ICICI Securities sees over 10% upside in Mazagon Dock Shipbuilders

In the current calendar year, ICICI Securities sees over 10 per cent upside in Mazagon Dock Shipbuilders despite an over 200 per cent rally in the state-owned firm on Dalal Street. The company's shares went to 890.05 on December 6, 2022, from Rs 278.90 on December 31st, last year.

Mazagon Dock Shipbuilders is the top performer of 2022 in the PSU pack, with a rally of 219 per cent. It is followed by Bharat Dynamics up 145 per cent Hindustan Aeronautics up 112 per cent Bank of Baroda up 112 per cent and Indian Bank up 110 per cent. The company is engaged in the construction and repair of warships and submarines for the Ministry of Defence, along with other vessels for commercial purposes. Mazagon Dock Shipbuilders is India's only shipyard to have built destroyers and conventional submarines for the Indian Navy.

Over the last 10 years, revenue increased at 10.5 per cent CAGR over FY 13 -- 22 while EBITDA and profit after tax increased to 3.6 per cent and 3.9 per cent CAGR, respectively, during the same period.

ICICI Securities has set a target price of Rs 1,025 for Mazagon Dock Shipbuilders, showing an upside of 15 per cent from the current market price. The brokerage said in a report on December 6 that it downgraded the recommendation to buy to hold the stock from Buy to Hold. It expects Mazagon Dock Shipbuilders to deliver earnings CAGR of 24 per cent in FY 22 -- 24 E, which is led by 18 per cent revenue CAGR and sustainable margins.

It said that the strong order backlog at Rs 42,000 crore gives strong revenue visibility. The order book contains three major contracts - Project 17 A frigates, Project 15 B destroyers and Project 75 submarines. ICICI Securities said the company is well placed to benefit from the Indian Navy's big procurement plan for the next three to four years.

On the other hand, the brokerage prefers Bharat Electronics BEL in the defence space with a target price of Rs 135. The company's shares traded at Rs 106 in the morning trade on December 7, while the benchmark BSE Sensex was down 203 points, or 0.33 per cent, at 62,422.

It believes that a strong order book and healthy pipeline in defence electronics offer a strong visibility for Bharat Electronics and that they diversify into non-defence to help improve margins.