Shipbuilding stocks rebound after three-day slide; Mazagon Dock gains 6%

After a three-day decline, shipbuilding stocks are rebounding in today’s intraday trade, with Mazagon Dock Shipbuilding gaining 6%, while Cochin Shipyard and Garden Reach Shipbuilders have seen increases of up to 5%.

Recently, defence stocks experienced a sell-off after a sustained period of gains, during which they reached multiple peaks and provided significant returns to shareholders. This has led to some profit booking in the sector.

However, the sell-off further was intensified following a report from ICICI Securities, released on August 16, where it projects the shares of Mazagon Dock and Garden Reach Shipbuilders could potentially fall by over 70% from their current levels.

Even though the brokerage has lifted the target price on Mazagon Dock to ₹1,165 from ₹900 earlier, that still implies a potential downside of 73% from Tuesday's closing levels. For Garden Reach Shipbuilders, the brokerage has a price target of ₹515 on the stock, which is a 71% downside from Tuesday's closing price.

The brokerage anticipates that Mazagon Dock’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin will remain strong in FY2025 and FY2026, with planned deliveries potentially coming ahead of schedule. However, once new contracts are completed, ICICI Securities expects the margins to decrease. In the June quarter, Mazagon Dock reported an EBITDA margin of 27.3%, up from 7.9% the previous year, thanks to reduced operating expenses.

For Garden Reach, ICICI Securities forecasts an earnings per share (EPS) range of ₹55 to ₹65 through FY2032. The brokerage also anticipates delays in executing orders from Bangladesh due to ongoing geopolitical tensions.

Criticism towards the report

The report has also sparked some flack on social media. Deepak Shenoy, CEO of Capitalmind, highlighted the brokerage's track record in a post on X (formerly Twitter), pointing out that ICICI Securities had released four reports over the past year, each predicting a 60%–77% downside for Mazagon Dock Shipbuilders shares. However, these predictions have been consistently proven wrong, as the stock has continued its upward trend.

“What do you do when you own a stock, and someone sends you a SELL report with “77% downside”? You check to see what they've said earlier. Case in point: Mazagon Dock (we own this) ICICI Sec puts out a sell rating, saying boss stock will fall to 1165 (77% down from 5000),” Shenoy said in a post on X.

He further noted that in May 2024, when Mazagon Dock Shipbuilders' share price was trading around ₹3,300, ICICI Securities issued a ‘sell’ rating with a target price of ₹900, predicting a 73% downside. Despite this, the stock price has risen by 50% since then.

Meanwhile, in July, Nirmal Bang downgraded its rating on the defence sector to 'Sell,' adjusting the ratings and lowering target prices for most stocks due to concerns over expensive valuations.

However, the long-term outlook for the Indian defence sector remains positive. The government is intensifying its focus on indigenisation, aiming to export defence products worth USD 5 billion by 2025 and increasing the budget allocation for the sector. India, which has the fourth-largest defence budget globally, allocated USD 72.6 billion for the fiscal year 2023–24.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.