Buy to sell: Why Kotak downgraded Cochin Shipyard despite strong returns
While Cochin Shipyard shares have gained over 120 per cent in 2023, Kotak has downgraded its rating for the stock to 'sell'.
In Short
- Kotak Institutional Equities issues 'sell' recommendation for Cochin Shipyard
- Cochin Shipyard's stock has surged over 127% in 2023
- Kotak foresees a 10% reduction in the repeat IAC-1 order.
Kotak Institutional Equities has issued a 'sell' recommendation for Cochin Shipyard Ltd, despite the stock's glory run in 2023. Shares of the company have gained over 127 per cent since the beginning of the year and in a year, the stock has surged 205 per cent.
However, the brokerage believes that the stock's current valuation is overly optimistic, factoring in potential orders for indigenously-made aircraft carriers (IAC).
Recent positive comments from the Chief of Naval Staff regarding a possible repeat IAC order have fueled market enthusiasm.The Indian Navy received its first indigenously-built aircraft carrier (IAC-1) from Cochin Shipyard in July 2022, highlighting the company's manufacturing expertise.
But Kotak Institutional Equities argues that this expertise may limit the possibility of the repeat IAC order going to another entity.
The change in sentiment regarding the repeat IAC order could be influenced by the expected retirement of one of India's two aircraft carriers, INS Vikramaditya, in the next 10-15 years. Additionally, China's recent advancements in naval capabilities, including far-sea exercises with its indigenous carrier and the imminent commissioning of its third aircraft carrier, may be contributing factors.
Kotak anticipates a 10 per cent reduction in the value of the repeat IAC-1 order and expects it to be smaller than the previously planned IAC-2.
The brokerage also believes that the order is unlikely to experience the cost overruns seen with IAC-1, which suffered a six-year delay and a six-fold cost increase.
Changes in margin norms may further limit Cochin Shipyard's top-line revenue from the repeat IAC-1 order. The estimated order value of Rs 21,000 crore would represent less than 7 per cent of the naval fleet's capital expenditure over the next seven years, according to Kotak's assessment.
‘Buy’ to ‘Sell’
As a result, Kotak has revised its fair value for Cochin Shipyard stock to Rs 990 from Rs 740, accounting for the potential repeat order at a lower cost and a seven-year execution period.
They have downgraded their recommendation from ‘buy’ to ‘sell’ due to their belief that the current market price is factoring in additional boosts, such as a larger order size or additional IAC orders, for which further clarity is needed.
At around 1:30 pm, Cochin Shipyard shares were up 5.39 per cent to 1,207 apiece.
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