Mazagon Dock Shipbuilders Ltd (MDSL) is India's leading defence public sector undertaking shipyard under the Ministry of Defence (MoD). Mazagon Dock is primarily engaged in constructing and repairing warships and submarines for MoD and other types of vessels i.e. cargo ships, multipurpose support vessels, barges and border outposts, tugs, dredgers, water tankers, etc. for commercial clients.
Strong order book provides revenue visibility: Currently, MDSL has strong order book of around Rs. 54,074cr that provides revenue visibility for long-term. Order book comprises of four P-15 B destroyers, four P-17A stealth frigates, repair and refit of a ship, four Scorpene class submarines and one medium refit and life certification of a submarine.
Government's focus on indigenization to boost Indian defence: MDSL's focus on indigenization under 'Make in India', 'Atmanirbhar Bharat', etc. will be a key positive for growth. Recently, the government has taken steps to ban 101 defence items, which clearly indicates government's focus on indigenization to promote and create big opportunities in Indian defence sector. Going ahead, it would be beneficial for companies like MDSL.
Plans to diversify revenue: MDSL intends to foray into segments like exporting its products, focus on ship repair facility and also enhancing infrastructure & manufacturing capacity that would help the company to diversify its revenue in future.
Outlook & Valuation: In terms of valuations, the pre-issue P/E works out to 6.1x FY20 earnings (at the upper end of the issue price band), which is lower vs. peers like Garden Reach Shipbuilders and Cochin Shipyard (trading at 12.2x and 6.6x of its FY20 earnings, respectively). Further, MDSL has healthy ROE of ~16% coupled with highest dividend yield (7.4%) and higher cash on balance sheet among its peers. Hence, considering the above positive factors, we recommend SUBSCRIBE to the issue with a long-term horizon.