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Saturday, 26 September 2020
CM RATING 48/100

Mazagon Dock Shipbuilders

Siting on strong order book

The current order book of Rs 54074 crore is 11.7 times of FY20 revenue. However, execution is subject to several risks

Mazagon Dock Shipbuilders (MDL), a public sector undertaking under the Ministry of Defence (MoD), is engaged in the construction and repair of warships and submarines for use by the Indian Navy and other vessels for commercial clients. The company was conferred with the 'Mini-ratna-I' status in 2006 by the Department of Public Enterprises.

The business operations of the company is divided into two divisions i.e. (i) shipbuilding and (ii) submarine and heavy engineering. The shipbuilding division of the company is engaged in building and repair of naval ships. The submarine and heavy engineering division of the company undertakes building, repair and refits of diesel electric submarines.

The shipyard of the company is strategically located on the west coast of India, on the sea route connecting Europe, West Asia and the Pacific Rim, a busy international maritime route.

MDL’s shipbuilding facilities currently comprise three dry docks, two wet basins, three slipways, production shops, assembly shops, module shop with painting chamber for integrated construction, sheet metal shop, pipe shop, machine and fitting shop, ship dry dock and dredging, electrical repair shop and instrumentation shop. MDL’s submarine division’s infrastructure includes shops for fabrication of frame, sub-section assembly and section formation, cradle assembly shop for structural and equipment outfitting and final assembly, one dry dock and submarine section assembly shop. The company has a maximum shipbuilding and submarine capacity of 40,000 DWT.

The company has completed the Mazdock Modernization Project, which comprised new wet basin, goliath cranes, module workshop, cradle assembly shop, store building and associated ancillary structures enabling integrated modular construction which would substantially reduce the build period. Post completion of the modernization project, the capacity of outfitting warships increased from eight warships to 10 warships since 2014 and submarine capacity has increased from six submarines to 11 submarines since 2016.

MDL also has a shore integration facility, which enables it to complete combat system integration off-site prior to on-board installation. It has also constructed a submarine assembly workshop which comprises of two bays and is equipped with two levels of EOT cranes as well as semi goliath cranes.

The company is also exploring the possibilities of developing a Greenfield shipyard at Nhava, Navi Mumbai with a ship-lift, wet basin, workshops, stores and buildings and a ship repair facility spread over an area of 37 acres. The Navi Mumbai Greenfield project is currently at consultancy level. MDL’s shipbuilding and submarine and heavy engineering divisions are both ISO 9001:2015 certified.

Since 1960, MDL has built a total of 795 vessels including 25 warships, from advanced destroyers to missile boats and three submarines. It has also delivered cargo ships, passenger ships, supply vessels, multipurpose support vessels, water tankers, tugs, dredgers, fishing trawlers, barges and border outposts for various customers in India as well as abroad. Some of the vessels built and delivered by MDL in the past include, six Leander class frigates, three Godavari class frigates, three corvettes, four missile boats, six destroyers, four submarines and three Shivalik class frigates for the MoD for use by the Indian Navy and constructed and delivered seven offshore patrol vessels to the Indian Coast Guard. The company has also fabricated and delivered jackets, main decks of wellhead platforms, process platforms and jack up rigs, etc.

While the shipbuilding division of the company is currently building four P-15 B destroyers and four P-17A stealth frigates and undertaking repair and refit of a ship for the MoD for use by the Indian Navy the submarine & HE division is currently building/ in the process of delivering four Scorpene class submarines under a transfer of technology agreement with Naval Group as well as one medium refit and life certification of a submarine for the MoD for use by the Indian Navy.

MDL recently entered a memorandum of understanding with BEL and HAL for the purpose of setting up of 150 MW grid connected solar power plants in ordnance factory estate on nomination basis under developer mode. Although, the company has decided to withdraw from the MoU and is awaiting approval from MoD, it cannot assure whether it will get such approval.

The company will not receive any proceeds from the IPO as it is an offer for sale by government of India (GOI), the promoters. The key objective of the offer is to carry out the disinvestment and achieve the benefits of listing the Equity Shares on the Stock Exchanges.


The company has established long track record in shipbuilding especially naval ships, refit of ships and ship repairing. MDL is India’s only shipyard to have built destroyers and conventional submarines for the Indian Navy. Since 1960 the company has built 795 vessels including 25 warships from advanced destroyers to missile boats and 3 submarines. The company is one of the initial shipyards in India to manufacture Corvettes (Veer and Khukri Class) in India.

The order book of the company as of July 31, 2020 stood strong at Rs 54074 crore, which includes products and services to be manufactured and delivered over the next eight years. Current order book for shipbuilding and submarines and heavy engineering comprise of three major shipbuilding projects and two submarine projects. Moreover, fixed portion of the contract is just about 45% with balance 55% being variable or cost-plus portion.

Moreover, the order book of the company at Rs 54074 crore was higher compared to Rs 26544 crore of Garden Reach Shipbuilders & Engineers (GRSE) and Rs 14393 crore of Cochin Shipyards (CSL).

The company has strong collaboration, as strategic partners, with leading defence shipbuilders such as Fincantieri, Italy for P17A project (next generation guided missile stealth frigates) and DCNS, France (Naval Group) for Scorpene submarines.

Strong government push for ‘Make in India’ programme across all sectors of defence manufacturing and the Defence Procurement Procedure, 2016 provides framework for encouragement of the same. Indian Navy in July 2015 announced an indigenization plan up to 2030 and the Indian industry is set to play a vital role in parts to meet the sophisticated needs of the armed forces. The MoD has also listed out the equipment which can be taken up for indigenization in the coming years and is encouraging all sectors of the industry to come forward and participate in indigenous development of weapons, sensors and other high-end equipment for the Indian Navy.


Capacity of the company to build ships (including warships and submarines) is up to 40000 DWT compared to 110000 DWT of Cochin Shipyard. Moreover, the company has no track record or experience of building large commercial ships like Cochin Shipyard. While MDL and GRSE largely focus on defence ships, CSL has got a mandate to build the country’s aircraft carrier to add to its strong experience of large commercial ships. Unlike CSL, MDL is not much focused on ship-repair and gets only about 3.5% of revenue from ship-repair.

A significant portion of the current order book has been awarded to the company by MoD on a nomination basis. With the liberalisation of the policy framework governing the defence sector in India, permitting both Indian and foreign companies to participate in defence procurement and manufacturing contracts, MDL may be required to participate in open competitive bidding processes. The competitive bidding process may require it to resort to price cuts to be able to win the contracts, which may not be awarded to it or may be split among competitors. Following an award, MDL may encounter significant expenses, delays, contract modifications, or even loss of such contract if its competitors protest or challenge contracts that are awarded to MDL. Moreover, new entrants may have extensive knowledge, competitive labour costs and other advantages and may successfully compete with MDL. They may also tie up with international competitors who may in turn utilize their overseas experience to compete in the Indian market. Moreover, on nominated contracts, too, the company has to split the total orders among its peer PSU docks with required capability alike that of ‘Project 17A’ where four ships are built by MDL and 3 are by GRSE.

Delays or cuts in funding can impact the timing of available funds or lead to changes in defence program content. Any reduction or unavailability of the funds available to the Indian Navy or specific projects that MDL is undertaking could have a material adverse impact on the company performance. Continued economic challenges may place pressure on GoI budgets and allocation of spending for defence procurement and manufacturing especially on long-gestation projects. Changing geo-political equations can shift defence spending to short-term urgent and tactical requirements and lead to delays on long term projects (most of MDL projects are long term projects).

MDL carries on its operations with technical collaborators, located in, countries, such as Russia, to which certain OFAC-administered and other sanctions continue to apply. For example, in relation to the P-15B destroyers, MDL is acquiring certain equipment from Russia

Building warship and submarine projects generally have long gestation periods due to technological and process complexities and are typically subject to delays due to stringent defence procurement procedures and delays in nominating, procuring and / or finalizing the specifications of the vessel and the weapons, sensors and other equipment by its customers and collaborators. Due to such long gestation periods, project related costs and revenue estimates of the company may vary to a large extent from the actual costs incurred and the actual revenues generated from such projects. Any adverse variance in the actual cost incurred and the revenues generated in comparison to the cost and revenue estimates may reduce profitability of the company.

The business is cyclical. Shipbuilding projects have a typical order-to-delivery period of 23 to 66 months. Recognition of revenues and expenses occurs in large parts in the middle period of the project, when expensive equipment and sophisticated systems are installed in the vessels. The beginning period of a project and the end period of a project give rise to significantly lower revenues and expense recognition compared with the middle period. As a result, revenue and expense recognition is heavily weighted toward five-year cycles of one to two years of lower revenue and expense recognition, followed by one to two years of significantly higher revenue and expense recognition, followed again by one to two years of lower expense recognition.

MDL had recently made applications to the ministry of environment and forest (MoEF) for getting the CRZ (coastal regulation zone) clearance with respect to three projects under the Mazdock Modernisation project programme, namely, for (i) extension of goliath crane south rail by 50 metres; (ii) submarine section assembly workshop; and (iii) construction of wet basin. But it has been rejected on account of certain shortcomings and MDL have been advised to resubmit such applications. The company is in the process of appointing a consultant for conducting studies and obtaining the recommendations of the Maharashtra Coastal Zone Management Authority prior to making such revised applications. MDL cannot assure whether these clearances will be granted to it in a timely manner or at all.

The company has certain limitations in infrastructure available in its current premises. It depends on Mumbai Port Trust (MbPT) and the Indian Navy for enabling the movement of its vessels for their docking and undocking from time to time, fitment of certain appendages and for meeting its berthing requirements.

The concept, preliminary and functional design of the ‘P – 17A’ stealth frigates and the ‘P – 15B’ destroyers being built by MDL are provided by the Indian Navy. The Indian Navy has a right to make further design changes during the construction phase of such vessels, which may result in lengthier build times or delay in the delivery of such vessels, which may have a material adverse effect on financial performance of the company. Under the defence procurement procedure strategic partnership Model, MOD has issued request for EOI (expression of interest) to shortlist Indian strategic partners for ‘Project 75-India (construction of six conventional submarines)’ and the company is shortlisted as one of the strategic partners by MOD along with a private shipyard of the country. But the RFQ (request for quote) is yet to be floated.

Financial track record is lack-lustre with little and volatile growth. Most of the profits are coming from other income.

Post-issue government stake will be 84.8% and the government is likely to continue to disinvest in tranches in future to raise funds for itself, keeping the scrip under constant pressure.


Consolidated revenues were up by 8% to Rs 4977.65 crore in FY 2020. But with the operating profit margin (OPM) contracting by 30 bps, the growth at operating profit was restricted at 3% to Rs 267.97 crore. After accounting for lower other income, higher interest and higher depreciation, the PBT was down by 4% to Rs 747.69 crore. Hit further by higher EO expense and higher taxation, the PAT was down by 18% to Rs 383.69 crore. The company has opted to adopt new reduced income tax rate under Section 115BAA and this has resulted in one time adverse effect on profit for the year by Rs 160.73 crore due to reduction in deferred tax assets. But gained by higher share of profit from associate, the fall in net profit was down by 10% to Rs 477.06 crore.

The consolidated EPS for FY2020 stood at Rs 24. At the price band of Rs 135-145, the P/E works out to 5.6-6.

The nearest comparable listed players CSL and GRSE quotes at a PE of 6.7 and 11.6 times their FY20 EPS. The current order book of MDL is 11.7 times of FY20 revenue compared to 4.2 times for CSL and 18.5 times for GRSE.

Mazagon Dock Shipbuilders: Issue Highlights

Sector Shipbuilding
Offer for sale (in Rs. Crore)  
Upper Price Band 444
Lower Price Band 413
Price band (Rs.)  
Upper 145
Lower 135
Post-issue equity (Rs crore) 201.69
Post-issue promoter (including promoter group) stake (%) 84.83
Issue Open Date 29-09-2020
Issue Close Date 01-10-2020
Listing BSE, NSE
Rating  48/100


Mazagon Dock Shipbuilders: Consolidated Financials

  1703 (12) 1803 (12) 1903 (12) 2003 (12)
Sales 3519.08 4470.36 4613.96 4977.65
OPM (%) 3.6 3.5 5.7 5.4
OP 125.74 154.7 260.8 267.97
Other income 755.78 557.27 590.72 557.66
PBIDT 881.52 711.97 851.52 825.63
Interest 9.31 9.08 9.08 9.26
PBDT 872.21 702.89 842.44 816.36
Depreciation 41.66 52.48 64.33 68.68
PBT 830.55 650.41 778.12 747.69
EO Exp 0 0 0 12.32
PBT after EO 830.55 650.41 778.12 735.37
Tax 287.72 256.83 307.73 351.68
PAT 542.83 393.57 470.38 383.69
Profit from associate 55.43 102.6 62.09 93.37
Net profit 598.26 496.17 532.47 477.06
EPS (Rs)* 29.7 24.6 26.4 24
* on current (post OFS) equity of Rs 201.69 crore. Face Value: Rs 10
EPS is calculated after excluding EO and relevant tax
# EPS can not be annualised due to seasonality in operations
Figures in Rs crore
Source: Capitaline databases