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Cochin Shipyard buyback: Long-term investors should stay put, say analysts

The Rs 2 billion share buyback offer by state-run Cochin Shipyard opened Wednesday. The company plans to buy back 4.39 million shares, (constituting 3.23 per cent of the paid up equity share capital) at Rs 455 apiece. The buyback price is at around 20 per cent premium to the current market price of Rs 378 (as of Wednesday’s close) on the Bombay Stock Exchange (BSE). The offer closes on December 11.

Despite a fall of 26 per cent since its listing in August 2017 (30 per cent fall thus far in calendar year 2018), analysts remain bullish on this government-owned company from a long-term horizon, which is also the largest shipbuilding and maintenance facility in India.

The optimism stems from the healthy order book and stellar performance by its key business segments – shipbuilding and ship repair. For the second quarter of financial year 2018 – 2019 (Q2FY19), the shipbuilding and ship repair segment contributed 57.8 per cent and 42.2 per cent to the top-line, respectively.

The company reported a 47 per cent year-on-year (YoY) jump in its net profit at Rs 1,476 million. Revenue from operations came in at Rs 7,994 million, up 37 per cent while Ebitda margin (earnings before interest, tax, depreciation and amortisation) rose 734 basis points (bps) to 16.2 per cent. Earnings per share (EPS) stood at Rs 10.86 against Rs 7.93 in the corresponding quarter last fiscal.

“Cochin Shipyard (CSL) has a healthy order book of Rs 22 billion plus L1 status for anti-submarine warfare (ASW vessels) at Rs 54 billion. Shipbuilding) and ship repair revenues are likely to grow at a compounded annual growth rate (CAGR) of 24.7 per cent and 2.1 per cent respectively over FY18-20E,” said analysts at ICICI Securities in a recent report.

They estimate revenue, Ebitda and PAT CAGR of 19.2 per cent, 13.6 per cent and 5.3 per cent, respectively, in FY18-20E and maintain a 'buy' rating on the stock with a target price of Rs 520, which is 14 per cent higher than the buyback price.

As regards the order-book, analysts expect Cochin Shipyard to bag orders for the third phase of Indigenous Aircraft Carrier (IAC), pegged at nearly Rs 102.70 billion (Rs 30 billion as fixed price contract and Rs 72.70 billion as cost-plus contract). This will take the total order-book to Rs 178.72 billion.

In this backdrop, analysts suggest investors continue to hold the stock from a long-term perspective.

“The fall in stock price is a function of how the overall markets have played out. The long-term prospects of Cochin Shipyard remain intact. The overall debt component is also at a manageable level. At the current levels, it is a good stock to hold if investors have a long-term view. However, if somebody wants to make quick money, they can surrender their shares in the buyback and then buy in the market once the price dips,” said A K Prabhakar, head of research at IDBI Capital.
Rajnath Yadav, a senior research analyst for fundamental research at Choice Broking, agrees and maintains an overweight on the stock with a mid-to-long term view given the financials.

“However, given that the markets may remain volatile over the next few months, investors may get an opportunity to buy this stock at a lower level going ahead. One can tender the stock now and buy it back later,” Yadav recommends.

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