RESULT UPDATE

COCHIN Sailing strong; expanding horizon

India Equity Research| Defence

Cochin Shipyard (CSL) beat the Street posting a 16% YoY uptick in revenue EDELWEISS 4D RATINGS and EBITDA each. Key highlights: a) Indigenous aircraft carrier (IAC) Absolute Rating BUY execution continues to anchor the segment, up 35% YoY. Repairs of INS Vikramaditya (~97% complete) reinforced ship repair Rating Relative to Sector Outperform margin at 40% YoY. b) While no major orders were bagged in Q3FY19, Risk Rating Relative to Sector Medium management expects the award of ASW corvettes (~INR54bn and CSL is Sector Relative to Market None

L1 in this) no later than March 2019 and IAC Phase III by June 2019. c) CSL

has commenced operations at the Mumbai Port, with receipt of two MARKET DATA (R: COCH BO, B: COCHIN IN) repair orders from private clients. Progress on various new initiatives— CMP : INR 349 ISRF, dry dock, and ship repairs business with port trust authorities—is Target Price : INR 490

satisfactory, which we believe enhances CSL’s capabilities and positions it 52-week range (INR) : 545 / 344 well for the next leg of growth. Maintain ‘BUY’ with an unchanged TP of Share in issue (mn) : 131.5 INR490 as we roll forward the valuation to June 2020E while maintaining M cap (INR bn/USD mn) : 46 / 654 8x EV/EBITDA. Avg. Daily Vol.BSE/NSE(‘000) : 118.6

SHARE HOLDING PATTERN (%) IAC lifts revenue and INS Vikramaditya drives repair margin Revenue rose 16% YoY led by a 35% YoY spurt in shipbuilding—the latter propelled by a Current Q2FY19 Q1FY19 Promoters * 75.2 75.0 75.0 33% YoY jump in IAC revenue to INR455mn. With repairs on INS Vikramaditya nearing completion (97% done), ship repair revenue dipped 21% YoY but aided margins (40% MF's, FI's & BK’s 9.8 10.8 11.0 YoY versus 14% YoY in Q3FY18). A lower mix of fixed price component in IAC execution FII's 2.9 2.7 3.2 (24% versus 48% YoY) dragged shipbuilding EBIT margin to 19.4% from 32.4% YoY. Others 12.1 11.5 10.9 * Promoters pledged shares : NIL (% of share in issue)

Visibility strong; capex to build up capabilities Despite no major orders bagged in Q3FY19, a healthy order book of ~INR16bn (ex of PRICE PERFORMANCE (%) EW Capital the IAC variable component) keeps CSL’s future growth horizon in sight. That said, ASW Stock Nifty corvette and IAC Phase III (expected shortly) will enhance shipbuilding visibility. The Goods Index new ISRF facility and JV with port trust authorities will build up capabilities to 1 month (2.7) (0.3) (8.0) undertake additional ship repairs and open a route to the Indian naval fleet business. 3 months (6.0) 4.3 (1.0) 12 months (32.3) (1.8) (15.0)

Outlook and valuation: Expanding target market; maintain ‘BUY’

CSL is expanding its market horizon in the shipbuilding (corvettes) and ship repair (strategic JV to tap naval repair opportunity) segments. This coupled with its execution track record and capabilities will insulate CSL from dependence on a single large contract or the deeply cyclical industry. We maintain ‘BUY/SO’. The stock is trading at 5.3/4.5x FY20/21E EV/EBITDA. Amit Mahawar +91 22 4040 7451 Financials (INR mn) [email protected]

Year to March Q3FY19 Q3FY18 % Chg Q2FY19 % Chg FY18 FY19E FY20E Swarnim Maheshwari Net revenues 7,164 6,150 16.5 7,994 (10.4) 23,551 28,656 33,405 +91 22 4040 7418 EBITDA 1,585 1,372 15.5 1,880 (15.7) 4,646 5,889 6,212 [email protected]

Adjusted Profit 1,297 1,138 14.0 1,476 (12.1) 3,968 4,759 4,449 ashutosh Mehta Diluted EPS (INR) 9.5 8.4 14.0 10.9 (12.1) 29.2 35.0 32.7 +91 22 6141 2748 Diluted P/E (x) 11.9 9.9 10.6 [email protected]

EV/EBITDA (x) 2.9 3.3 5.3 ROAE (%) 15.0 14.1 12.3 February 12, 2019

Edelweiss Research is also available on www.edelresearch.com, Edelweiss Securities Limited Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Defence

Financial snapshot (INR mn) Year to March Q3FY19 Q3FY18 % change Q2FY19 % change YTD19 FY19E FY20E Net revenues 7,164 6,150 16.5 7,994 (10.4) 21,745 28,656 33,405 Direct costs 4,397 3,658 20.2 4,891 (10.1) 13,710 17,910 21,746 Employee expenses 731 684 6.9 701 4.2 2,091 2,851 2,981 Other expenses 452 437 3.5 521 (13.2) 1,327 2,006 2,465 EBITDA 1,585 1,372 15.5 1,880 (15.7) 4,618 5,889 6,212 Depreciation 86 91 (5.4) 84 2.0 254 346 407 EBIT 1,499 1,281 17.0 1,796 (16.6) 4,363 5,543 5,805 Interest 27 30 (11.8) 31 (14.8) 90 117 117 Other income 497 510 (2.5) 558 (10.9) 1,631 1,895 1,105 Add: Prior period items Profit before tax 1,969 1,761 11.9 2,323 (15.2) 5,904 7,321 6,793 Provision for taxes 672 623 7.9 847 (20.6) 2,068 2,562 2,343 Reported net profit 1,297 1,138 14.0 1,476 (12.1) 3,837 4,759 4,449 Adjusted Profit 1,297 1,138 14.0 1,476 (12.1) 3,837 4,759 4,449 Equity capital(FV INR 5) 1,359 1,359 1,359 1,359 1,359 1,359 No. of shares (mn) 136 136 136 136 136 136 Diluted EPS (INR) 9.5 8.4 14.0 10.9 (12.1) 28.2 35.0 32.7 As % of net revenues Raw material 61.4 59.5 61.2 63.0 62.5 65.1 Employee cost 10.2 11.1 8.8 9.6 10.0 8.9 Other expenses 6.3 7.1 6.5 6.1 7.0 7.4 EBITDA 22.1 22.3 23.5 21.2 20.5 18.6 Depreciation 1.2 1.5 1.1 1.2 1.2 1.2 EBIT 20.9 20.8 22.5 20.1 19.3 17.4 Interest expenditure 0.4 0.5 0.4 0.4 0.4 0.3 Other income 6.9 8.3 7.0 7.5 6.6 3.3 Reported net profit 18.1 18.5 18.5 17.6 16.6 13.3 Tax rate 34.1 35.4 36.4 35.0 35.0 34.5

2 Edelweiss Securities Limited Cochin Shipyard

Company Description CSL was incorporated on March 29, 1972, and was conferred the 'Category A Mini Ratna' status in 2008 by the Department of Public Enterprises, GoI. CSL is the largest public sector shipyard in in terms of dock capacity. It caters to clients from the defence sector in India and commercial sector worldwide. CSL commenced ship building operations in 1975 and ship repair facility in 1978 and has current capacity of 1,10,000 DWT and 1,25,000 DWT for ship building and ship repair. In addition to ship building and ship repair, the company also offers marine engineering training.

Investment Theme The company has moved up the ladder to build high capability /capacity naval ships (IAC, Corvettes) from commercial ships earlier. This, we believe, opens an additional INR 3.0tn (INR1.1tn CSL’s target market) opportunity over the next decade. The company’s capability will be further enhanced (LNG carriers, jack-up rigs and bigger IAC) once the proposed dry dock—expected to be operational by 2020—is constructed.

CSL’s current capacity constraints in ship repairs will be eliminated with setting up of the new ISRF and JVs with different port trusts (Mumbai, Kolkata, Andaman & Nicobar). This, we believe, will expand the company’s capability to cater to 320-350 ships (~80-100 currently), thereby adding substantial and sustainable revenue stream. Hence, we estimate the company’s ship repairs business to clock 30% revenue CAGR over FY18-20E, significantly surpassing the industry’s 8-10% CAGR growth.

Among ship building peers, CSL stands tall in terms of adaptability (lower employee fixed cost), capability (historical track record of catering to various types of ships), efficiency (declining liquidated charges) and financial superiority (strong balance sheet). Moreover, it is strategically located on the West coast (which handles 64% of total cargo), rendering it a convenient location for ship repairs. Also, the recent JV with Mumbai Port Trust offers it the opportunity to cater to repairs of India’s western naval fleet.

Key Risks Revenue concentration

CSL’s top two customers— and —have accounted for ~85% revenue over the past three years. The company does not have any contractual arrangements with these customers.

Slowdown in global economy

The commercial ship building industry is highly cyclical and also sensitive to the cyclical nature of industries it serves such as oil, natural gas, shipping, transportation and other trade-related industries.

3 Edelweiss Securities Limited Defence

Financial Statements Key Assumptions Income statement (INR mn) Year to March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E Macro Income from operations 23,551 28,656 33,405 39,218 GDP(Y-o-Y %) 6.7 7.1 7.1 7.3 Materials costs 14,261 17,910 21,746 25,962 Inflation (Avg) 3.6 3.7 4.0 4.5 Employee costs 2,714 2,851 2,981 3,287 Repo rate (exit rate) 6.0 6.3 5.8 5.8 Other mfg expenses 1,931 2,006 2,465 3,020 USD/INR (Avg) 64.5 70.0 72.0 72.0 Total operating expenses 18,905 22,767 27,193 32,269 Company EBITDA 4,646 5,889 6,212 6,949 Ship building - Order intake ( INR bn) 5,000 104,000 28,800 5,760 Depreciation 375 346 407 1,752 Ship repair - Order intake ( INR bn) 4,750 9,025 11,281 12,409 EBIT 4,271 5,543 5,805 5,198 Total - Order intake ( INR bn) 9,750 113,025 40,081 18,169 Less: Interest Expense 114 117 117 110 Ship building - Revenues (INR bn) 17,319 20,383 23,079 27,064 Add: Other income 1,892 1,895 1,105 1,187 Ship repair - Revenues (INR bn) 6,233 8,273 10,326 12,154 Profit Before Tax 6,049 7,321 6,793 6,274 Total - Revenues (INR bn) 23,551 28,656 33,405 39,218 Less: Provision for Tax 2,081 2,562 2,343 2,196 Depreciation rate (%) 8 7 8 5 Reported Profit 3,968 4,759 4,449 4,078 Tax rate (%) 34.4 35.0 34.5 35.0 Adjusted Profit 3,968 4,759 4,449 4,078 Shares o /s (mn) 136 136 136 136 Diluted shares o/s (mn) 136 136 136 136 Adjusted Diluted EPS 29.2 35.0 32.7 30.0 Adjusted Cash EPS 31.9 37.6 35.7 42.9 Dividend per share (DPS) 12.0 14.7 13.7 12.0 Dividend Payout Ratio(%) 41.1 42.0 42.0 40.0

Common size metrics Year to March FY18 FY19E FY20E FY21E Operating expenses 80.3 79.5 81.4 82.3 EBITDA margins 19.7 20.5 18.6 17.7 Net Profit margins 16.8 16.6 13.3 10.4

Growth ratios (%) Year to March FY18 FY19E FY20E FY21E Revenues 14.4 21.7 16.6 17.4 EBITDA 21.1 26.7 5.5 11.9 Adjusted Profit 23.4 19.9 (6.5) (8.3)

4 Edelweiss Securities Limited Cochin Shipyard

Balance sheet (INR mn) Cash flow metrics As on 31st March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E Share capital 1,359 1,359 1,359 1,359 Operating cash flow (7,518) 179 6,498 7,571 Shareholders' funds 32,559 34,921 37,130 39,252 Financing cash flow 8,130 (2,513) (2,357) (2,016) Long term borrowings 1,230 1,230 1,230 1,280 Investing cash flow 548 (3,855) (17,295) (3,665) Total Borrowings 1,230 1,230 1,230 1,280 Net cash Flow 1,160 (6,190) (13,155) 1,890 Long Term Liabilities 254 254 254 254 Capex (746) (5,750) (18,400) (4,852) Sources of funds 33,609 35,972 38,180 40,353 Dividend paid (1,967) (2,396) (2,240) (1,956) Gross Block 4,537 4,787 5,187 33,687

Net Block 3,490 3,394 3,387 30,135 Profitability and efficiency ratios Capital work in progress 1,148 6,648 24,648 1,000 Year to March FY18 FY19E FY20E FY21E Total Fixed Assets 4,638 10,043 28,035 31,135 ROAE (%) 15.0 14.1 12.3 10.7 Non current investments 164 164 164 164 ROACE (%) 15.5 16.0 15.7 13.3 Cash and Equivalents 34,903 28,713 15,559 17,449 Inventory Days 64 63 59 61 Inventories 3,146 3,065 3,983 4,749 Debtors Days 69 84 86 81 Sundry Debtors 5,801 7,458 8,237 9,133 Payable Days 347 348 310 323 Loans & Advances 3,936 4,133 4,339 4,556 Cash Conversion Cycle (214) (200) (165) (181) Other Current Assets 1,672 1,672 1,672 1,672 Current Ratio 2.4 2.3 1.4 1.3 Current Assets (ex cash) 49,458 45,041 33,789 37,558 Gross Debt/EBITDA 0.3 0.2 0.2 0.2 Sundry creditors 17,817 16,301 20,685 25,225 Gross Debt/Equity - - - - Provisions 2,833 2,975 3,124 3,280 Adjusted Debt/Equity - - - - Total Current Liab 20,650 19,276 23,808 28,505

Net Curr Assets-ex cash 28,808 25,765 9,981 9,053 Operating ratios Net Deferred tax (433) (433) (433) (433) Year to March FY18 FY19E FY20E FY21E Uses of funds 33,609 35,972 38,180 40,353 Total Asset Turnover 0.9 0.8 0.9 1.0 BVPS (INR) 239.5 256.9 273.1 288.8 Fixed Asset Turnover 6.5 8.3 9.9 2.3 Equity Turnover 0.7 0.8 0.9 1.0

Free cash flow (INR mn)

Year to March FY18 FY19E FY20E FY21E Valuation parameters Reported Profit 3,968 4,759 4,449 4,078 Year to March FY18 FY19E FY20E FY21E Add: Depreciation 375 346 407 1,752 Adj. Diluted EPS (INR) 29.2 35.0 32.7 30.0 Interest (Net of Tax) 75 76 77 72 Y-o-Y growth (%) 23.4 19.9 (6.5) (8.3) Others (1,054) (1,854) (1,064) (1,148) Adjusted Cash EPS (INR) 31.9 37.6 35.7 42.9 Less: Changes in WC 10,881 3,148 (2,629) (2,818) Diluted P/E (x) 12.0 10.0 10.7 11.6 Operating cash flow (7,518) 179 6,498 7,571 P/B (x) 1.5 1.4 1.3 1.2 Less: Capex 746 5,750 18,400 4,852 EV / Sales (x) 0.6 0.7 1.0 0.8 Free Cash Flow (8,263) (5,571) (11,902) 2,719 EV / EBITDA (x) 3.0 3.4 5.3 4.5

5 Edelweiss Securities Limited Defence

Additional Data Directors Data Shri Madhu S Nair CMD Shri D Paul Ranjan Director (Finance) & CFO Shri Sureshbabu N V Director (Operations) Shri Satinder Pal Singh Official Part Time Director Shri Jyothilal K R Official Part Time Director Smt. Roopa Shekhar Rai Non Official Part Time Director Shri Radhakrishna Menon Non Official Part Time Director Shri Krishna Das E Non Official Part Time Director Shri Pradipta Banerji Non-Official Part Time Director Shri Jiji Thomson Non-Official Part Time Director Shri Nanda Kumaran Puthezhath Non-Official Part Time Director Shri Bejoy Bhasker Director (Technical)

Auditors - Krishnamoorthy & Krishnamoorthy *as per last annual report

Holding – Top10 Perc. Holding Perc. Holding

No Data Available

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

6 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk BUY SP H Cochin Shipyard BUY SO M

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

7 Edelweiss Securities Limited Defence

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research [email protected]

Coverage group(s) of stocks by primary analyst(s): Defence Bharat Electronics, Cochin Shipyard

Recent Research

Date Company Title Price (INR) Recos

31-Jan-19 Bharat Forex drives PAT 84 Buy Electronics outperformance; valuation underpins BUY; Result Update 26-Oct-18 Bharat Civil business drives PAT beat; 88 Buy Electronics strong growth visibility ; Result Update 26-Sep-18 Bharat Braving the odds; 76 Buy Electronics Visit Note

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn 743 Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11 594

One year price chart 446 550

(INR) 297 500 149 450

(INR)

- 400

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300

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8 Edelweiss Securities Limited

Cochin Shipyard

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10 Edelweiss Securities Limited Cochin Shipyard

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