Mazagon Dock Shares Slump 26% From 52-Week High—What Led To The Rout
Analysts predict a massive downside, but is the street finally catching up with premium valuations?
Multibagger defence stock Mazagon Dock Shipbuilders Ltd. continued to be in focus after the stock hit an intraday low of 9.4% in Tuesday's trading session after seeing a 5% decline a day before.
During the past month, the counter has remained under pressure with the stock price falling 19%. It has fallen 26% from the 52-week high of Rs 5,860 per share. This is in contrast to its 12-month returns of 131% and a surge of 14 times in the last three years.
Robust Q1 Results Fail To Arrest Decline
Mazagon Dock Shipbuilders Q1 FY25 Highlights (Cons, YoY)
Revenue up 8.48% to Rs 2,357 crore (Bloomberg estimate: Rs 2,933 crore)
Ebitda rises 274% to Rs 642.3 crore (Bloomberg estimate: Rs 420 crore)
Margin expands 1,934 basis points to 27.2% (Bloomberg estimate: 14.30%)
Net profit rose 121.4% to Rs 696.1 crore (Bloomberg estimate: Rs 491 crore)
Mazagon Dock clocked in its highest ever Ebitda margins at 27.2% aided by earlier than expected deliveries of ships ahead of schedule.
The company continues to maintain a similar trajectory as the previous fiscal for its overall margin levels during the current financial year. As of June 2024, the total orderbook stood at Rs 36,839 crore.
However, despite the robust results, brokerages remain bearish on the stock. ICICI Securities has maintained its 'sell' rating with a target price of Rs 1,165, which implies 73% downside from the current levels.
Bearish Outlook Triggers Rout
ICICI Securities said that Mazagon Dock Shipbuilders stock is overvalued at the current market price. “Despite factoring in the potential orders of P75 (three additional submarines), P75I and next-gen destroyers, and margins at an elevated level in the near term, we believe the stock is overvalued at the CMP,” the brokerage firm said in the note.
Even though ICICI Securities raised the target price of Mazagon Dock Shipbuilders stock to Rs 1,165 apiece from Rs 900 earlier, it implies a massive downside of 77% from Friday’s close.
The brokerage expect high margins to sustain until fiscal 2026-27 estimates as major deliveries are planned over the next two-to-three years.
However, what stood out in the note was its expectation that once the company starts executing new orders, its revenue recognition is likely to be milestone based, and hence, Ebitda margin could taper off to 12-15% levels.
ICICI Securities' Bearish Stance Raises Questions
The steep 77% downside given by ICICI Securities for Mazagon Dock is not a one-off. The brokerage has maintained its bearish stanch over the last couple of quarters despite the strong rally in the Mazagon Dock stock. This leads to a couple of questions:
Is street finally catching up with the premium valuations or its the stock correction which is forcing investors to consider the downside target set by the note?
Are the analysts factoring in order inflow growth beyond March 2027 as it expects Ebitda margins to taper off at 12-15% levels?
What would be the growth rates post the execution of the orders and new orders in place?
Management Outlook For FY25
Expected to deliver one destroyer, one frigate, and one submarine in the fiscal 2024-25.
Plans to bid for eight next-generation corvettes going forward.
Targeting higher revenues than past fiscal, awaits second quarter results for more clarity.
Expect margins to continue in a similar range as the previous fiscal.
