After 291% gains in 1 year; this defence PSU gets a ‘sell’ call: Check details

After 291% gains; this defence PSU gets a ‘sell’ call: Check details

Amid all the buzz around PSU stocks which have performed exceedingly well over the past few years due to the central government’s focus on strengthening the space, domestic brokerage ICICI Securities has retained its ‘Sell’ call on the defence PSU stock which has zoomed 291 per cent in the last one year. Not only the sell rating has been continued but it sees a potential downside of a significant 72 per cent.

The brokerage has retained its sell after the PSU company released its quarterly numbers last week.

Any guess on the stock? The stock which is on the radar for a ‘sell’ view is Mazagon Dock Shipbuilder. And this is despite the company posting a better-than-expected Q4FY24 show. The higher year-on-year margin expansion at the company which came in at 16.9 per cent as against 10.1 per cent during the same period last year was aided 
by refund of LD charges, operating leverage advantage, lower subcontracting and other
Expenses. With the order book at Rs 38,500 crore, the company has planned capex of Rs 2500-3000 crore over the next 3-4 years to develop infrastructure facility.

‘Further, management is expecting FY25 to be the peak revenue booking year of the current orderbook; margins are likely to remain at an elevated level, added the report.

Limited upside

Despite the big-ticket potential orders in the medium term, the brokerage expects limited EPS growth as current order book is in peak execution stage and there is expected meaningful contribution from new orders once the current order book is exhausted.

Risk-reward unfavorable in the stock despite factoring all available opportunities

Despite order inflow opportunity to the tune of Rs 1,20,000 crore envisaged for the company for the next 5-7 years, there is no clarity around ordering/ execution timelines. Also, there is risks on account of depleting current order book and considerable uncertainty around the ordering timelines of the Indian Navy’s key procurement programmes. Also, as the budgetary allocation for the naval fleet  in the interim budget for FY25 is stable, fresh ordering is unlikely in FY25. So, as the EPS is expected to be range bound at Rs 80-110/share from FY25-FY32E, the brokerage continues with its ‘sell’ on the counter with a target of Rs 900, revised from the earlier pegged target at Rs 880.

The brokerage maintained that factoring in the potential orders of P75, P75I and next-gen destroyers, and margins at an elevated level in the near term, the positives have already been factored in the stock price.

Key risks

However, the key risks cited by the brokerage for the stock are higher than expected  margin, higher than expected order value and repeat order of frigates which it has not accounted for.