Navigating Growth: Cochin Shipyard's Maritime Triumph

As an defence and aerospace enthusiast, the Cochin Shipyard Limited's (CSL) recent surge in its capex journey after delivering INS Vikramaditya in 2022 has piqued my interest. A quick examination of CSL's strategic endeavors and financial maneuvers, revealed certain key factors that make this PSU a captivating entity in the Indian Shipbuilding Industry.......#DefenceIndustry #AerospaceEnthusiast" Cochin Shipyard Limited

1. Strategic Expansion Across the Seas

CSL's recent capex overdrive has not been a mere expansion but a calculated strategic move. In the past four years, the company has acquired and operationalized ship repair facilities across multiple locations, including Mumbai, Goa, Vishakhapatnam, Andaman & Nicobar Islands, and Udupi. This expansion, coupled with the recent inauguration of a third dry dock at Cochin with a mammoth 1.25 Lakh DWT capacity, and the establishment of the International Ship Repair Facility (ISRF) at Wellingdon (built at a cost of Rs 2,769 Cr), demonstrates CSL's commitment to excellence on a global scale.

This geographic diversification positions CSL as a key player not only in its home base of Cochin but also on a broader international maritime canvas.

2. Financial Acumen: Navigating High Tides with Equity Funding

The entire capex surge is supported by equity funding, showcasing CSL's commitment to financial resilience. With an Equity Share Capital of INR 131.54 Cr and Reserves & Surplus of 3,364.9 Cr, CSL's total Equity stands impressively at INR 4,423.41 Cr. The company's virtually debt-free status, with 'non-current borrowings' at a mere 23 Cr.

The balance sheet items such as 'Capital Works in Progress' and land lease liabilities further provide a transparent picture of CSL's financial fortitude.

3. Market Valuation: Riding the High Seas of Confidence

CSL's market cap has surged to over 23,000 Cr, with the Govt of India owning a substantial 72.86% stake. In last one year, the stock has witnessed a remarkable growth of 250%. Today, while the P/E (TTM) stands at 53.5 and P/B at 5.19, these figures align with the robust Indian Defence and Aerospace sector. In comparison with Nifty India Defence index and competitors like Mazgaon Dockyard and GRSE, CSL's pricing seems justified.

The high EV/EBITDA ratio of 20 also indicates market optimism about future growth. However, the market seems to be projecting a future sustained growth rate of 10 to 11% (assumed WACC of 15.25%), which exceeds the past 10 years YoY revenue growth of 3.83%.

4. Profitability and Financial Resilience: Facing the Winds of Change

The ROE for FY 2023 is a modest 6.93%, down from the peak of 17% in 2020. While maintaining a stable leverage ratio of 1.1, CSL faces a drop in profitability from the 2021 level of 20% to 11.8%. Asset turnover, from the high of 1.02 in 2017, has spiraled downwards to 0.53 in FY 2023. On the face of it, Increasing fixed costs is a major factor for this pressure on ROE and demands strategic adjustments.

CSL's ability to weather these challenges and maintain a positive cash flow is evident through a constant positive cash flow since 2019, peaking at Rs 1,889 Cr in 2023. Cash from Operating Activities has seen a notable increase, reaching INR 1,889.05 Cr in FY 2023.

5. Cash Conversion Cycle: Sailing Through Efficiently ????

In an industry where a long Cash Conversion Cycle (CCC) is often a norm, CSL stands as an exception. The company has significantly improved its CCC from 338 days in 2014 to a market-leading 135 days in 2023. Efficient inventory management and receivable collection are the highlights of this remarkable turnaround, showcasing CSL's commitment to operational efficiency.

6. Working Capital Dynamics: Navigating the Financial Seas ????

CSL's working capital has steadily increased, reaching INR 4,400 Cr in FY 2023 from approximately INR 1,700 Cr in FY 2014. This growth surpasses the rise in revenue, indicating a strategic deployment of resources to support operational needs. While it suggests potential for the expansion of shipbuilding and repair capabilities, a continued upward trend requires careful monitoring to ensure optimal cash usage.

7. Revenue & EBITDA Growth: Adapting to New Tides

CSL's EBITDA growth has lagged behind revenue, the transition post-delivery of the IAC project in 2022 marked a shift. Total revenue, which peaked at INR 3,667.57 Cr in FY 2020, decreased to INR 2,571.56 Cr in FY 2023. Correspondingly, EBITDA dropped from the peak of 931 Cr in 2021 to INR 531 Cr for FY 2022-23. The fluctuations in the EBITDA/Revenue ratio, peaking at 30.6% in 2021 and dropping to 20.6% in 2023, indicate a challenge to profit margins amidst ongoing capex.

For optimal asset utilization, CSL needs strategic adjustments and continued innovation in securing and executing major shipbuilding projects. While shipbuilding remains the major revenue generator, diversifying revenue streams becomes crucial. In this regard, ship-repairs revenue of INR 543.31 Cr, and export orders of 69.05 Cr, indicate a scope for further growth.

8. Horizon Strategies: Navigating Future Waters

Horizon-1 Strategy: Sailing with the Indian Navy CSL's H-1 strategy focuses on major orders from the Indian Navy. Recurring revenue from MRO of IAC, contracts for 8 Anti-Submarine Warfare Corvettes, an imminent agreement for 6 Next Generation Missile Vessels, and the planned procurement of 04 x Landing Platform Dock by Indian Navy can position CSL as a front-runner in naval contracts.

Horizon-2 Strategy: Green Energy Solutions Venturing into sustainable urban water transport with 23 Hybrid-Electric Aluminium Catamaran Hull Vessels for the Kochi Water Metro Project showcases CSL's commitment to environmental sustainability. Contracts like India's largest Trailing Suction Hopper Dredger for the Dredging Corporation of India and the Hydrogen Fuel Cell Vessel pilot project through CSL Strategic & Advanced Solutions (C-SAS) mark strides in diverse vessel construction and cutting-edge technologies.

Horizon-3 Strategy: Global Collaborations & Technology Ventures CSL's strategic partnership with HS Service GMBH & Co. KG, Germany, for 8 Eco Freighter 7,000 DWT Vessels reflects global outreach. The establishment of CSL's Startup Engagement Program highlights a commitment to fostering innovation and technological advancements, particularly in smart technologies, artificial intelligence, and autonomous ships.

9. The Moonshot: Emerging as a Global Ship Repair Hub

CSL's audacious goal is to emerge as a hub of global ship repair facilities. This ambitious move aligns with shifting global value chains out of China, which presently commands 50% of the annual global shipbuilding and ship repair market size of Rs 1.06 Lakh Cr; of which India currently holds only a 1% share.

10. Conclusion: Anchoring Investment Perspectives

For an external enthusiast with a keen interest in the Defence and Aerospace sector, CSL presents an intriguing investment prospect. Despite recent financial fluctuations, the company's commitment to growth, technological advancements, and global collaborations makes it a captivating option for those passionate about the Indian Shipbuilding and Defence manufacturing industry.

Navigating through the highs and lows, CSL's strategic moves, financial acumen, and innovative ventures position it as a resilient player in the maritime domain. The company's audacious moonshot to become a global ship repair hub adds an exciting dimension to its journey, making it a potential beacon for investors seeking opportunities in the ever-evolving maritime landscape.

#MaritimeInvestments #AerospaceEnthusiastInsights #ShipbuildingSaga 欧洲工商管理学院 (INSEAD) INSEAD Alumni INSEAD | Leadership Program for Senior Executives (ILPSE)