MDL rises on the back of defence indigenization and order wins

Every year, countries take a hard look at their defence budgets and their armed forces. India has the world's third-largest defence spend, and aims to hit $15 billion in defence exports by 2026. 

India has recently refocused on its defence capabilities as tensions rise with China, and Russian arms supplies grow erratic with European and US sanctions. Opportunities in the local defence sector have opened up after the Centre earmarked 25% of the defence R&D budget to private Indian industry and startups in the Union Budget for 2022-23. This push for indigenisation and the rise in defence exports has led to substantial growth in the defence industry over the past two years. The industry has risen by 64.7% in the past year, comfortably outperforming the benchmark index. 

One such stock, Mazagon Dock Shipbuilders (MDL), has seen a surge of 386.1% in the past year. The company is primarily engaged in building and repairing ships, submarines,  and related engineering products. It is currently the only company with the technology to build submarines domestically.

As of June 2023, the President of India holds a majority stake of 84.8% in the company, and is the only promoter. In this edition of Chart of the Week, we  examine the price action chart of the stock and analyze the reasons and news contributing to its surge. 

MDL gains momentum in 2022, set for meteoric rise in 2023

The first big surge in the past year for Mazagon Dock came on May 16, 2022, when the company launched its fourth warship under the Udayagiri and Surat project. This led to a 7.5% surge in the stock’s value. During the same period, the company diversified into a non-defence area of container production with a Rs 100 crore order from CONCOR (Container Corporation of India) for 2,500 cargo-carrying boxes. These events drove the company’s net profit up by 121.2% YoY in Q1FY23, despite a 122% increase in raw material expenses to Rs 1,335 crore. 

On August 29, 2022, the Ministry of Defence released the third private indigenisation list (PIL) containing 780 components, aimed at increasing self-reliance and reducing defence imports. Of these, 130 components are made by MDL for submarines, driving an 11.4% stock price surge on the same day.The launch of the third ship under project frigate ‘Taragiri’ on September 7, 2022, boosted the stock by 7.5%, followed by a 5.9% rise the next day. 

In October 2022, Elara Capital reported a planned government investment of Rs 9 lakh crore in the defence sector. Currently, compared to the defence sector's PE of 37.1, MDL's PE TTM (31.9) is relatively lower. However, MDL's PE TTM is higher than its historical averages and is in the PE sell zone. 

On October 19, 2022, PM Narendra Modi released the fourth private indigenisation list with 101 more components. This also led to a 21.8% rise for the stock in the week of October 30, 2022. 

November saw a revision of revenue growth guidance for FY23 by the company’s Director (Finance), Sanjay Singhal, from 8% to a robust 25-30%. This adjustment caused the stock to surge by 7% in the week ending November 20, 2022. On November 22, the delivery of INS Mormugao to the Navy aided a surge in the stock price by 12%.

However, December 2022 came with challenges, as the stock fell by 15.9% in the week ending December 18 due to weak market sentiments. While the delivery of INS Vagir to the Navy triggered a rise on December 20, a mass sell-off by FIIs on December 23 tanked the stock by 11.5%. 

However, the stock rebounded by rising 14.8% on December 26, 2022, when the Defence Acquisition Council approved acquisition proposals totalling more than Rs 84,000 crore, with Rs 82,000 crore sourced domestically. These acquisitions include light tanks, naval anti-ship missiles, and offshore patrol vehicles. In a statement, Sanjay Singhal said that the allocation to shipbuilding from this recent push is close to Rs 3,000 crore. 

FY24 budget disappoints defence industry, but deal wins continue for MDL

The company’s stock price fell by 6% on February 1, 2023, as the FY24 fiscal budget raised defence allocation by only 7%, despite a 33% increase in overall capex. The company’s FY23 order book fell by 15.8% YoY to Rs 38,755 crore as of March 31, 2023.  On June 7, 2023, the company signed a $5.2 billion (Rs 43,038 crore) MoU with Germany’s Thyssenkrupp Marine Systems to participate in the submarine tender by the Indian Navy. The MoU caused a 14.8% surge in the stock’s price in the week ending June 11, 2023. To compete with MDL, L&T and Spain’s Navantia have also joined the submarine project P75(I) bidding process. 

Fast forward to the week ending July 9, 2023, the company’s share price surged by 23.9% on the back of the signing of a life extension agreement for INS Shankush. The deal worth Rs 2,724.6 crore was signed with the Indian Navy. July 11, 2023, brought another boost (a 10% surge) as the Indian Government approved the purchase of 26 Rafale jets and 3 Scorpene submarines, which will be built at Mazagon Docks.  

On August 14, 2023, MDL was in discussions with the Indian Navy and France's Naval Group to potentially manufacture three more Scorpene submarines, with progress anticipated in the next six months. Additionally, MDL has inked a memorandum of understanding with the Indian Navy's Warship Design Bureau to collaboratively focus on indigenizing over 8,000 Scorpene submarine components. This led to a 7% increase in the stock price. 

Recently, on September 1, 2023, the commissioning of Mahendragiri, the company’s fourth warship under the project frigate 17A, prompted a 3% surge in its stock price. 

The company continues to win multiple orders both domestically and internationally. However, the focus now falls on execution, and the company is on the clock to deliver orders on time and reduce the backlog in the order book.