Defence is an essential part of any country’s security. With rising geopolitical tensions and security threats around the world, increasing defence expenditure is crucial. Defence companies need to improve their expertise, technological advancements, and manufacturing to ensure they have an edge over their competitors. In this article, we will focus on Cochin Shipyard, which operates in the shipbuilding sector.

Cochin Shipyard was established in 1972 and is overseen by the Ministry of Ports, Shipping, and Waterways. A team of experts chose Cochin as the location for the country’s first greenfield yard. It specializes and is a market leader in vessel construction, refits, and repairs of various types of vessels. It including ship life extension and periodic upgrades.

The Shipbuilding division manufactures a diverse range of products, including oil tankers, bulk carriers, electric passenger ferries, passenger vessels, tugs, aircraft carriers, pollution control vessels, and more. Meanwhile, the Ship Repair division maintains and services a wide range of vessels, including tankers, bulk carriers, aircraft carriers, defence vessels, and commercial and specialised vessels.

As of March 31, 2023, it had built and delivered 21 large vessels, 35 offshore vessels, 93 small and medium-sized vessels, and 31 defence vessels. Their manufacturing capacities are across India such as Cochin, Kolkata, Mumbai, Udupi, Port Blair and Howrah.

They were involved in key reputational projects, such as India’s first indigenous aircraft carrier, INS Vikrant, which was commissioned in September 2022.

Here’s an overview:

# Background:

1. Location: It is situated in Kochi, Kerala, on the southwestern coast of India.

2. Ownership: Cochin Shipyard is owned by the Government of India.

3. History: Established in 1972, it has grown to become one of the largest shipyards in India.

# Operations:

1. Shipbuilding: CSL is involved in the construction of a wide range of vessels, including tankers, bulk carriers, offshore vessels, and passenger ships.

2. Ship Repair: Besides building new ships, it offers repair and maintenance services for various types of vessels.

3. Facilities: The shipyard has modern facilities for fabrication, engineering, painting, and testing of ships.

# Key Projects:

1. Naval Vessels: CSL has been involved in the construction of naval vessels for the Indian Navy, including aircraft carriers, offshore patrol vessels, and fast patrol vessels.

2. Commercial Ships: It has also built numerous commercial ships for domestic and international clients.

3. Rigs and Platforms: CSL has experience in constructing offshore rigs and platforms for the oil and gas industry.

# Achievements:

1. ISO Certification: It is ISO 9001:2015 certified for Quality Management Systems.

2. Financial Performance: CSL has consistently shown strong financial performance over the years.

3. Expansion: The shipyard has undertaken expansion projects to enhance its capacity and capabilities.

# Future Prospects:

1. Diversification: CSL is looking to diversify its portfolio by entering into new segments such as LNG carriers, specialized vessels, and renewable energy projects.

2. Global Presence: It aims to increase its global presence by securing orders from international clients and participating in joint ventures and collaborations.

Growth Table

Segment Analysis:

Cochin Shipyard's revenue streams are diversified across multiple segments, with shipbuilding comprising 69.72% (a decrease of 28.62% YoY), ship repair at 22.22% (a decrease of 15.81% YoY), and other services at 8.06% (a decrease of 21.23% YoY) in FY23. As per the latest Q3FY24 report, the current order book stands at approximately Rs 21,500 crores, with ship repair orders contributing around Rs 800 crores.

Source : Tijori Finance

Source : Company Investor Presentation

Industry Overview:

The defense sector has witnessed significant transformations recently, with the Indian Government planning to allocate approximately US $130 billion over the next 5 to 7 years to bolster fleet capabilities across all armed services branches. The Ministry of Defence aims for a revenue of $25 million from defense and aerospace manufacturing by 2025, with exports targeted at around $5 billion.

Under the FDI route, modifications allowing up to 74% ownership through the automatic route (up from 54%) have been implemented. This facilitates foreign firms in establishing manufacturing units and gaining ownership and control. Exports have surged by 334% in the past 5 years, with India exporting to over 75 countries through collaborative efforts. These endeavors foster technological exchange and advancements, enhancing the sector's capabilities.

Additionally, significant defense projects contribute to domestic manufacturing, job creation, and bolstering national security. Such initiatives aid India in achieving self-sufficiency, reducing reliance on external sources for aircraft and warship procurement.

Financial Performance:

In FY23, Cochin Shipyard reported revenue from operations at Rs. 2,364.55 crore (a 25.89% decrease from FY22's Rs. 3,190.95 crore) and net profits declined by 45.96% to Rs. 304.71 crore from Rs. 563.96 crore in FY22. An exceptional item of Rs. 61.81 crores in FY23, related to a prior-period error recognized during the year, impacted the results.

Profitability Metrics:

Operating Profit Margins (OPM) decreased to 20.31% in FY23 from 25.51% in FY22, and Net Profit Margins (NPM) decreased to 11.85% from 16.33% over the same period. The decline in margins was attributed to increased subcontract and other direct expenses, alongside rising employee costs as a percentage of revenue.

Return Ratios:

Return on Equity (RoE) in FY23 was 5.89%, down from 13.39% in FY22, and Return on Capital Employed (RoCE) decreased to 7.96% from 17.08% in FY22. These decreases were primarily due to lower net profits impacting overall returns.

Debt Analysis:

Cochin Shipyard has maintained a low debt-to-equity ratio, standing at 0.13. However, the interest coverage ratio declined to 9.24 times in FY23 from 15.41 times in FY22, reflecting the impact of decreasing net profits despite reduced interest costs.

Future Outlook:

The company aims for a turnover growth of 12-15% by FY25, with shipbuilding margins expected to be around 18-19%. Ongoing and upcoming projects, such as maintenance work on INS Vikrant and orders for naval platforms and vessels, are expected to contribute positively to future revenues. The completion of new facilities like the dry dock and initiatives in subsidiary companies further enhance growth prospects.

In conclusion, Cochin Shipyard's fundamental performance remains strong, with promising prospects in the defense sector and strategic initiatives driving growth and sustainability.