Get Your In­vest­ment On Board CSL!

Cochin Ship­yard Ltd (CSL)

Dalal Street Investment Journal - - CONTENTS -

Cochin Ship­yard Ltd (CSL), In­dia's largest state-owned ship maker, made a strong de­but on the bourses two months ago. The ₹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 ₹2059.5 crore. Ship­build­ing con­trib­uted ₹1513.7 crore or 73.4 per cent to the to­tal rev­enue, whereas ship re­pair busi­ness con­trib­uted ₹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 ₹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 ₹100-crore fa­cil­ity for con­struc­tion of ves­sels for in­land wa­ter transport.

Also, the com­pany plans to use ₹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 ₹1,800 crore, whereas the ship re­pair yard would cost ₹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 ₹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 ₹2059.5 crore in FY17 from ₹1990 crore in FY16. The com­pany’s EBITDA rose 4.8 per cent to ₹529.1 crore in FY17 from ₹498.9 crore in FY16. CSL’S profit af­ter tax rose by 7.24 per cent from ₹290.7 crore in FY16 to ₹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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