The BSE smallcap index has officially entered the correction mode, falling into a bear market which is defined as down more than 20% from its recent peak.
However, one must remember that market corrections or minor pullbacks like this are part and parcel of the journey – what Warren Buffett calls a norm, and not a calamity.
In the past 2 decades, the Indian benchmark index has averaged a correction every 12 months, and most of them didn’t turn into prolonged bear markets.
Is this just a reset or the start of something worse? Nobody knows…
While most investors try to predict what’s coming next, Mazagon Dock Shipbuilders is charting its own course.
This quarter, the company posted record-breaking earnings and it’s expecting the order book to accelerate in the coming months.
Even in this correction, the stock has fallen less and covered up a lot of the lost ground.
Mazagon Dock share price performance – 6 Months
Source: Equitymaster
Of the six government-owned shipyards (Mazagon Dock, Cochin Shipyard, Garden Reach Shipbuilders, Goa Shipyard, Hindustan Shipyard and Hooghly Cochin Shipyard), Mazagon Dock is the only one to be entrusted to build and repair warships (frigates and destroyers) and submarines.
With government taking serious steps to reboot the industry by launching the Shipbuilding Financial Assistance Policy, the current naval fleet can last until late 2030s.
As India’s largest warship builder, Mazagon Dock has a massive order book.
Lets take a look at Mazagon Dock’s long-term prospects and how investors can think about navigating the defence shipbuilding sector with this state-owned PSU.
India’s Top Submarine Stock with a ‘Monopoly’ Status
With critical projects like Project 17A frigates, Kalvari-class submarines and Project-15 Bravo destroyers, Mazagon Dock is a monopoly player.
The company initially received a shot in the arm thanks to the Union Budget 2025. The government rolled out the Shipbuilding Financial Assistance Policy, offering tax relief and financial incentives to ramp up domestic manufacturing.
Key takeaways include a basic customs duty exemption on shipbuilding and shipbreaking companies for 10 years, along with a Rs 250 billion (bn) Maritime Development Fund to support local shipbuilders.
The timing couldn’t be better. India wants to become a global shipbuilding hub, but it’s still far behind big players like South Korea and China.
Right now, India’s market share in global shipbuilding is less than 1%. The new policy aims to change that, giving Indian shipbuilders a much-needed boost.
Financials Paint a Compelling Picture
Mazagon Dock’s revenue is 98% defence-driven, making it a key player in India’s naval expansion.
Between 2020 and 2024, the company’s business has performed admirably, with revenue and net profit growing at a CAGR of 15% and 30%, respectively. The profitability has shot up on the back of steady improvement in profit margins.
The company has been delivering strong returns, with the RoE and RoCE averaging at a healthy 19.2% and 28.1%, respectively over the same period.
Coming to its recent results, the company recorded the highest quarterly revenue and profit in Q3 with revenue growing 5% YoY to Rs 31.4 billion (bn).
Order execution remained on track, but working capital pressure increased due to slower advances from key naval projects. The company also faced delays in the much-anticipated follow-on Scorpene submarine order, keeping investors on edge.
Additionally, the pace of execution for its Project 17A frigates and Project-15 Bravo destroyers remained slower than anticipated, adding to concerns about near-term cash flows.
Mazagon Dock’s 9MFY25 performance remained strong, with solid revenue growth and margin expansion.
Revenue rose 30% YoY, while net profit jumped 68% YoY, aided by cost efficiencies.
Its total EBITDA surged 51% YoY, with the margins improving to 26% from 23%.
Smooth Sailing Ahead?
In the latest earnings call, Mazagon Dock’s management highlighted that revenue stability remains a key focus for the company as it transitions from existing to future projects.
It expects only a minor dip, if any, in revenue over the next couple of years, thanks to contributions from offshore projects, Indian Coast Guard (ICG) orders, and exports.
While there may be fluctuations in annual revenue growth depending on project timelines, the overall base is expected to remain intact. This suggests Mazagon Dock has reasonable visibility on its order execution over the medium term.
In the near term, Mazagon Dock is eyeing a 10-12% topline growth over last year, keeping the momentum steady as it works through its order book.
The margins have seen a boost recently, thanks to early vessel deliveries that kept costs below budget. This trend is expected to hold strong until FY27, as major deliveries continue over the next two to three years.
However, once new orders kick in, revenue recognition could shift to a milestone-based model, which could bring EBITDA margins down to 12-15%.
That said, even with a potential dip, margins are likely to stay above the FY17-FY23 levels, driven by improved cost efficiencies and internal capabilities.
Critical Growth Areas
As part of its strategic plans, Mazagon Dock is eyeing several large naval contracts, though they are still in the approval process.
The company has bid for the next-generation Corvette and next-generation destroyers, but these projects are awaiting government clearance.
If approved, they could bring in significant new orders over the next few years.
There is also a possibility of a repeat order under Project-17 Bravo which could add more frigates to Mazagon Dock’s pipeline.
On the submarine front, Mazagon Dock has several strategic opportunities lined up. The company is expecting a follow-on order, a deal for which it has already been nominated.
Separately, it has partnered with German shipbuilder TKMS for the competitive P-75I submarine program and has qualified for the tender, awaiting government decisions.
Additional opportunities exist in propulsion systems into existing Scorpene submarines. The company is also keeping an eye on potential refit contracts for the Scorpene fleet.
Given that the approval granted by the Indian MOD for these projects was set at Rs 270 bn in 2018, costs are expected to escalate when final contracts are awarded.
To gauge the potential size of these future contracts, Mazagon Dock is looking at past orders as a benchmark. The current four-destroyer contract under Project-15 Bravo was signed in 2011 for Rs 340 bn. With naval platforms evolving and inflationary factors at play, the next-generation destroyer contract is expected to be larger in scale and value.
Similarly, the Project-17 Alpha frigate contract, awarded in 2015 for Rs 270 bn, offers insights into what a similar or more advanced frigate order would cost today.
These large-value contracts will be key drivers of Mazagon Dock’s long-term revenue trajectory once they move forward.
While these projects are still in various stages of approval, Mazagon Dock is well-positioned to secure some of them, ensuring a steady stream of orders in the coming years.
Heavy Capex Spending
To gear up for future orders, Mazagon Dock is investing around Rs 50 bn in expanding its shipbuilding and repair capabilities over the next couple of years.
It has acquired 15 acres of land adjacent to its existing shipyard, where it plans to develop a new facility. This will enhance its ability to manage multiple projects simultaneously.
Additionally, Mazagon Dock has a land parcel where it is setting up an even larger shipyard. It will feature a significantly bigger dry dock, enabling the construction of larger warships and submarines while also boosting its ship repair and maintenance business.
Mazagon Dock can currently handle 21 vessels (11 submarines, 10 warships). Planned expansions will nearly double capacity, enabling it to build larger vessels and take on bigger projects.
While the immediate focus remains on completing ongoing orders, these expansions will be crucial in securing Mazagon Dock’s long-term growth.
With Rs 40 bn in cash reserves, Mazagon Dock has a strong financial cushion to support its Rs 50 bn capex plan without relying heavily on debt. Most of the funding will come from internal accruals.
Its steady revenue pipeline from existing defence projects strengthen its position. While the full capex outlay exceeds its current cash reserves, Mazagon Dock has enough financial flexibility to bridge the gap through future earnings or raising capital if needed.
Do Valuations Merit a Closer Look?
The steep rally in Mazagon Dock’s share price isn’t without reason. Strong revenue growth and margin expansion in the past few quarters have kept the stock in the spotlight.
But what drove the momentum was its first-ever stock split, making the stock more accessible to retail participants.
Beyond the stock split, Mazagon Dock is eyeing major defence deals, which could solidify its role in India’s naval expansion. It also secured an AI-based security contract, adding diversification. With multiple triggers, Mazagon Dock remains a top defence stock.
Currently, the stock is trading at Rs 2,300. This implies a trailing price to earnings ratio of 33 times, much higher than its 5-year median PE of 15.7. However, it is lower than its peak PE of 59 times in July 2024.
For years, Mazagon Dock traded at cheap price to earnings multiple of around 10-12x because the company did not have the kind of growth visibility and order book that it has now. Its margins and return ratios were significantly lower in the past.
In conclusion, Mazagon Dock’s reliance on government contracts is both a strength and a challenge. While its massive order book offers strong revenue visibility, erratic payments and delays in securing new deals create near-term hurdles.
Rising competition from private players only adds to the pressure, making execution speed and cost control critical.
For now, the company’s priority is delivering on existing orders, but its long-term growth depends on winning large defence contracts and executing its capex plans efficiently.
With a solid track record in warship and submarine building, the company is well-positioned to benefit from India’s naval modernisation push.
That said, near-term risks can’t be ignored. The stock is trading at elevated valuations, leaving little room for disappointment. If upcoming results fail to impress investors, there could be some volatility in its stock price.
Investors should stay cautious and track execution timelines closely. As always, it’s essential to do thorough research and include corporate governance in your due diligence process before making any investment decisions.
Happy Investing.
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