52% stock fall ahead? PSU multibagger Cochin Shipyard gets 'Sell' rating from Kotak; here's why

Cochin Shipyard Ltd shares, which hit a record high recently on signing of master ship repair agreement (MSRA) with US Navy, has received a 'Sell' call from Kotak Institutional Equities as uncertainty prevails regarding IAC-2 (Indigenous Aircraft Carrier) order. Any clarity on IAC-2 would be the biggest catalyst for the stock, Kotak said.

Kotak said with agreement with the US Navy and establishing of International Ship Repair Facility (ISRF) will help Cochin Shipyard gain a foothold in the $2.5-3 billion US defence ship repair market. But it sees see the MSRA as only the first step -- a technical prequalification, as Cochin Shipyard would still have to compete with multiple domestic and international shipyards for orders.

"While ship repair remains a key growth driver for the company, the main focus remains the IAC-2 order for which uncertainty continues. We retain our SELL rating with an unchanged fair value of Rs 540," it said.

Kotak's fair value for the stock suggests a 52 per cent downside for the stock at Tuesday's closing price of Rs 1,130.80. The stock is up 66 per cent in 2024 so gar and 365 per cent in the past one year.  

Cochin Shipyard would  have to compete commercially with two other Indian shipyards— L&T’s Kattupalli Shipyard and Mazagon Dock Shipbuilders, both of which also have an active MSRA with the US Navy, along with a host of other shipyards from various countries in the Indo-Pacific that could potentially have a similar agreement with the US Navy, Kotak said.

Kotak said the new international ship repair facility highlights Cochin Shipyard's technical prowess. Cochin Shipyard expects ship repair to be a key growth driver and targets to increase its ship repair revenue from Rs 560 crore in FY2023 to Rs 1200 crore in FY20206E (28 per cent CAGR).

"This MSRA could help in getting new orders. Cochin Shipyard has also recently inaugurated a new International Ship Repair Facility (ISRF), with capabilities to handle multiple complex ship repairs simultaneously, which, in our view, puts the company in a strong position among Indian shipyards," it said.

Beyond ship repair, the potential IAC-2 order remains the key focus area for the company. In its Q2FY24 earnings call, the Cochin Shipyard management indicated that a repeat IAC order (IAC-2) is very close to being considered by the Defence Acquisition Council.

"However, multiple Defence Acquisition Council meetings have taken place since then with no approvals for IAC-2; hence; uncertainty prevails. Cochin Shipyard's pipeline at end-Q3FY24 was down to Rs 9,000 crore from defence and non-defence customers. This is significantly below Rs 16,000 crore in Q1FY24. CSL has also lost three recent contracts to other shipyards. These all indicate muted near-term ordering in the next 12 months," Kotak said.

That said, the brokerage believes that the medium-term pipeline remains steady for Cochin Shipyard at Rs 84000 crore.