Profit Margins Expected To Decline, Yet New Defense Orders May Improve Outlook

Key Takeaways

• Declining profit margins from shifting to lower-margin orders and potential revenue delays create risks for future profitability.
  
• Ambitious capital expenditures and indigenization efforts could strain finances if increased revenues do not offset costs timely.
  
• The company foresees promising revenue growth and margin enhancement through new orders, international collaborations, and increased production efficiency from CapEx investments.

Catalysts

Engages in building and repairing of ships, submarines, vessels, and related engineering products in India and internationally.

• Mazagon Dock Shipbuilders Limited may face declining profit margins in the future due to a shift from high-margin legacy orders to new orders with expected margins of 12-15% at the PBT level. This could impact their net margins and overall profitability.
  
• The uncertainty surrounding the finalization and execution timeline of the anticipated P75(I) and other large submarine orders may result in delayed revenue recognition and potential revenue shortfalls if orders are not secured promptly.
  
• The substantial increase in provisions for inventories, which may not be utilized, and potential liquidity damages linked to project timelines highlight financial risks that could affect future earnings.
  
• The ambitious capital expenditure plans, including developing new shipyard facilities and a floating dry dock, could strain the company's finances and impact earnings if the expected increase in revenues doesn't materialize in time to offset these costs.
  
• The indigenization of production processes brings uncertain costs, as initial investments are required, and it is unclear how these changes will affect future production costs and margins, potentially affecting future profit margins.

Mazagon Dock Shipbuilders Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mazagon Dock Shipbuilders's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.1% today to 19.0% in 3 years time.
• Analysts expect earnings to reach ₹24.3 billion (and earnings per share of ₹99.26) by about February 2028, down from ₹27.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.3x on those 2028 earnings, up from 32.7x today. This future PE is lower than the current PE for the IN Aerospace & Defense industry at 60.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.79%, as per the Simply Wall St company report.

Mazagon Dock Shipbuilders Future Earnings Per Share Growth

Risks

• Mazagon Dock Shipbuilders Limited is optimistic about receiving new orders, specifically for additional submarines and large platforms like Corvettes and Project 75(I), which could bolster future revenue streams.
  
• The company has indicated that for the next financial year, margins could remain higher than the normalized industry margins of 12% to 15%, suggesting sustained earnings strength from existing orders.
  
• Ongoing export efforts and potential for international collaborations, such as those mentioned with Malaysia, could open new revenue avenues and positively impact the company's future revenue profile.
  
• Pending projects, such as the Scorpene submarine AIP integration and the next-generation destroyers, if materialized, could further secure robust revenue growth in the medium term.
  
• The company's extensive CapEx plans, notably the developments at the Nhava Shipyard, may provide enhanced production capabilities and efficiency over the long term, potentially improving future profit margins.

Valuation

• The analysts have a consensus price target of ₹1867.167 for Mazagon Dock Shipbuilders based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2757.0, and the most bearish reporting a price target of just ₹582.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹127.9 billion, earnings will come to ₹24.3 billion, and it would be trading on a PE ratio of 44.3x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of ₹2230.2, the analyst price target of ₹1867.17 is 19.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.