Here is my speculation about Cochin Shipyard (as on 21.06.2021)
Current shipbuilding order book > 20’000 cr. (including new Missile vessel order). If these get executed over 5-8 years, it should translate into 2’500-4’000 cr. annual sales.
Assuming 3’000 cr. annual sales from missile orders + 400 cr. from other customers gives 3’400 cr. sales from shipbuilding.
Add to this 1’000 cr. ship repair sales gives FY25 revenue potential of 4’400 cr.
Given company makes PAT margins of 15%+ in good times, I am assuming an exit multiple of 3x EV/sales (can be re-rated higher to 4x sales depending on performance + market sentiment).
EV ~ 4’400 * 3 ~ 13’200 cr.
Mcap ~ 13’200 + 2’000 cr. (cash) ~ 15’200 cr. (share price ~ 1155)
Business quality (Medium)
Here are the very long term financials since FY2002, sales have grown at 15% CAGR and PAT at 21% (FY02-21). At the same time book value has compounded at 16% CAGR. The core EBITDA margins have averaged at 21.6% and has varied b/w 10-30%. PAT margins have averaged at 12.23% and this can go upto 20% in good years.
| FY02 | FY03 | FY04 | FY05 | FY06 | FY07 | FY08 | FY09 | FY10 | FY11 | FY12 | FY13 | FY14 | FY15 | FY16 | FY17 | FY18 | FY19 | FY20 | FY21 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Turnover | 210.25 | 235.16 | 228.44 | 276.48 | 373.53 | 719.74 | 833.79 | 1’256.21 | 1’248.50 | 1’461.72 | 1’404.85 | 1’554.16 | 1’652.66 | 1’859.51 | 1’993.45 | 2’058.87 | 2’355.12 | 2’962.16 | 3’422.49 | 2’818.90 |
| Turnover increase % | 11.85% | -2.86% | 21.03% | 35.10% | 92.69% | 15.85% | 50.66% | -0.61% | 17.08% | -3.89% | 10.63% | 6.34% | 12.52% | 7.20% | 3.28% | 14.39% | 25.78% | 15.54% | -17.64% | |
| Total income | 253.84 | 282.07 | 267.94 | 323.31 | 452.89 | 845.64 | 857.17 | 1’383.26 | 1’326.49 | 1’589.17 | 1’481.54 | 1’642.33 | 1’728.64 | 1’952.97 | 2’107.37 | 2’217.50 | 2’544.28 | 3’190.27 | 3’667.57 | 3’009.72 |
| Depreciation & write-offs | 5.40 | 6.80 | 6.47 | 7.24 | 10.62 | 7.89 | 9.69 | 9.80 | 15.24 | 17.06 | 18.07 | 19.22 | 26.43 | 38.33 | 37.19 | 38.51 | 37.51 | 34.16 | 48.94 | |
| PBT | 25.45 | 85.77 | 149.40 | 247.63 | 331.25 | 344.23 | 252.97 | 275.55 | 290.96 | 367.56 | 419.65 | 493.40 | 604.86 | 751.38 | 857.72 | 808.13 | ||||
| PAT | 16.41 | 16.49 | 17.78 | 12.10 | 18.23 | 58.11 | 93.85 | 160.07 | 223.04 | 227.53 | 172.33 | 185.27 | 194.24 | 235.07 | 273.79 | 321.55 | 396.75 | 481.18 | 632.01 | 608.66 |
| PAT increase % | 0.49% | 7.82% | -31.95% | 50.66% | 218.76% | 61.50% | 70.56% | 39.34% | 2.01% | -24.26% | 7.51% | 4.84% | 21.02% | 16.47% | 17.44% | 23.39% | 21.28% | 31.35% | -3.69% | |
| Equity share capital | 111.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 113.28 | 135.94 | 131.54 | 131.54 | |
| Reseves & surplus | 15.68 | 25.86 | 34.19 | 36.83 | 55.06 | 93.67 | 199.64 | 336.70 | 490.54 | 775.38 | 898.41 | 1’062.42 | 1’239.25 | 1’447.79 | 1’701.05 | 1’915.30 | 3’119.93 | 3’200.54 | 3’591.34 | |
| Net worth | 245.43 | 255.66 | 264.03 | 266.62 | 284.85 | 323.45 | 429.43 | 566.49 | 680.32 | 967.80 | 1’050.83 | 1’175.70 | 1’352.53 | 1’561.07 | 1’814.33 | 2’028.58 | 3’255.87 | 3’332.08 | 3’722.88 | 4’033.00 |
| Gross fixed assets | 198.86 | 205.00 | 195.86 | 204.65 | 206.92 | 217.18 | 233.46 | 270.39 | 349.68 | 362.10 | 376.73 | 444.35 | 602.38 | 636.84 | 569.53 | 357.72 | 369.79 | 426.69 | ||
| Net fixed assets | 84.92 | 86.30 | 74.09 | 78.30 | 76.33 | 81.91 | 92.16 | 121.64 | 189.75 | 190.67 | 192.61 | 247.30 | 383.41 | 377.44 | 296.44 | 302.85 | 284.47 | 313.03 | 700.48 | |
| EBITDA margin | 17.40% | 15.20% | 16.30% | 10.10% | 11.70% | 14.50% | 19.50% | 22.00% | 29.20% | 26.70% | 20.21% | 20.45% | 20.37% | 22.81% | 23.52% | 26.38% | 27.76% | 27.00% | 27.95% | 32.43% |
| ROE % | 6.69% | 6.45% | 6.73% | 4.54% | 6.40% | 17.97% | 21.85% | 28.26% | 32.78% | 23.51% | 16.40% | 15.76% | 14.36% | 15.06% | 15.09% | 15.85% | 12.19% | 14.44% | 16.98% | 15.34% |
| ROCE % | 4.22% | 4.28% | 4.33% | 2.45% | 3.65% | 11.70% | 23.28% | 29.09% | 38.57% | 27.44% | 18.76% | 19.08% | 13.97% | 14.61% | 17.14% | 16.41% | 12.35% | 15.95% | ||
| Capital employed | 389.25 | 392.75 | 410.98 | 493.63 | 499.64 | 496.60 | 401.33 | 550.31 | 578.32 | 829.27 | 918.68 | 970.70 | 1’389.98 | 1’621.24 | 1’695.35 | 2’089.05 | 3’212.22 | 3’017.66 | ||
| PBT margin | 6.81% | 11.92% | 17.92% | 19.71% | 26.53% | 23.55% | 18.01% | 17.73% | 17.61% | 19.77% | 21.05% | 23.96% | 25.68% | 25.37% | 25.06% | 28.67% | ||||
| PAT margin | 7.80% | 7.01% | 7.78% | 4.38% | 4.88% | 8.07% | 11.26% | 12.74% | 17.86% | 15.57% | 12.27% | 11.92% | 11.75% | 12.64% | 13.73% | 15.62% | 16.85% | 15.08% | 17.23% | 20.22% |
| # of employees | 2’232.00 | 2’189.00 | 2’175.00 | 2’109.00 | 2’075.00 | 2’084.00 | 2’059.00 | 1’962.00 | 1’907.00 | 1’818.00 | 1’900.00 | 1’656.00 | 1’751.00 | 1’786.00 | 1’671.00 | 1’829.00 | 1’781.00 | 1’744.00 | ||
| EBDIT | 36.58 | 35.74 | 37.24 | 27.92 | 43.70 | 104.36 | 162.59 | 276.37 | 364.56 | 390.28 | 283.92 | 317.83 | 336.65 | 424.15 | 468.86 | 543.13 | 653.78 | 799.78 | ||
| Shipbuilding income | 1’643.00 | 1’626.00 | 1’516.00 | 1’732.00 | 2’130.00 | 2’852.00 | 2’406.00 | |||||||||||||
| Ship repair income | 196.00 | 367.00 | 543.00 | 623.00 | 832.00 | 570.00 | 413.00 | |||||||||||||
| Order book | ||||||||||||||||||||
| Indian navy shipbuilding | 767.00 | 6’567.64 | 12’813.09 | 10’777.14 | ||||||||||||||||
| Other shipbuilding | 1’345.00 | 1’718.55 | 1’317.53 | 940.50 | ||||||||||||||||
| Ship repairs | 800.00 | 500.00 | 500.00 |
| Year | ROCE & ROE > 20% | Positive FCF | |||
|---|---|---|---|---|---|
| FY10 | Yes | No | Total # years | 12 | |
| FY11 | Yes | No | # ROCE & ROE > 20% | 2 | |
| FY12 | No | Yes | # Positive FCF | 6 | |
| FY13 | No | No | |||
| FY14 | No | No | SUM | 8 | |
| FY15 | No | Yes | AVERAGE | 33.33% | |
| FY16 | No | No | HIGH BUSINESS QUALITY | No | |
| FY17 | No | Yes | |||
| FY18 | No | Yes | |||
| FY19 | No | No | |||
| FY20 | No | Yes | |||
| FY21 | No | Yes |
Management quality (HIGH)
- Organic sales growth greater than category level growth: Yes (Most other private ship builders catering to commercial ship building has gone bankrupt)
- Able to find new avenues to grow: Yes (Have managed to grow ship repair operations which are less cyclical)
- Treats minority shareholders in a fair manner: Yes (Good dividend distribution + buybacks)
- Concerns
o PSU: Higher cost structure (although they have managed lower employee costs by hiring contract workers)
o Client concentration: Very high from Indian Navy and AP government
Confidence in projection (Low)
- Business quality (high/medium/low): Medium (Core business ROE is >20% but large cash on books reduces ROE)
- Promoter quality (high/medium/low): High (Despite being a PSU, they have executed very well especially in their ship repair business)
- Financial projections (high/medium/low): Medium (Lumpy revenues, ship repair should reach >1’000 cr. given the massive expansion they are undertaking)
- Valuation projections (high/medium/low): Low (Market has never valued them at >2.2x EV/sales, but given this margin structure they should trade at >3x EV/sales)
- Is it a cyclical business (Yes/No): Yes (Ship building is very cyclical + concentration of orders towards Indian navy)
Overall summary:
| Companies | Ticker | Projection date | Price | 4 years fwd Price (FY25) | Price return % | Dividend yield % | Total returns % | Confidence | Business | Promoter | Financial proj. | Valuation proj. | Cyclical? |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cochin Shipyard Ltd. | nse:cochinship | 20.06.21 | 356.00 | 1,155.00 | 34.21% | 4.35% | 38.56% | Medium | High | Medium | Low | Yes |
The expected returns seem to be high, however I do not have much confidence in the assumed exit multiple of 3x EV/sales (implying ~20x P/E). Hence, I have not allocated 8% and limited its position size to 4%.
You can always put your own multiple, I avoid high multiples when I am already assuming cyclical high margins.
The point about ESOPs is very valid, I don’t have much control over it. About share price movements, these are cyclical factors. ITC over its history has largely traded between 4x-10x EV/sales, I am assuming this will persist going forward. Sometimes I will be correct in my assumptions, sometimes not.