Goldman Sachs has turned bearish on Mazagon Dock Shipbuilders Ltd. and Garden Reach Shipbuilders & Engineers Ltd., setting the lowest price targets for both companies among analysts tracked by Bloomberg as it warns of falling earnings and uncertainty over new orders.
The brokerage initiated coverage with Sell ratings and 12-month price targets of Rs 1,855 for Mazagon Dock and Rs 1,515 for Garden Reach. For Mazagon Dock, the call marks the second bearish rating in October and the third in two months, while Garden Reach has received a rare Sell rating, according to data compiled by Bloomberg.
Goldman Sachs expects earnings before interest, taxes, depreciation and amortisation (Ebitda) at the two shipbuilders to decline through FY29 as major programmes near completion and fresh orders take time to translate into revenue. It expects Ebitda to contract at a compound annual growth rate of 19.3% between FY26 and FY29, compared with 26% growth for other aerospace and defence companies under its coverage.
Earnings Pressure
Mazagon Dock faces the risk of weaker earnings as it approaches the end of major programme deliveries. Goldman Sachs flagged its book-to-bill ratio of 1.37 times, which it said was at a cyclical low. It also said major events that could drive a re-rating of the stock appear to have played out.
Garden Reach faces a similar challenge, with delays in the next-generation corvette order adding to uncertainty over the timing of new business and revenue. Its book-to-bill ratio stands at 1.87 times, also at a cyclical low, according to the brokerage.
The low ratios point to a weaker order pipeline relative to the companies' revenue, making fresh contracts increasingly important to sustaining future earnings. Long periods between order placement, construction and revenue recognition also make the timing of new business critical for shipbuilders.
Order Risks
India accounts for less than 1% of the global shipbuilding market, while defence and military vessels account for about 75% of India's domestic market, compared with around 22% globally, Goldman Sachs said.
The brokerage described Indian shipbuilding as a cyclical business with long gaps between order placement and revenue recognition. Defence shipbuilders also operate under fixed-price and cost-plus contracts, leaving profitability exposed to cost variations.
Indian Navy capital expenditure has more than doubled from Rs 33,300 crore in FY22 to Rs 70,000 crore in the Union Budget for FY27. However, Goldman Sachs expects incremental spending to be concentrated more on aircraft carriers and amphibious ships than on surface vessels, potentially delaying orders for other types of vessels.
The Indian Navy aims to expand its fleet to 200 ships by 2035. But programmes such as the P-17A frigates and P-75I submarines require multi-year tendering and gestation periods before generating revenue, the brokerage said.
Growth Prospects
Goldman Sachs identified unmanned and autonomous platforms, ship repair and commercial shipbuilding as potential growth areas for the Indian industry. It said private shipbuilders have an advantage in commercial shipbuilding because of their greater exposure to the segment.
Despite the longer-term opportunities, Mazagon Dock and Garden Reach trade at a premium to global shipbuilders on a market capitalisation-to-order book basis, according to Goldman Sachs.
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