Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank loan facilities of Cochin Shipyard Limited (CSL; part of the Cochin Shipyard group).

 

The ratings reflect the strategic importance of the company to the Government of India as it is majorly owned by the Ports, Shipping and Waterways and is the only ship building company under the Ministry. The company also benefits from the long-standing presence in the ship building industry with healthy execution track record, strong market position driven by healthy association with Indian navy and sizeable order book. The scale of operations of the group has been increasing steadily for the past few fiscals and has achieved Rs. 3852 crore in fiscal 2024 and is further expected to steadily grow over the medium term. In the current fiscal, CSL has already achieved revenues of Rs. 1915 crore with a PAT of Rs.363 crore till Sep 30, 2024. The group’s healthy order book of around Rs. 22587 crore as on June 30, 2024 is also substantial, being around 6 times the fiscal 2024 revenues which provides revenue visibility. Some of the key orders to be executed over the next few months include ASW SCW Corvette and NGMV for Indian Navy, as well as few commercial orders. The group has also benefitted from the execution of the construction and deployment of INS Vikrant (first indigenously developed aircraft carrier) over the past 2 decades through fiscals 2022, and is currently executing the Phase III of IAC, leading to it becoming the only shipyard in the country to have done so.

 

The ratings also incorporate a strong financial risk profile supported by comfortable capital structure, robust debt protection measures and ample liquidity. The debt outstanding as on Sep 30, 2024 was at Rs.24 crore while the net worth remained comfortable at Rs.5276 crore, leading to a comfortable gearing of less than 0.01 times. The debt protection metrics for fiscal 2024 were also comfortable and interest coverage and net cash accruals to debt ratios for H1 fiscal 2025 were at 35 times and 17 times, respectively. The liquidity of the group also remains comfortable with almost nil utilization on the fund-based bank limits for the past 12 months ending September 2024, while having healthy unencumbered cash and bank balances.

 

These strengths are partially offset by the vulnerability of operating margins to fluctuations in raw material prices and foreign exchange (forex) rates. Volatility in the prices of key raw materials such as steel, engines, and pipes, which account for 45-50% of the total operating revenue can impact the operating margins. This is compounded by the absence of escalation clauses in contracts with customers.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of CSL along with its wholly owned subsidiaries, Hooghly Cochin Shipyard Ltd (HCSL) and Udupi Cochin Shipyard Ltd (UCSL), together referred to as the Cochin Shipyard group. For arriving at the ratings of CSL, CRISIL Ratings has also applied its criteria for notching up standalone ratings of entities based on government support as CSL is majority owned by the Government of India and operates under the Ministry of Ports, Shipping and Waterways.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to the Government of India: CSL is a government-owned shipyard (which holds 67% stake in the company) under the administration of the Ministry of Ports, Shipping and Waterways. Along with its subsidiaries, the company builds and repairs ships, such as indigenous aircraft carrier, bulk carriers, next generation missile vessels, anti-submarine warfare shallow watercrafts, and platform supply vessels used by the Indian Navy. The company is strategically important to the government for strengthening the naval and coast guard defence of India.  CSL built the first indigenous aircraft carrier (IAC-1), INS Vikrant, and successfully delivered the same in  fiscal 2022, and is currently executing the Phase III for the project thereby becoming the only shipyard in India with such a distinction. CRISIL Ratings believes that CSL will continue to benefit from being a government held PSU with continued focus on Indian defense projects which currently account for more than 65% of its current orderbook.

 

• Longstanding presence and strong market position: Incorporated in 1972, CSL has an industry presence of over five decades which has enabled the company to develop strong technical capabilities and market position. Till fiscal 2023, CSL has built 180 ships, including large, small, and medium-sized vessels; offshore support vessels; and defense vessels. Also, geographical presence is diversified, with all the dockyards located strategically (Kerela, Maharashtra, West Bengal, Andaman and Nicobar, Karnataka). Revenues have been increasing for the past few fiscals (except fiscal 2023) and the group has achieved the highest revenues its incorporation in fiscal 2024 of Rs. 3852 crore  driven by strong demand and healthy execution of projects as the company caters to commercial (domestic and export) as well as defense segment. The company achieved sales of Rs 1,915 crore for the first half of fiscal 2025 and are estimated  to reach around Rs 4500-5000 crores for the full year. The scale of operations is expected to sustain over the medium term on the back of capacity expansion, healthy order book and timely execution track record.

 

• Sizeable order pipeline and execution track record: CSL and its subsidiaries had outstanding orders of Rs 21,587 crore and around Rs 1000 crore for shipbuilding and ship repair, respectively, as of June 2024. This includes orders from the Indian Navy as well as commercial orders from both in the domestic and overseas markets. The company also has orders worth Rs 7820 crore in the pipeline, with plans to add more over the medium term. Track record of timely execution will continue to aid business risk profile.

 

• Strong financial risk profile: The group has a strong financial profile marked by a strong networth of Rs 4985 crore as on March 31, 2024 and increased further to Rs 5,275 crore as of September 2024. Lower reliance on external debt for working capital requirement and capex has led to comfortable gearing and total outside liabilities to adjusted networth ratio of less than 0.1 time and 1.4 times, respectively, as on March 31, 2024. This, along with high profitability, led to robust debt protection metrics, with interest coverage and net cash accrual to total debt ratios of 25.4 times and 27.2 times, respectively, for fiscal 2024. The financial risk profile is expected to remain stable over the medium term, driven by steady accretion of reserves, low leverage and strong profitability.

 

Weakness:

• Vulnerability of operating margin to fluctuations in raw material prices and forex rates: Operating margin remains exposed to volatility in the prices of key raw materials such as steel, engines, and pipes, which account for 45-50% of the total operating revenue. This is compounded by the absence of escalation clauses in contracts with customers. Furthermore, CSL procures raw materials and components from the international market, which exposes margin to any sharp fluctuation in forex rates. However, this risk is mitigated by forward contracts

Liquidity: Superior

Utilisation of fund-based limits was minimal over the 12 months through September 2024. Cash accruals, expected at over Rs 570-590 crore per annum, will be sufficient against nil repayment debt obligations . This will further provide a cushion to the liquidity of the company over the medium term. The current ratio was healthy at 1.32 times and unencumbered cash and balance stood at around Rs 627 crore, as on March 31, 2024, thereby providing financial flexibility in case of  exigencies. Strong gearing and networth support financial flexibility and provides cushion in case of any adverse condition or downturn in the businesses.

Outlook: Stable

Business and financial risk profiles will remain strong over the medium term, underpinned by the company’s strategic importance to the Ministry of Ports, Shipping and Waterways, and continued business support from the Indian Navy and the Indian Coast Guard.

Rating sensitivity factors

Downward factors:

• Lower-than-expected revenue or sustained decline in operating margin below 12% leading to lower cash accruals.
• Any change in government policy resulting in dilution of the strategic importance of CSL to the Indian Navy.

About the Group

CSL was incorporated in March 1972 in Cochin, Kerala. The Government of India holds 72.86% stake in the company, which is listed on the Bombay Stock Exchange and the National Stock Exchange. The company was conferred with Schedule ‘A’, Category-I Miniratna status by Ministry of Port, Shippings and Waterways. The company is engaged in shipbuilding and ship repair for both the domestic and international markets. The operations are headed by Mr Madhu Sankunny Nair (Chairman & Managing Director), Mr Bejoy Bhasker (whole-time director), Mr Valiyaparambil Jacob Jose (whole-time director & CFO), along with other directors.

 

HCSL was set up as a joint venture between CSL and Hooghly Dock & Port Engineers Ltd (HDPEL) on October 23, 2017. Pursuant to the approval of the Union Cabinet, CSL acquired the shares held by HDPEL and, with effect November 01, 2019, made HCSL its wholly owned subsidiary. HCSL manufactures and repairs commercial ships, barges and tugs for domestic and international clients.

 

UCSL was incorporated as Tebma Engineering Pvt Ltd in July 1984. CSL acquired the company through a National Company Law Tribunal, Chennai, order in September 2020 and renamed it UCSL in April 2022. The company manufactures and repairs tugs and coastal vessels, auxiliary vessels for defence, and mid-sized commercial fishing vessels for the Middle East and European markets. Main facility is in Udupi, Karnataka.

Any other information: Not Applicable