After 291% gains in 1 year; This Defense PSU Gets a ‘Sale’ Call: Check Details

After 291% gains in 1 year; this defence PSU gets a ‘sell’ call: Check details

After 291% gains; This Defense PSU Gets a ‘Sale’ Call: Check Details

Amid all the buzz around PSU stocks which have performed extremely well over the past few years due to the central government’s focus on strengthening the space, domestic brokerage firm ICICI Securities has retained its call of “sell” on PSU defense shares which climbed 291%. over the past year. Not only was the Sell rating maintained, but it forecasts a potential decline of 72 percent.

The brokerage retained its sale after the PSU company released its quarterly numbers last week.

Any idea on stock? The stock that is on the radar for a “sale” view is Mazagon Dock Shipbuilder. This is despite the company posting a better-than-expected Q4FY24 showing. The company’s higher annual margin increase, which stood at 16.9 percent compared to 10.1 percent during the same period last year, was favored.
through the reimbursement of LD costs, the advantage of operating leverage, the reduction of subcontracting and others
Expenses. With an order book of Rs 38,500 crore, the company has planned investments of Rs 2,500-3,000 crore over the next 3-4 years to develop infrastructure.

“Furthermore, management expects FY25 to be the peak revenue creation year of the current backlog; margins are expected to remain high, the report adds.

Limited upside potential

Despite the large potential orders in the medium term, the brokerage expects limited EPS growth, as the current order book is in its peak execution phase and a significant contribution from new orders is expected. once the current order book is exhausted.

The risk-reward ratio is unfavorable for the stock despite considering all available opportunities

Despite the order entry opportunity to the tune of Rs 1,20,000 crore envisaged for the company for the next 5-7 years, there is no clarity around order/execution timelines. There are also risks related to the depletion of the current order book and considerable uncertainty over order lead times for the Indian Navy’s major procurement programs. Moreover, as the budgetary allocation for the naval fleet in the interim budget of FY25 is stable, new orders are unlikely in FY25. Thus, as the EPS is expected to be limited to Rs 80- 110/share from FY25 to Rs 32E, the brokerage continues its ‘sell’ on the counter with a target of Rs 900, revised from the target set earlier at Rs 880.

The brokerage firm argued that taking into account potential orders for P75, P75I and next-generation destroyers, as well as high near-term margins, the positives have already been factored into the stock price .

Main risks

However, the main risks cited by the brokerage for the stock are a higher-than-expected margin, a higher-than-expected order value and a repeat order for frigates that it has not accounted for.

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