Buy This Miniratna Defence Sector Stock, Shares Can Surge 26%, Gave 81.12% In 3 Months

Axis Direct has recently published a report on Mazagon Dock Shipbuilders Ltd. (MDL has recommended investors buy the stock of the company for a target price of Rs 560 apiece.

MDL is engaged in the construction and repair of warships and submarines for the Ministry of Defence (MoD) to be used by the Indian Navy along with other vessels for commercial clients. MDL is India's only shipyard to have built destroyers and conventional submarines for the Indian Navy. It is a small cap Miniratna stock having a market capitalization of Rs 21,170.73 crore.

According to the brokerage's estimated target price, the stock has the potential to gain 26% if the stock is purchased at the current market price.

Stock Outlook

The current market price of the company's stock is Rs 445.05 apiece, trading 6.37% up from its previous close. The 52-week low of the stock record on 24 February 2022 is Rs 225.40 apiece, and the 52-week high recorded on 16 September 2022 is Rs 457.40 apiece.

Returns on Investments

In a week, it gave 5.52% positive return. In the past 1 month, the stock gave nearly 38.92%, whereas, in the past 3 months, it gave 81.12% positive return. Over the past 1 year, it gave 72.92% positive return. It was listed on the stock exchange in October 2020, since then it has delivered 158.21% positive returns.

Business Update

The company has an order backlog of Rs 43,343 crore as of August 2022 (6.4x TTM revenues), of which Rs 19,795 crore of backlog is in Project-17A (Nilgiri class frigates), Rs 18,897 crore in Project-15B (Visakhapatnam class Destroyers), Rs 4,400 crore in Project-75 (Kalvari class submarines). Over the last 10 years, MDL's revenue increased at 10.5% CAGR over FY13- 22 while EBITDA and PAT increased 3.6% and 3.9% CAGR, respectively, during the same period due to a fall in operating margins.

Buy for a target price of Rs 560 apiece

MDL's execution capability is set to improve in the coming period led by increasing indigenisation of platforms and sub-systems. Next two year's revenue CAGR is expected at 18.2% vs. 7.5% CAGR in FY19-22. FY24E margin is set to improve substantially led by positive operating leverage "We initiate coverage under the Stock Tales format with a BUY rating Target Price and Valuation: We value MDL at Rs 560 i.e. 14x FY24E EPS," the brokerage said.

Key triggers for future price performance

Total defence equipment procurement budget was at Rs 1.24 lakh crore for FY23E of which Rs 84,598 crore (68% of procurement budget) has been kept for purchasing locally produced weapons and systems to boost self-reliance in the defence sector. The defence procurement budget is likely to increase considerably for FY24E with the share of imports coming down further.

With an already strong order backlog of Rs 43,343 crore as of August 2022 (6.4x TTM revenues), MDL is well placed to benefit from Indian Navy's big procurement plan for the next three to four years.

Indian Navy's major projects in the pipeline are next generation destroyers, next generation frigates, conventional submarines and next generation corvettes. The estimated cost of these four projects is ~Rs 1.8 lakh crore. Thus, it provides a huge opportunity for MDL given its strength across building submarines and major warships (mainly destroyers and frigates).

Out of 1238 sub-systems/components notified for indigenisation, 144 such components are used in submarines & warships manufactured by MDL. Execution is expected to pick up in the coming period led by indigenous manufacturing of large platforms (submarines, surface warships) and the associated sub-systems/components.

Disclaimer

The stock has been picked from the brokerage report of ICICI Direct. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.