has two docks – dock no. 1 is primarily used for ship repair ("Ship Repair Dock") and dock no. 2 is primarily used for shipbuilding ("Shipbuilding Dock"). 

CSL has adopted the Japanese Integrated Hull Outfitting and Painting system (IHOP) for its new construction, which gives it an edge in the field of fabrication and commissioning of accommodation modules and topside modifications. 

CSL's revenue in FY17 stood at RS.2059.5 crore. Shipbuilding contributed RS.1513.7 crore or 73.4 per cent to the total revenue, whereas ship repair business contributed RS.548.8 crore or 26.6 per cent of the total revenue. In the last five years, the average contribution of the defence sector has been about 80 per cent, whereas the average contribution of the commercial projects has been about 20 per cent. 

INDUSTRY OVERVIEW 

Shipbuilding industry - Over the past few decades, the shipbuilding industry has shifted from Europe to Asia due to the availability of cheap labour, competitive steel-making sectors and state support. However, between 2011-2015, due to persistent excess supply and weak global trade, the Indian shipbuilding order book declined at a CAGR of 9.3 per cent. 

Ship-repair industry- According to the Ministry of Shipping, the global ship repair market is approximately US$ 12 billion, whereas the Indian ship repair industry's market potential is approximately US$1.5 billion. The ship repair market in India is expected to grow at a CAGR of 8-10 per cent between FY16-21.

Indian defence sector-The Indian budgetary allocation for defence in 2017-18 increased by about 6 per cent to RS.2623 billion, which is approximately 1.56 per cent of the country's GDP. A major part of CSL's total business comes from the Indian Navy and Coast Guard. With the government's emphasis on enhancing defence preparedness, strong order flows are expected from the armed forces. 

EXPANSION PLANS 

Last month, Nitin Gadkari, Minister for Shipping, Road Transport and Highways, had said that CSL is looking at shipbuilding and ship repair facilities in Andaman and Nicobar, Gujarat, Kolkata and Mumbai. Also, Cochin Shipyard is in an advanced stage of incorporating a joint venture company for taking over assets of the Hooghly Dock in Kolkata where it has plans to build a RS.100-crore facility for construction of vessels for inland water transport. 

Also, the company plans to use RS.1,442 crore raised from the market to complete two massive projects: a dry dockyard that can build aircraft and LNG carriers and an international ship repair facility. The dry dockyard is expected to cost RS.1,800 crore, whereas the ship repair yard would cost RS.970 crore. Currently, CSL can repair 80 to 100 ships at a time. A new yard will allow the company to accommodate 80 more mid-sized vessels. 

MAKE IN INDIA AUGURS WELL: CSL is in a good position to benefit from the ‘Make in India' initiative of the government. The company is building four passenger-cum-cargo vessels for the Andaman and Nicobar administration under the Make in India initiative. As per orders placed by the administration, two of these will have a capacity of 500 persons-cum-150 tonne cargo and the remaining two will have a capacity of 1,200 persons-cum-1,000 tonne at a total cost of about RS.1,500 crore. 

Also, Gas Authority of India has signed contracts to buy LNG from suppliers in the US. For their transportation, specialised LNG carriers are required. As part of the ‘Make in India' campaign, the GOI is keen that one-third of the total number of ships should be built by Indian shipyards. Cochin Shipyard, being one of the bidders, may benefit from this opportunity. 

 CHANGE IN REVENUE MIX CSL is focusing more on ship repair business which is a higher margin business- the business margins are twice that of ship building business. During FY15-17, CSL's ship repair business grew at a CAGR of 65.8 per cent and now contributes around 24.6 per cent to the total revenue as against 11.9 per cent in FY15. Going ahead, with higher growth in the ship repair industry, along with CSL's market leadership position and higher margin in ship repair business, the company's overall profit margin is expected to swell.

RISKS In FY17, CSL's top two customers contributed about 80 per cent of the revenues. So any loss in customer would seriously impact the business. Also, the conversion of order book into revenue depends on wide-ranging factors such as changes in the Indian and global shipping markets, the availability of funds to ship-owners, competition, etc. The entire business operation of CSL is based out of a single shipyard at Kochi, so any shutdown of Kochi will impact the financials. 

 FINANCIALS 

On an annual basis, the company's revenue increased 3.4 per cent to RS.2059.5 crore in FY17 from RS.1990 crore in FY16. The company's EBITDA rose 4.8 per cent to RS.529.1 crore in FY17 from RS.498.9 crore in FY16. CSL's profit after tax rose by 7.24 per cent from RS.290.7 crore in FY16 to RS.311.1 crore in FY17. 

Over FY15- FY17, CSL's sales grew at a CAGR of 14.1 per cent, whereas its EBITDA grew at a CAGR of 106.4 per cent and PAT at a CAGR of 112.3 per cent. During the period under consideration, ROCE of the company improved from 5.2 per cent to 15 per cent. Its ROE too improved from 4.5 per cent in FY15 to 15.4 per cent in FY17. 

Unlike its peers such as Great Eastern Shipping Company Ltd and Shipping Corporation of India Ltd, CSL reported good revenue growth in the last five years, despite the recessionary trend witnessed in shipbuilding industry-not only globally but also in the domestic markets- since the global meltdown in 2008. 

Considering its market leadership position, relationships with customers and other stakeholders, increasing focus on higher margin business of ship repair, healthy revenue growth and its expansion plans in the pipeline, we recommend our reader-investors to BUY the stock. 

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