Shares of Mazagon Dock Shipbuilders surged over 12% on Monday as media reports suggested that the company is close to getting an order to build three submarines. However, analysts at ICICI Securities are wary about the stock because the brokerage firm “believes earnings growth is likely to recede owing to an uncertain order pipeline.”

The Mazdock Analyst: The Amit Dixit-led analyst team at ICICI Securities maintained the “sell” rating for the stock with a target price of ₹600 – a potential 28% downside from the stock’s last closing price of ₹838.40.

The Mazdock Thesis: The analyst noted that the company’s March quarter performance was 50% ahead of its estimates mainly on higher-than-expected revenue. The company’s revenue grew 49% year-over-year to ₹2078.6 crore mainly led by the commissioning of the fifth submarine (under P75 programme).

Talking about the state-controlled company’s order book, ICICI Securities noted that as of March 2023, it had orders worth around ₹38,500 crore. As per the brokerage firm these orders are likely to be executed by FY27 with peak execution through to FY25.

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The analysts said that after FY25 free cash flow is likely to decline with the unwinding of contract liability,
resulting in cash depletion. The analysts added that while they expect robust revenue growth until FY25, they believe earnings growth is likely to recede owing to an uncertain order pipeline.

The analysts also highlighted that currently all of the company’s revenue comes from Ministry of Defence contracts. These contracts depend upon the continuing availability of funds being extended to the MoD. “Future revenue of the company under existing multi-year contracts is reliant on the continuing availability of budgetary appropriations by the MoD and release of such funds to the company in a timely manner,” the firm added in its latest research note.

Price Action: Mazdock’s share price surged over 12% to trade at ₹940.50 on Monday afternoon.

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