COCHIN SHIPYARD LTD (COSH)

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1 Company Update Stock Details Market cap (Rs mn) : wk Hi/Lo (Rs) : 599 / 356 Face Value (Rs) : 10 3M Avg. daily vol (Nos) : 120,885 Shares o/s (mn) : 136 Source:Bloomberg Financial Summary Y/E Mar (Rs mn) FY18 FY19E FY20E Revenue 23,922 26,514 27,921 Growth (%) EBITDA 4,979 5,437 5,959 EBITDA margin (%) PAT 3,998 4,025 4,263 EPS EPS Growth (%) BV (Rs/share) Dividend/share (Rs) ROE (%) ROCE (%) P/E (x) EV/EBITDA (x) P/BV (x) Source: Company, Kotak Securities - PCG Shareholding Pattern (%) (%) Sep-18 Jun-18 Mar-18 Promoters FII DII Others Source: Company Price Performance (%) (%) 1M 3M 6M Cochin Shipyard (4.7) (7.4) (23.0) Nifty (8.1) (3.2) 0.5 Source: Bloomberg Price chart (Rs) Oct-17 Feb-18 Jun-18 Oct-18 Source: Bloomberg COCHIN SHIPYARD LTD (COSH) PRICE RS.400 TARGET RS.520 BUY Cochin Shipyard has announced a buyback of 3.23% of its equity or 4.4 mn shares at a price of 455 per share aggregating Rs 2 bn. We believe that this buyback was to support the disinvestment programme of the government and does not change the fundamentals of the company. However, unfavorable domestic macro environment, lack of fresh order inflow especially from the government and weaker global equity sentiment compel us to cut earnings by 1 to 7% for FY19 and FY20 and also lower the target multiple for Cosh. Maintain BUY with a lower TP of Rs 520 at 16x FY20E (from Rs 610 at 18x) Cosh announces buyback of stock worth Rs 2 bn Cosh has announced a buyback of 3.23% of its equity or 4.4 mn shares at a price of 455 per share aggregating Rs 2 bn, in which the government of India would also participate. We believe that this buyback was to support the disinvestment programme of the government. Small investors (with investment of less than Rs 2 Lakh) hold 7.4 million shares as per the FY18 annual report of Cosh. Assuming a 15% allocation for retail investors, the acceptance ratio calculated is ~9% for small investors. We do not see the buyback as a stock price supportive event for investors. Details of the buyback No of Equity Shares (mn) 4.4 Buy back price per share (Rs) 455 Total amount (Rs bn) 2 Buy Back Equity (%) 3.23 Record date 31 st October Promoter Holding (%) 75 Valuation & outlook We believe that Cosh is well placed and is ahead of the curve to exploit the massive opportunity that India's defense sector offers in the next few years. Commercial shipbuilding, offshore vessels and ship-repair helps the company beat the cyclicality associated with any one sector. It also has the requisite and best-in-class tie-ups. Also, Cosh offers the only credible shipyard for investors to India's defense business. However, high bureaucracy/slowness in awarding defense orders from the government, continued weakness in the commercial shipbuilding space, higher commodity prices, INR depreciation, weaker domestic macros and low appetite for PSU stocks compel us to cut earnings by 1 to 7% and lower the multiple for Cosh from 18x to 16x on FY20 earnings. Maintain BUY rating with a revised TP of Rs 520 (from Rs 610). Order-book situation is not healthy Amit Agarwal agarwal.amit@kotak.com Cosh currently has a shipbuilding order book of Rs bn which gives investors revenue visibility of only one year. Almost 80% of the order-book involves complex work refurbishment of an aircraft carrier, which is a high margin business, estimated to be completed by December Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

2 The company is also a L1 bidder for an order worth Rs 54 bn for 8 Anti-Submarine Warfare- Shallow water vessel from the Indian navy. Management of Cosh expects to convert this L1 bid to actual orders within FY19 post completion of formalities with the Indian Navy. This would give revenue visibility upto FY22 for Cosh. We estimate any additional flow of fresh orders, especially from the Navy and Coast guard to come to Cosh post the general elections in CY19. We believe this to be a political risk for the company. Current order book Segment Rs bn Confirmed shipbuilding order book 19.6 Ship-repair order book 3.5 L1 Bid 54.0 Source: Company Focus on Ship-repair segment Cosh currently has an order-book of Rs 3.5 bn in the ship-repair segment. The company intends to expand in ship-repair segment with an international shiprepair center and increased geographical reach. It has signed up MOUs with various port trust for creation of captive ship-repair facilities in the respective ports with a revenue potential of Rs 16 bn. MOUs signed by COSH Partner Location Business area Investment by Revenue potential COSH (Rs mn) per annum (Rs bn) Mumbai Port trust Mumbai Ship-repair Andaman and Nicobar administration Andaman Ship-repair Hooghly Dock & Port Kolkata Ship-repair Source: Company. Kotak Securities Private Client Research Current capacity to double in 3 years COSH currently has two docks dock number one, primarily used for ship repair (Ship Repair Dock) and dock number two, primarily used for shipbuilding (Shipbuilding Dock). The Ship Repair Dock is one of the largest in India and is capable of accommodating vessels with a maximum capacity of 125,000 DWT. While the Shipbuilding Dock can accommodate vessels with a maximum capacity of 110,000 DWT. The company had raised Rs 9.8 bn through fresh issue of shares leading to 17% dilution. The company would be ramping up its capacity with a third dry-dock (measuring 310 x 75 x 13 Meters) and an international ship-repair center at Kochi. The capacity addition will enable the company to construct bigger and complex vessels as well as undertake repairs of vessels like LNG carriers, semisubmersibles, jack up rigs, and drill ships. We estimate the new facilities to comeup in the 3 to 5 years and double the capacity of the company. We have drawn a capex plan of Rs 13 bn for the company over FY18 to FY20E for the same. We estimate the balance capex to spill-over beyond FY20E. Outlook and valuation Cosh is one of the best companies to invest to play in the India s defence sector. We estimate company to report sales CAGR of 8.1% over FY18 to FY20E to Rs 27.9 bn and report earnings CAGR of 3.3% over the same period to Rs 4.26 bn. However, we are concerned with the high bureaucracy/slowness in awarding defense orders. For instance, Cosh is still L1 for eight anti-submarine shallow Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

3 water craft ships worth Rs 54 bn (since October 2017) and still awaiting final confirmation on the order from the government. Weak domestic macros, increasing country risk and lack of fresh orders compel us to cut earnings by 1 to 7% for FY19E and FY20E and lower the multiple accorded to Cosh from 18x to 16x on FY20 earnings. Maintain BUY rating with a revised TP of Rs 520 (from Rs 610). Lack of fresh orders is the biggest risk for the company. Upside to the stock would come from conversion of L1 order and fresh orders. Change in estimates FY19E FY20E Rs mn Old New % chg Old New % chg Sales 26,735 26, ,867 27, EBIDTA 5,482 5, ,375 5, PAT 3,937 3, ,610 4, Source; Kotak Securities Private Client Research Company Background Cochin Shipyard (Cosh) is wholly-owned Government company, incorporated on March 29, 1972 and were conferred the 'Miniratna' status in 2008, by the Department of Public Enterprise. It is the largest public sector shipyard in India in terms of dock capacity. The company caters to clients engaged in the defence sector in India and clients engaged in the commercial sector worldwide. In addition to shipbuilding and ship repair, Cosh also offer marine engineering training. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

4 Financials: Consolidated Profit and Loss Statement (Rs mn) Revenues 20,594 23,922 26,514 27,921 % change YoY Raw material cost 13,141 11,907 16,240 17,032 Employee cost 2,167 2,714 2,784 2,792 Other expenses 1,485 4,322 2,054 2,138 Total Operating expd 16,793 18,943 21,078 21,962 EBITDA 3,801 4,979 5,437 5,959 Depreciation EBIT 3,416 4,517 4,805 5,113 Other income 1,490 1,600 1,350 1,400 Interest expense Profit before tax 4,801 6,021 6,062 6,420 Tax 1,680 2,023 2,037 2,157 ETR (%) Profit after tax 3,121 3,998 4,025 4,263 Minorities& Associates Net income 3,121 3,998 4,025 4,263 % change YoY Shares outstanding (m) EPS Balancesheet(Rsmn) Cash 21,523 28,379 24,208 21,871 Debtors 3,611 5,020 5,564 5,538 Inventory 1,865 3,178 3,004 3,134 Other current assets Total current assets 5,481 8,203 8,572 8,677 LT investments 2,327 2,500 2,500 2,500 Net fixed assets 4,245 8,783 15,152 20,306 Total assets 33,576 47,866 50,433 53,354 Creditors 1,613 2,326 2,484 2,506 Provisions 2,496 3,150 3,274 3,503 Other current liabilties 7,665 8,914 10,743 10,703 Total current liabilities 11,774 14,391 16,501 16,712 LT debt 1,491 1,467 1,495 1,496 Minority Interest Equity Capital 1,133 1,360 1,316 1,316 Reserves 19,177 30,648 31,120 33,830 Networth 20,310 32,008 32,436 35,146 Total liabilities 33,576 47,866 50,433 53,354 BVPS (Rs) Cash flow Statement (Rs mn) PAT 3,121 3,998 4,025 4,263 Depreciation+DTL Change in working capital (328) (106) 1, Cash flow from operations 3,178 4,355 6,397 5,216 Capex (686) (5,000) (7,000) (6,000) Investments 521 (173) - - Cash flow from investments (165) (5,173) (7,000) (6,000) Equity issuance - 9,625 (2,044) - Debt raised - (24) 28 0 Dividend Paid (1,199) (1,926) (1,553) (1,553) Miscellanous items Cash flow from financing (1,199) 7,675 (3,569) (1,552) Net cash flow 1,813 6,856 (4,171) (2,337) Opening cash 19,710 21,523 28,379 24,208 Closing cash 21,523 28,379 24,208 21,871 Ratio Analysis EBITDA margin (%) EBIT margin (%) Net profit margin (%) ROE (%) ROCE (%) DPS Dividend payout (%) Working capital turnover (days) (114.5) Debt Equity (x) PER (x) P/C (x) Dividend yield (%) P/B (x) EV/Sales (x) EV/ EBITDA (x) Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

5 RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 12 months SELL We expect the stock to deliver negative returns over the next 12 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Research Associate rusmik.oza@kotak.com arun.agarwal@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com deval.shah@kotak.com Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate sanjeev.zarbade@kotak.com ruchir.khare@kotak.com jatin.damania@kotak.com cyndrella.carvalho@kotak.com ledo.padinjarathala@kotak.com Teena Virmani Sumit Pokharna Pankaj Kumar Jayesh Kumar Krishna Nain Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap Economist M&A, Corporate actions teena.virmani@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com kumar.jayesh@kotak.com krishna.nain@kotak.com K. Kathirvelu Support Executive k.kathirvelu@kotak.com TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale shrikant.chouhan@kotak.com amol.athawale@kotak.com DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 10

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