Defence PSU stock: Sell Cochin Shipyard, says Kotak as it shares key concern

Kotak Institutional Equities has retained its sell call on Cochin Shipyard, saying the defence PSU's margins are normalising and that the pipeline remains uncertain. The domestic brokerage, which has a 'Sell' rating on Cochin Shipyard, said the PSU's Q2 results came in line with its expectations, as steady execution was offset by lower margins and higher D&A expenses.

"Ship repair margins came in at 30 per cent, implying normalisation of margins as the impact of the one-off INS Vikrant order is now behind us. Lack of major defense orders in pipeline and uncertainty around IAC-2 implies low potential for a major order win over the near term and remains a key concern for the stock," it said.

The brokerage has suggested a revised fair value of Rs 800 for the index, as it roll forwarded its earnings estimates September 2026. On Friday, the stock was trading 4.98 per cent lower at Rs 1,448. The multibagger stock is up 113 per cent in 2024 so far and 177 per cent in the past one year. Kotak's target price suggests a 45 per cent downside over the prevailing stock price.

Kotak said clarity on IAC-2 order remains the key catalyst for Cochin Shipyard. A lack of any movement on the matter for the last one year indicates a further delay in timelines, it noted.

"Beyond IAC-2, there have not been any major defense orders, with YTD order wins, driven largely by commercial shipping orders; the near-term pipeline remains muted at Rs 7,800 crore. The medium-term pipeline has also been lowered to Rs 30,000 crore (from Rs 50,000 crore)," it said.

Out of the total Rs 3 lakh crore-pipeline identified by the Indian Navy, Kotak only sees a landing platform dock (Rs 20,000 crore) as a key project for Cochin Shipyard.

Kotak said Cochin Shipyard's H1FY25 margins stood at 20.9 per cent against a full-year guidance of 17-19 per cent, implying further normalisation of margins in the coming quarters, as the one-off ship repair orders are now behind the company.

Furthermore, after the commissioning of the new ship repair and dry dock facility, the company expects a significant rise in its depreciation in H2FY25. As a result, Kotak expects Cochin Shipyard to see no major improvement in profits in FY2025.