Defence stocks are once again gaining momentum on Dalal Street following expectations of increased government spending. This optimism is driven by escalating geopolitical tensions with neighbouring countries, especially Pakistan and Bangladesh, prompting higher defence equipment procurement for border security.
Despite earlier outperforming the market with strong returns, defence stocks have recently corrected over 50%, leading to more reasonable valuations. With India’s push towards self-reliance and greater capital expenditure in defence manufacturing, these stocks are expected to rebound. Additionally, rising defence budgets in the European Union may result in fresh international orders for Indian defence firms.
Cochin Shipyard: A Key Player with Solid Prospects
Cochin Shipyard, a government-owned enterprise (72.9% stake), has grown into a major shipbuilding and repair company. Known for projects like the INS Vikrant aircraft carrier, it has collaborated with major global firms including Rolls-Royce Marine, GTT, and IHC Holland BV.
The company earns 73% of its revenue from shipbuilding and the remaining 27% from ship repair. In FY24, shipbuilding revenue rose by 49% to ₹26.4 billion, while ship repair jumped 78% to ₹10.1 billion. Total revenue climbed 56% to ₹36.5 billion, resulting in a net profit of ₹8.1 billion—up 243% from FY23.
With a robust order book worth ₹199.6 billion as of FY24, 73% of which is defence-related, Cochin Shipyard has strong visibility. The order book-to-bill ratio exceeds 5x, indicating healthy business continuity.
FY25 Slowdown but Long-Term Outlook Positive
In the first nine months of FY25, revenue grew at a slower pace of 19%, as shipbuilding growth decelerated. The company’s margins also dropped, with EBIT margins at 16.4% compared to 22.5% the previous year. However, ship repair maintained a high margin of 38%. Net profit was marginally up at ₹5.6 billion.
New Contracts and Strategic Diversification
Cochin Shipyard continues to diversify beyond defence. Its order book reached ₹217.84 billion by Q3 FY25, five times its trailing revenue. However, 65% of the orders still come from government contracts, exposing the company to concentration risks.
Recent wins include a ₹12 billion contract for refurbishing the INS Vikramaditya and an international order to build two service vessels, with potential for four more. The company also signed an agreement with the US Navy for ship repairs and commissioned new facilities to boost capacity.
It is expanding into new areas like commercial vessels, cruise ships, yachts, and inland shipping. It is also exploring partnerships for offshore rigs and green maritime initiatives, including India’s Green Tug Transition Program.
Challenges Ahead
While long-term demand remains solid, the pace of defence order inflows has slowed. The near-term order pipeline is ₹78 billion, and the medium-term outlook has been revised to ₹300 billion from the earlier ₹500 billion. Project delays or slow execution could impact earnings.
Cochin Shipyard continues to demonstrate strong fundamentals with improved margins, rising profits, and a well-diversified order book. While short-term growth has moderated, the company remains well-positioned to benefit from India’s defence spending and export opportunities. Investors should consider risks related to order concentration and execution delays before making investment decisions.
