Fundamental Analysis of Mazagon Dock

Fundamental Analysis of Mazagon Dock - Cover Image

Fundamental Analysis of Mazagon Dock: The last twelve months have given plenty of multi-bagger PSU stocks to Dalal Street. From RVNL to HAL, government companies have shed their slow growth image. Among these, Mazagon Dock Shipbuilders has also given a sweet 200% return to its shareholders.

Can investors expect similar returns in the future? We’ll attempt to answer these and other questions by performing a fundamental analysis of Mazagon Dock

We’ll begin our study of the ship maker by understanding its business and the scale of its operations. Next, we’ll learn about the changing defence landscape in India. After that, we’ll race through the financials of the stock. A highlight of the future plans & recent developments and a summary conclude the article at the end.

Company Overview

Mazagon Dock Shipbuilders Ltd. (MDSL) is a Mini-Ratna-I status public sector undertaking (PSU) under the Ministry of Defence, Government of India. Founded 9 decades ago in 1934, it has grown from a small ship repair company into India’s leading multi-unit and multi-product warships builder.

MDSL provides a broad range of services including shipbuilding, ship repairs and ship refits to both government and private institutions. It is a key supplier of warships, missile boats and submarines to the Indian Navy and Indian Coast Guard. Since its privatisation in 1960, Mazagon Dock has built 801 vessels including 27 warships and 7 submarines.

The shipbuilder owns 4 dry docks, 2 wet basins, 3 slipways along with production shops, assembly shops, 300-tonne crane among other facilities. It employs close to 5,000 people.

As a feather in its cap, Mazagon Dock is the only shipyard in India with the capabilities to build destroyers and conventional submarines both.

Talking about the shareholding structure, the Government of India holds a majority 84.83% stake in the business as a promoter. The balance of ownership lies with the public and FIIs holding an 11.57% stake and a 3.29% stake respectively. DIIs hold a negligible 0.30% of the shares of Mazagon Dock as per the recent March 2023 shareholding pattern.

Industry Overview

Mazagon Dock Shipbuilders caters to the private maritime sector and the naval forces (including the coast guard). The volume of maritime trade is expected to grow multifold in the coming years as the nation’s overseas trade and energy needs will only increase in the future.

As for the defence sector, the Central government increased the defence budget by 13% year on year to 5.94 lakh crore for the 2023-24 period from Rs 5.25 lakh crore in 2022-23. What’s more? It is not only that the nation’s defence spending is rising.

The share of the total capital defence allocation in defence expenditure has increased in the last few years. The capital expense for modernization and new infrastructure has grown by 57% since 2019 to Rs 1.62 lakh crore in 2023-24.

Thus, going forward indigenization plan as part of the “Atmanirbhar Bharat” vision, higher capital defence expenditure and maritime trade growth will drive the shipbuilding and repair industry in India.

So far in our fundamental analysis of Mazagon Dock Shipbuilders, we have learnt how the company is well-positioned in the industry to take advantage of future growth prospects. In the sections ahead, we’ll learn how it has performed in the past by studying its financials.

Mazagon Dock – Financials

Revenue & Net Profit Growth

The operating revenue of MDSL grew slowly at a CAGR of 5.58% every year from Rs 4,614 crore in FY19 to Rs 5,733 crore in FY22. However, the nine-month period of FY23 from January to December registered higher sales of Rs 5,749 crore, marginally higher than the full-year FY22 sales.

Higher income translated into higher profit after tax for the company. It clocked a net profit of Rs 793 crore in the 9MFY23 period, more than the FY22 net profit of Rs 611 crore. Thus, the investors flocked to the Mazagon stock, taking it to higher highs because of increased earnings.

The table below presents the operating revenue and net profit growth and fundamental analysis of Mazagon Dock Shipbuilders from FY19 to FY22.

Financial Year	Operating Revenue	Net Profit
2023	TBA	TBA
2022	5,733	611
2021	4,048	514
2020	4,905	471
2019	4,614	532

(figures in Rs Cr)

EBITDA & Net Profit Margin

The topline growth of the ship maker was aided by expansion in profit margins during the 9MFY23 period. Its EBITDA margin rose to a high of 18% for the period. Prior periods exhibited margin volatility because of cost fluctuations.

The table below presents the EBITDA margin and net profit margin of Mazagon Dock for the past few years.

Financial Year	EBITDA Margin	Net Profit Margin
2023	TBA	TBA
2022	14.7	10.7
2021	19.7	12.7
2020	16.7	9.6
2019	18.4	11.5

(figures in %)

Net Worth & Return on Equity / Net Worth

Moving on to our profitability analysis of the company, we can say that RoE marginally declined from 16.6% in FY19 to 15.8% in FY22. Does that mean something is wrong with the shipbuilder?

Actually, no. The reason behind this is the concurrent increase in the equity base because of profits. In recent years, the profit growth rate slowed down on an annual basis thereby decreasing the return on equity. However, the higher profits may push the stock to clock high RoE this year along with its objective of a 20% RoE target as guided by the Department of Public Enterprises, Government of India.

The table below presents the net worth and return on net worth/equity of Mazagon Dock Shipbuilders for the last few fiscals.

Financial Year	Net Worth	RoE / RoNW
2023	TBA	TBA
2022	3,858	15.8
2021	3,432	15.0
2020	3,059	15.4
2019	3,214	16.6

(Net Worth in Rs Cr and RoE / RoNW in %)

Debt Analysis

We’ll keep our debt study short for our fundamental analysis of Mazagon Dock Shipbuilders since it is a debt-free stock with a high-interest coverage ratio of 118. It has maintained its debt-free status for a considerable number of years.

Future Plans Of Mazagon Dock

So far we looked at previous fiscals’ data for our fundamental analysis of Mazagon Dock. In this section, we will try to get some sense of what lies ahead for the company and its investors.

MDL has been working towards modernization with a huge capital expenditure of Rs 900 crore. The sum has been deployed to build a module workshop, a large crane, a new wet basin to hold vessels, a submarine workshop, etc. The benefits of this are expected to accrue in the coming years in the form of steady topline growth.
As part of the “Atmanirbhar Bharat” vision of Honourable Prime Minister Narendra Modi, the company has been working on an important indigenous midget submarine. In addition to this, its R&D division is also working on training simulation tools, decoy systems, hybrid electric & solar boats and lithium-ion battery systems for submarines.
In the years ahead, the management of the company is planning to target international clients for export revenue. Furthermore, it has increased its focus on the ship repair business to diversify its income sources and decrease dependency on defence orders.
Mazagon Dock owns a large area of 37 acres which it plans to use for building a greenfield shipyard, a submarine launch facility, and for other purposes.
The total order book stood at Rs 40,592 crore at the end of December 31, 2022, providing strong revenue visibility to the business.