Mazagon Dock investors should not get swayed by narrative and newsflow

Mint

18-06-2025

Mazagon Dock Shipbuilders Ltd's shares rose 5% on Tuesday to ₹3,306. This is the first significant bounce after the stock dropped almost every day from its all-time high of ₹3,775 seen in May, just before the dismal March quarter (Q4FY25) results were declared.
What might have rekindled some interest in the stock is JM Financial's note indicating a medium probability that the stock may be included in the MSCI India Index. The index rebalancing may be announced on 7 August.
Investors must be cautious of the news flow and narrative surrounding the Mazagon stock, which is being viewed as a defence sector play. However, this does not necessarily mean superior profitability versus the global shipbuilding industry. Management has clarified that their sustainable profitability margin will be in line with the global shipbuilding industry at about 15% at the profit before tax (PBT) level.
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Management has guided for about 10% growth in revenue for FY26, which comes to about ₹12,500 crore and PBT of ₹2,000 crore based on the margin guidance. After accounting for corporate tax at 25%, net profit after tax should be about ₹1,500 crore. But it must be noted that Mazagon's PBT margins for FY25 and FY24 are in the range of 23-24%, far above the guidance of 15%. So, it is likely that the company may well report higher margins in FY26, too.
Nirmal Bang Institutional Equities has estimated Mazagon's FY26 net profit at ₹2,904 crore. At the current market capitalization of ₹1.3 trillion, this translates into a price-to-earnings ratio of around 45x, which isn't cheap. Perhaps then, the Street is looking at a narrative of how the order book is going to expand multifold.
No guarantees
Mazagon expects the order book to grow from ₹32,000 crore at FY25 end to ₹1.3 trillion by FY26 on the back of contracts for additional submarines in the Project 75-AS and Project -75 (I) categories. The order book to annual revenue ratio translates into almost 10x FY25 sales, which means strong revenue visibility.
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Mazagon has the technical capabilities to execute a large order book. But it does not guarantee healthy profitability, going by the recent history of provisioning for losses in certain contracts. The company anticipates losses in the contracts for the supply of fast patrol vessels (FPV) to the Indian Coast Guard and also to Denmark. As a result, its provisions have jumped up to ₹747 crore in FY25 from ₹169 crore in FY24. The extent of actual loss will be reviewed in the future, and the provisions will be adjusted accordingly.
Amid this, Mazagon continues to focus on the profitable segment of submarines, wherein it has expanded capacity from the construction of 6 submarines to 11. Besides submarines, it will also be able to build 10 major warships as it has acquired land for ship projects. The additional facilities would require capital expenditure of ₹4,000 crore.
Even though Mazagon has an agreement with the US Navy for repairing ships, it does not have the infrastructure to handle large ships. So, it will only look for contracts to repair ships that are compatible in size with its shipyard.
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More order announcements are likely in the future, but there could be a long gap before order wins translate into actual revenue. For e.g. the delay in the design and finalization of submarine models would mean Project 75-AS revenues would begin reflecting in revenue only in FY28.
Investors would do well to ignore the noise and focus on the valuation that captures most of the near-term positives.