Mazagon Dock Shipbuilders has been a star performer in the stock market, delivering jaw-dropping returns over the past few years. If you had invested in this defence stock three years ago, you’d be sitting on gains of over 1,751%.
Even in the past 12 months, the share price has surged by more than 133%. Sounds like a dream, right?
But hold on—recent developments suggest that the party might be winding down. Mazagon Dock shares have tumbled 12.75% over the last three trading sessions and are now over 25% off their 52-week high of ₹5,859.95. What’s going on here?
In this article, we’ll dive into the reasons behind the dip, the company’s financial performance, and what experts are saying about its future.
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The Recent Dip: Why Are Mazagon Dock Shares Falling?
Mazagon Dock Shipbuilders, a PSU defence company, saw its share price plunge over 7% in just one day, marking the third consecutive session of losses.
From a recent high, the stock has shed more than 12%, raising concerns among investors who have enjoyed spectacular gains in the past.
One of the key reasons for the drop is a report from ICICI Securities, which has slapped a ‘Sell’ rating on the stock. The brokerage firm believes that Mazagon Dock shares are significantly overvalued at current levels and sees a massive downside potential of 77%.
Overvalued or Justified? ICICI Securities’ Take
ICICI Securities has set a target price of ₹1,165 for Mazagon Dock, up from its previous target of ₹900. Even with this revised target, the stock is expected to drop significantly from its current levels. But why does ICICI Securities think the stock is overvalued?
The brokerage firm argues that while Mazagon Dock’s recent performance has been stellar, much of this success has already been priced into the stock. They point out that the company’s high margins, which have been a major driver of its recent gains, may not be sustainable in the long run.
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A Closer Look at Mazagon Dock’s Financials
Despite the recent dip, it’s important to acknowledge that Mazagon Dock Shipbuilders has delivered strong financial results. In the first quarter of FY25, the company reported a 121% jump in net profit, reaching ₹696 crore compared to ₹314 crore in the same period last year.
Revenue from operations also saw a solid increase, climbing to ₹2,357 crore from ₹2,172.76 crore year-on-year (YoY).
Strong Margins, But For How Long?
Mazagon Dock’s EBITDA for Q1FY25 was up 2.7x YoY, with margins hitting a record high of 27.2%. These impressive margins were largely driven by the company’s ability to deliver ships ahead of schedule, resulting in lower costs.
However, ICICI Securities warns that these elevated margins may not last. As the company begins to execute new orders, revenue recognition could shift to a milestone-based system, which may lead to a decline in EBITDA margins to 12-15%.
The takeaway here is that while Mazagon Dock’s current financials look solid, there are concerns about whether these high margins can be maintained over the long term.
What’s Next for Mazagon Dock Shipbuilders?
Given the company’s robust order book, which stood at ₹36,839 crore as of June 30, 2024, there’s still plenty of work on Mazagon Dock’s plate. The company is expected to continue delivering vessels over the next 2-3 years, which should keep its revenue stream healthy.
However, ICICI Securities cautions that there are risks associated with the timelines for new orders and executions. Even though they have raised their earnings per share (EPS) estimates by 51% and 73% for FY25 and FY26, respectively, they still believe the stock is overvalued.
Should You Hold or Sell?
If you’re holding Mazagon Dock shares, you’re probably wondering whether to stick with it or cash out. ICICI Securities’ bearish outlook may be unsettling, but it’s worth noting that this is just one perspective. Other analysts might have a different view, particularly if they believe that the company can continue to deliver strong results.
That said, if you’re concerned about the potential downside, it might be wise to reassess your position. The stock has already seen a sharp decline, and if ICICI Securities’ prediction is correct, there could be more pain ahead.
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The Bigger Picture: Mazagon Dock in the Defence Sector
Mazagon Dock Shipbuilders operates in the defence sector, which has been a hot area for investors lately. With increasing government spending on defence and a focus on indigenization, companies like Mazagon Dock are well-positioned to benefit.
However, the defence sector is also highly regulated, and companies are often at the mercy of government contracts. This can make earnings less predictable and introduce risks that aren’t present in other sectors.
Final thoughts
Mazagon Dock Shipbuilders has been an incredible success story, delivering multibagger returns that have made many investors very happy.
But as the saying goes, “What goes up must come down.” The recent dip in share price and the bearish outlook from ICICI Securities suggest that the stock may have run too far, too fast.
If you’re an investor in Mazagon Dock, it’s important to stay informed and consider both the positives and the negatives. While the company’s financial performance has been strong, there are concerns about whether these results can be sustained in the long term.
Ultimately, whether you decide to hold or sell will depend on your risk tolerance and investment strategy. Just remember, the stock market is full of surprises, and even the best-laid plans can change in an instant.
