The stock of the recently-listed Cochin Shipyard, India’s most profitable shipyard company under the ministry of shipping, surged 11 per cent on Tuesday after it announced that it has emerged as the lowest bidder to supply eight vessels to the Indian Navy worth Rs 5,400 crore.
The company will start delivering two vessels every year after 42 months of concluding all formalities. Cochin Shipyard will start receiving an advance from the Navy once milestones such steel cutting before the final delivery of the vessel are accomplished.
The order would further accen tuate the revenue visibility for the medium term and may help improve the company’s average margin. At the time of filing of initial public offer this July, the company had an order book of Rs 3,000 crore, which translates into an order-to-revenue ratio of 1.5 based on FY17 financials.
The new order of Rs 5,400 crore will further expand its order-to revenue ratio. Typically, the Street starts ascribing superior price-earnings multiple to a company when there’s an improvement in order-to-revenue ratio (if order book doesn’t have slowmoving orders).
Cochin Shipyard is currently trading at 24 times of its FY17 earnings, compared with 18.6 times at upper price band of its IPO price. The PE of Cochin Shipyard is equivalent to Bharat Electronics which too gets a large share of its revenues from the defence sector.
After the current order, the company will still have another Rs 6,000 crore of bid yet to be opened from the Navy, coast guard and ministry of home affairs, besides more than a Rs 2 lakh-crore of prospective bid pipeline in the next couple of years.
Cochin Shipyard gets 85 per cent of its revenues from the defence sector, and 80 per cent of its order book is from the defence sector. The company is building India’s first indigenous aircraft carrier (IAC), Viraat, and expanding its facilities to bid for more advanced and heavier second IAC.