COMPANY REPORT

Cochin Shipyard – BUY

Investing in capacity and capability for next leg of growth

Weak operating performance led by increased provisioning CMP (Rs) 371 12-mths Target (Rs) 503 Upside 36%
Cochin Shipyard’s (CSL) Q4FY19 revenues were up 31% yoy led by Stock data (As on May 27, 2019) Sector: Defence
31.4%/29.7 growth in the Ship building (SB)/ Ship repairing (SR) Sensex: 38,970 Stock performance
52 Week h/l (Rs) 517/333 140 CSL Sensex
segments respectively. CSL reported EBITDA margin of 14% in
Market cap (Rs bn) 48.8 110
Q4FY19, down 520bps yoy as SR segment reported EBIT loss of Rs71mn
Enterprise value (Rs bn) 40.7 80
vs Rs175mn in Q4FY18. SB segment reported EBIT margins of 27.4%,
6m Avg t/o (Rs mn): 29.4 50
up 40bps yoy. Weak operating performance in SR segment was due to
FV (Rs): 10 May-18 Sep-18 Jan-19 May-19
provisions of ~Rs300mn pertaining to projects such as Sagar Bhushan,
Div yield (%): 3.3
Sagar Dhwani and Nireekshak. Mumbai Port facility repair business Shareholding pattern (As of Mar’19 end)
Bloomberg code: COCHIN IN
operation was still in nascent stage so CSL had a loss of Rs50mn due to Promoter 75.2%
BSE code: 540678
fixed cost associated with this facility. However, it expects profitability FII+DII 15.6%
turnaround in FY20 as the business and operations matures. NSE code: COCHINSHIP Others 9.2%

CSL has a robust order book of Rs188bn as on Mar’19 which includes Exhibit 1: Result table (Standalone)
signed contracts of Rs85bn (ASW vessels ~Rs63bn, Cargo vessels (Rs mn) Q4 FY19 Q4 FY18 % yoy Q3 FY19 % qoq
~Rs11bn, Floating Border Outposts ~Rs3.5bn, SR orders of ~Rs2.7bn & Total sales 7,876 6,006 31.1 7,164 9.9
TDV vessels for DRDO ~Rs1.3bn). CSL is likely to sign order for phase EBITDA 1,100 1,151 (4.4) 1,585 (30.6)
III of IAC by 1HFY20, which could be worth ~Rs103bn (Rs30bn as fixed EBITDAM (%) 14.0 19.2 (520) 22.1 (816)
price contract and Rs73bn as cost-plus contract). This translates to 6.4x Depreciation (87) (90) (2.9) (86) 1.4
TTM sales, providing a huge long‐term visibility on revenues. CSL has Interest (53) (26) 103.9 (27) 97.9
~Rs100bn opportunity pipeline of new orders which are likely to be Other income 650 381 70.6 497 30.6
finalized over FY19-21, which comprise pollution control vessels, 225 PBT 1,609 1,416 13.7 1,969 (18.3)
coastal security boats, large floating docks, multipurpose vessels and Tax (634) (500) 26.9 (672) (5.6)
next-gen missile vessels. CSL expects incremental SR revenues of Rs3- Adjusted PAT 975 916 6.4 1,297 (24.8)
4bn/year once ISRF becomes operational in Aug’20. We retain BUY PATM (%) 12.4 15.3 (287) 18.1 (573)
rating with TP of Rs503, valuing the core business at 8x FY21E EBITDA EPS (Rs) 7.2 6.7 6.4 9.5 (24.8)
Source: Company, YES Sec - Research
(Rs443) and 0.8x FY21E cash balance of Rs 10 bn (Rs60). Implied PE at
our target price stands at 11.6x FY20E and 10.6x FY21E earnings.

May 28, 2019

Research Analyst: Umesh Raut  umesh.raut@yessecuritiesltd.in
Head of Research: Amar Ambani  amar.ambani@yessecuritiesltd.in (For important information about YES SECURITIES (INDIA) LTD. and other disclosures, refer to the end of this material.)
Cochin Shipyard

Exhibit 2: Cost analysis (Standalone) Exhibit 4: Order book details as on March 2019
As a % of net sales Q4 FY19 Q4 FY18 bps yoy Q3 FY19 bps qoq No of % Balance
Project Client OB
COGS 52.7 46.0 670.8 55.3 (260.2) vessels Completed orders
Employee cost 8.7 13.8 (512.5) 10.2 (150.3) Shipbuilding
Other expenses 24.7 21.1 361.5 12.4 1,226.5 IAC Phase II Indian Navy 1 28.5 91% 2.6
Total costs 86.0 80.8 519.9 77.9 816.0 Technology
DRDO 1 3.9 67% 1.3
Source: Company, YES Sec – Research
Demonstration Vessel
500 Pax cum 150 Ton
A&N Admin 1 2.4 67% 0.8
Exhibit 3: Segment-wise quarterly revenue contribution Cargo Vessel
500 Pax cum 150 Ton
FY18 FY19 A&N Admin 1 2.4 62% 0.9
Cargo Vessel
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1200 Pax cum 1000 Ton
Revenue A&N Admin 1 4.2 21% 3.2
Cargo Vessel
SB (Rs mn) 3,983 4,224 4,077 5,035 4,544 4,621 5,521 6,617
1200 Pax cum 1000 Ton
yoy gr. (%) 14.1 9.4 35.4 31.4 A&N Admin 1 4.2 10% 3.7
Cargo Vessel
SR (Rs mn) 1,580 1,609 2,073 971 2,043 3,373 1,644 1,259
ROPAX Vessels IWAI 10 1.0 13% 0.9
yoy gr. (%) 29.3 109.7 (20.7) 29.7
OI (Rs mn) 388 612 510 381 576 558 497 650 Fishing Vessel DoF TN 12 0.1 10% 0.1
yoy gr. (%) 48.4 (8.9) (2.5) 70.6 ASW SCW Corvette Indian Navy 8 63.1 63.1
Net (Rs mn) 5,951 6,445 6,660 6,387 7,163 8,552 7,662 8,526 Mini General Cargo
JSW 4 2.5 2.5
yoy gr. (%) 20.4 32.7 15.0 33.5 Vessel
EBIT Floating Border
BSF 9 3.5 3.5
SB (Rs mn) 969 497 1,319 1,362 775 796 1,070 1,810 Outposts
yoy gr. (%) (20.0) 60.0 (18.9) 33.0 Others 0.3 0.3
Margin (%) 24.3 11.8 32.4 27.0 17.1 17.2 19.4 27.4 Ship repairing
SR (Rs mn) 213 630 287 175 438 1,351 654 (71) Defence Indian Navy 1.8
yoy gr. (%) 105.9 114.4 127.8 (140.3) Non-defence 0.7
Margin (%) 13.5 39.2 13.9 18.0 21.4 40.0 39.8 (5.6) Total OB 85.4
OI (Rs mn) 248 372 184 (95) 431 208 272 (77) IAC Phase III (Fixed Not signed
yoy gr. (%) 73.5 (44.2) 47.9 (18.2) Indian Navy 1 30 30.0
price) yet
Margin (%) 64.0 60.8 36.1 (24.9) 74.8 37.2 54.8 (11.9) IAC Phase III (Cost Not signed
Net (Rs mn) 1,430 1,500 1,791 1,442 1,644 2,354 1,996 1,662 Indian Navy 1 73 73.0
plus) yet
yoy gr. (%) 15.0 57.0 11.5 15.3 Total OB (including L1) 188.4
Margin (%) 24.0 23.3 26.9 22.6 23.0 27.5 26.1 19.5 Source: Company, YES Sec – Research
Source: Company, YES Sec - Research

2
Cochin Shipyard
Growth drivers for Shipbuilding business
 Inland and coastal water segment: The government’s focus on
development of inland and coastal waterways infrastructure is
expected to spur demand of ships for this sector. The Government
is investing substantially to improve the infrastructure in the major
waterways. This will spur the demand for such vessels in the inland
water segment. It is estimated that the vessels required to meet the
demand by 2030 will triple which may be around 3000+ vessels. CSL
is working closely with Inland Water Authority of India (IWAI) and
other potential customers to provide efficient product solutions in
this segment
 Special purpose vessels: Various agencies are looking for modern
and efficient vessels to equip and upgrade the assets to meet the
operational demands. This gives an opportunity to CSL for custom
made vessels such as Polar Research Vessels, Well Stimulation
Vessel, Cement Carriers, etc.
 Fishing segment: Government of India (GoI) has got an ambitious
plan under the “Blue Revolution” to equip the segment with more
modern and efficient fishing vessels. This segment is presently
managed by unregulated players and gives a good opportunity for
CSL to focus and position itself as a quality player. CSL is working
closely with Tamil Nadu Fisheries by providing custom made
solution to the fishermen and has contracted for the construction of
16 vessels as a pilot project. The total requirement for the
department for fishermen is about 2000 vessels. In addition to the
above there are also potential requirements for bigger and
sophisticated vessels in this segment for the domestic and
international market.
Potential opportunity for Ship repairing business in India
India’s share in global ship repair market is less than 1%, while around
7-9% of global trade is passing within 300 NM of its coastline. India’s
strategic position along the east bound and west bound international
trade routes offers an opportunity to cater to vessels plying on these
routes. A main container route connecting America and Europe to the
East passes very close to the Indian coastline presenting a major
opportunity. for repairs. This presents huge untapped potential which
is valued around Rs35-40bn. The captive market for ship repair in India
is estimated at ~Rs25bn. It is estimated that only 15% of the potential is
being tapped presently. MOU with the Mumbai Port Trust & Kolkata
Port Trust for operations and management of respective ship repair
facilities would be beneficial for CSL. It shall utilize these facilities for
ship repair and allied services and for the growth of ship repair in the
region.
CSL has also signed a MoU with Andaman & Nicobar (A&N)
Administration for setting up its unit at Port Blair in September 2018.
The agreement with A&N is in the administrative phase and is expected
to be cleared in FY20. By entering into this arrangement with A&N
Administration, CSL shall be developing an integrated ship repair
ecosystem at A&N islands that includes modernization of facilities,
maintenance of Administration owned vessels and skill development
for the islanders.
CSL is planning to increase the throughput of a profitable business
through International Ship Repair Facility (ISRF). This Facility will
allow CSL to increase its repair throughput by 60‐70% as it includes a
ship‐lift and transfer system. CSL will be able to repair 80 additional
ships in the new ISRF and an additional 12 in the new dry dock. CSL
will spend capex of ~Rs9.7bn on the ISRF.
3
Cochin Shipyard

Major provisions in Q4FY19 Revenues/EBITDA/PAT CAGR of 14%/13%/14% over FY19-21E

 INS Aditya & INS Airavat –Indian Navy: Rs291.8mn respectively driven by strong order book (~Rs188bn), promising
outlook for ship repairing business, strong execution capabilities and
Refit of INS Aditya & INS Airavat owned by Indian Navy involved healthy balance sheet.
additional refit job beyond the Contractual Value. The additional
refit was approved by the Contract Operating Authority (CoA), Exhibit 5: Shipbuilding revenues grew by 23% yoy in FY19
however the amount has been held up due to lack of budget
allocation and long approval process involved at the Navy’s end to 35000 Shipbuilding revenue (Rs mn) YoY Growth (%) 30
rectify the budget allocation. Following the principle of conservative 27
25
30000
accounting, CSL has made provisions of Rs291.8mn in Q4FY19. 23
20
However, it is actively pursuing with the Indian Navy for the 25000
19
16
14 15
approval and release of the amount.
20000 10 11 10
 Provision of IAC withholding tax refund: Rs261.5mn

31,450
15000 5

27,000
The supply of Working Design Documents (WDD) from an overseas

21,302
-

17,319
10000

16,208
15,564

15,137
vendor was subjected to withholding tax and Customs duty. The

13,996

13,670
-5
-7
withholding tax was paid treating the supply as technical service 5000
-10
-12
while the Customs Duty was simultaneously demanded by the 0 -15
Customs authority, which had to be paid by CSL in the interest of FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
the project. Subsequently, the Company then based on the advice of Source: Company, YES Sec - Research
the tax consultants is in the process of filing a refund application for
the withholding tax paid. However, as the same is matter which may
encounter time delays, the Company on a conservative principle has
made a provision for the same in the accounts.

CSL would remain net debt free

CSL has historically maintained healthy liquidity as ~90% of capital
employed (average during FY15-19) stood in the form of cash. While a
bulk of company’s cash balance will be utilized towards capex, we still
expect the company to remain net debt free, as it is likely to generate
annual operational cash of Rs5-6bn per annum. We estimate the total
cash balance to reduce to ~Rs10bn by FY20. CSL is expected to deliver
4
Cochin Shipyard

Exhibit 6: Ship repairing revenues grew by 32% yoy in FY19 Exhibit 8: Expect revenue CAGR of 14% over FY19-21E
Shiprepairing revenue (Rs mn) YoY Growth (%) Net revenues (Rs mn) YoY Growth (%)
9000 120 45000 30
8000 100 40000 26 26 25
95
7000 86 35000 19 20
80
6000 30000 14 15 15
60 14
5000 48 25000 10
40

8,320
7

38,771
4000 33 20000 5

7,321

33,656
3

6,656
6,233
20

29,622
15
5,430
3000 10 15000 -

23,551
20,589
19,900
-

17,979
3,675

16,799
2000 10000 -5

15,833
2,853

-14
2,287

1,978

1000 -20 -20 -20 5000 -10

-12
0 -40 0 -15
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
Source: Company, YES Sec – Research Source: Company, YES Sec – Research

Exhibit 7: Segment wise revenue mix Exhibit 9: Expect EBITDA CAGR of 13% over FY19-21E
(%) SB revenue share (%) SR revenue share (%) EBITDA (Rs mn) YoY Growth (%)
8000 25
100
87 86 23
83 81 7000
90 21
74 74 72 20 20 20
80 6000 19 19 19
18
70
5000 15
60
4000

7,279
50

6,222
40 10

5,692
26 26 28 3000

4,639
4,171
30 18

3,924

3,838
17 2000

3,523
13 12 6 5
20
1000
10

899
0 0 -
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
Source: Company, YES Sec – Research Source: Company, YES Sec – Research

5
Cochin Shipyard

Exhibit 10: Expect PAT CAGR of 14% over FY19-21E

PAT (Rs mn) ROE (%)
7000 25
24
6000
21 20
5000 17 17 16 16
15 15 15
4000

6,224
5,689
3000
10

4,778
3,963
2000
3,215
2,918
2,818
2,663

5 5
1000
693

0 -
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
Source: Company, YES Sec – Research

Exhibit 11: Financial summary

Y/e 31 Mar (Rs mn) FY17 FY18 FY19 FY20E FY21E
Revenues 20,589 23,551 29,622 33,656 38,771
yoy growth (%) 3.5 14.4 25.8 13.6 15.2
EBITDA 3,838 4,639 5,692 6,222 7,279
EBITDAM (%) (2.2) 20.9 22.7 9.3 17.0
Adjusted PAT 3,215 3,963 4,778 5,689 6,224
yoy growth (%) 10.2 23.2 24.6 19.1 9.4

EPS (Rs) 23.7 29.2 36.3 43.2 47.3

P/E (x) 15.7 12.7 10.2 8.6 7.8
P/BV (x) 2.1 1.5 1.5 1.3 1.2
EV/EBITDA (x) 7.8 3.2 4.3 3.3 2.9
D/E (x) (0.9) (1.0) (0.7) (0.8) (0.7)
ROE (%) 16.7 15.0 14.5 16.2 15.9
ROCE (%) 103.2 278.2 72.5 39.8 42.9
Source: Company, YES Sec - Research

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returns, the recommendations are categorized as mentioned below. The performance horizon is 12 to 18 months unless specified and the target price is defined as the analysts’
valuation for a stock. No benchmark is applicable to the ratings mentioned in this report.

BUY > 15%

ADD 5% to 15%
HOLD -15% to +5%
SELL > - 15%
NOT RATED
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ABOUT YES SECURITIES (INDIA) LIMITED

YES SECURITIES (INDIA) LIMITED (‘‘YSL’’) was incorporated on 14th March 2013 as a wholly owned subsidiary of YES BANK LIMITED. YSL does not have any other
associates. YSL is a SEBI registered stock broker holding membership of NSE and BSE. YSL is also a SEBI registered Category I Merchant Banker, Investment Adviser and a
Research Analyst. YSL offers, inter alia, trading/investment in equity and other financial products along with various value added services. We hereby declare that there are
no disciplinary actions taken against YSL by SEBI/Stock Exchanges.

7
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Opinions expressed are our current opinions as of the date appearing on this report. Investor should
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YES SECURITIES (INDIA) LIMITED
Registered Office: Unit No. 602 A, 6th Floor, Tower 1 & 2, Indiabulls Finance Centre,
Senapati Bapat Marg, Elphinstone Road, Mumbai – 400013, Maharashtra, India.
Tel: +91-22-71123123 | Email: research@yessecuritiesltd.in | Website: www.yesinvest.in
DISCLOSURE OF INTEREST
Name of the Research Analyst : Umesh Raut
The analyst hereby certifies that opinion expressed in this research report accurately reflect his or her
personal opinion about the subject securities and no part of his or her compensation was, is or will be
directly or indirectly related to the specific recommendation and opinion expressed in this research report.
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CIN: U74992MH2013PLC240971 | SEBI Single Registration No.: NSE, BSE & MCX:
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