Cochin Shipyard Limited (COCHINSHIP.NS) Earnings Call Transcript & Summary

Welcome to the conference call of Cochin Shipyard Limited arranged by Concept Investor Relations to discuss its Q3 and 9-month FY '20 results. We have with us today Shri, Jose V. J., Director Finance; Mr. Sivaram Narayana Swamy, Deputy General Manager, Business Development; Shri. Shibu John, Deputy General Manager, Finance; Shri. HariKumar. K., Deputy General Manager, New Projects; and Shri, Syamkamal N., Company Secretary. [Operator Instructions] Please note this conference is recorded. I would now like to hand over the floor to Mr. Shri. Jose V. J., Director Finance for the opening remarks. Thank you, and over to you, sir.

Hello? Am I audible?

Yes, sir, you're audible.

Hello? Yes. My name is Jose, Director Finance. I have with me, Mr. Rajesh also, GMBD, GM Business Development. Rajesh will give you a brief overview of the overall performance.

Yes. Good morning, everyone. Welcome to the CSL con call. Let me just give you a quick update on the latest, and then we move on to taking specific queries. I'm sure by now, all of you would have seen the numbers. The investor presentation is being uploaded today so that you will get more details there. But just to update on the operations front, things have generally been going okay on the -- on both the shipbuilding as well as the ship repair front. On the shipbuilding front, as you are all aware, the key project is, of course, the aircraft carrier, which is slated to go out for sea trials during the first half of this year, and so significant ramp-up and work progress on that vessel. We have recently delivered almost around 12 out of the 16 fishing vessel orders that we had taken, the smaller one. The RO-RO and RO-Pax order from IWAI for 12 -- 10 vessels out of which, 8 are already delivered and are being shortly transported from Kochi to Kolkata because they are being put to use in the National Waterway #1 and 2. The last 2 are being -- are constructed in CSL and that will be put to use in Kochi, that is National Waterway #3. As regards to the floating border outpost, the 9 floating border outpost that we are constructing for the Ministry of Home Affairs, steel cutting has commenced and the ASW contract, which was signed with the Navy for 8 Anti-Submarine Warfare Corvette that -- it's moved into the design phase. As regards ship repair, we'd like to update you that things are generally going well, both in Kochi, which is the main yard. Operations -- ship repair operations in Bombay have picked up, we've completed more than 20 projects in Bombay. We are glad to inform that ship repair operations at the Kolkata facility, which is named CKSRU, that is, CSL Kolkata Ship Repair Unit, has commenced. 2 vessels have already been completed. It's commenced towards the latter part of October. And we're also glad to report that agreement for commencement of operation and maintenance of the Marine Dockyard in Port Blair has also been executed and -- with the administration -- Andaman & Nicobar administration. So there, again, it would be ship repair. As regards to the major infrastructure projects, we also want to update you that work is progressing, and the construction of the new dry dock is expected to be completed by mid '22, and as well as the international ship repair facility, which is coming up in Willingdon Island is also scheduled for completion by mid-2022. That's about a quick update on what we have from our side. We can detail out further as we move forward, and we are ready to -- moving to the question-and-answer session. But prior to that, I would also request my Director of Finance, Mr. Jose to just update you on the latest figures that we have put out.

Yes. See, you would have seen the financial results uploaded in the exchanges, with the total turnover is up by 24% on a Q1 to Q1 and PBT is up by around 17%, and PAT is 22%, primarily because of the lower write-off PAT, so 22%. Now we can take on questions.

[Operator Instructions] The first question is from the line of Sandeep Tulsiyan from JM Financial.

Sir, first question is pertaining to the revenue guidance that we had given of 12% to 14% for the current financial year. Saying that ship repair out of that, maybe around INR 650 crores. If you could just give an update on the same because we are much ahead of that run rate at 20% for 9-month, but are falling a little bit behind on the ship repair side.

Yes. Sandeep, Jose here. Sandeep, regarding the top line, ship repair we'll be doing around instead of INR 650 crores, we'll be doing around only INR 610 crores this year. Because -- primarily because last year, we had that retaining Vikramadity, it was a one-off case. That ship alone contributed around INR 240 crores, that is not there. Above that, this year, the Q3, IAC was to be dropped in ship repair for almost 45 days. So we could not use that dock for the ship repair facility. So these two are the reason for the final reduction in the ship repair turnover. Otherwise, the turnover are -- see, though we have guided earlier 12%, overall, it will be around 14% to 15% on an annual basis.

Got it. Second question was actually pertaining to the new orders. So a couple of quarters back, we had mentioned there were 2 orders, which is pollution control vessel worth about INR 900 crores and there was a large floating dock order that we had spoken about, this order was also about INR 450 crores odd. So what is the update on these 2? Have you won? Or has competition has won these orders, can you just help us on that?

Yes, Sandeep, Rajesh this side. Actually, those are still here, right? We had bid for these 2. And the technical evaluation, TECA has been completed in the first case on the submersible pontoon by the Indian Navy. And the TECA for the pollution control vessels, 2 of them, has also been completed by the coast guard. So we are now waiting for the price bid opening date. And then -- and that is when we would know who would win the bid. But we have crossed the TECA stage on both these as of now.

Okay, okay. So other than these two, if you could also, sir, highlight, which other orders are there where Cochin Shipyard is bidding or where at least the tender documents are out?

Yes. In fact, I can -- I'll just quickly take you through before for other projects, which we have already submitted the bid or will be submitting shortly. We have bid for 8 Fast Patrol Vessels of the coast guard. The total value is, I believe, estimated to be around INR 600 crores for these 8 vessels. But then the TECA is yet to start for that. We have also bid for 12 air cushion vessels. These are normally called hovercraft, and this is towards the Indian Coast Guard, and that is roughly INR 550 crore estimate there. And here, the technical evaluation has already started. We have also just last week submitted a bid for 6 new generation missile vessels to the Indian Navy, which is a relatively bigger order because these 6 vessels ideally the AoN taken by the Navy is close to INR 13,600 crores, and we have submitted. All these bids, which I'm talking about are on competitive basis, where all other major yards in the country are also participating. In the NGMER, the New Generation Missile Vessel, HSL has not submitted, but our MDL, Goa, CSL, L&T and GRSE have submitted their bids. There are 2 other upcoming bid submissions, which will be done during the course of this month and next. One is multi-purpose vessel for the Indian Navy, 4 of them that is close to INR 2,800 crores to INR 3,000 crores order. And 1 survey training vessel for the Indian Navy, which is around, I believe, INR 750 crores. And these 2 bids are yet to be submitted, but we would be participating.

Got it. Sir, my last question is, on the ship repair side, now we've also acquired the balance stake in Hooghly Cochin Shipyard. And we also have now all the other facilities, which are generating -- started generating revenues. So maybe not for this year, but for FY '21, if you could highlight facility by facility, how much revenue-generating potential do you see in all the facilities that you've undertaken?

Yes, Sandeep, before I pass it on to Jose for -- to give you some indications there, just a quick clarification there. See, if you take today's CSL, the main facility is in Kochi, there's Cochin Shipyard Limited, the main yard, where we do both shipbuilding and ship repair. We have the new dry dock coming up within the existing premises, where we propose to do both shipbuilding and ship repair. Next is, we have the international ship repair facility, which is being constructed in Willingdon Island, which is again in Cochin, so just right across the channel from where we are currently, which is predominantly a ship repair facility. Now moving outside Cochin, we have Bombay, which is called CMSRU, the CSL Mumbai Ship Repair Unit, which is pure ship repair. Again, Kolkata there is CKSRU, again, pure-play ship repair. But in Kolkata, we have the HCSL yard, which is Hooghly Cochin Shipyard Limited, which is a fully wholly-owned subsidiary of CSL. As you have mentioned, we have taken over the remaining stake. But that would be predominantly new building facility for inland water vessels. We might be able to do some repairs of inland water vessels there, but that facility is predominantly meant for new building because we have the Netaji Subhas Dock for repairs in Kolkata. And the Andaman facility, again, is pure-play ship repair, so that is just for an overall idea of what it is. And maybe on the overall estimates from each of these, I would presume [ DF ] might be able to guide you there.

Yes, Sandeep. Mumbai will be fully become operational only by FY '22. So we are expecting around INR 120 crores from Mumbai in FY '21. This year, we may do around 75% there, but next year, we may do it around 120%. And Kolkata, as Rajesh mentioned, because we have just started, and we have to find out the market there because now, as of now, there is no market there, but -- so we are not putting any amount there as of now. Overall, we may achieve around INR 700 crores to INR 750 crores since next year from ship repair altogether. And ISR will also become operational only by FY '22, by around May FY '22. So FY '21, overall, will be around INR 700 crores to INR 750 crores.

The next question is from the line of Aditya Mongia from Kotak Securities.

I had a few questions on the shipbuilding business of yours. Firstly wanted to get a sense of how much contribution are we expecting from the IAC [ PSG ] in '21 in terms of execution?

Can you repeat?

This is not clear. Could you please repeat?

Sure. So for the 2 key projects that you have on the shipbuilding side, which is GRSE and ASW Corvette order, how much are we building in, in terms of execution for this and next year?

Yes. See, IAC, from FY '21 around INR 2,500 crores will come from IAC. And from ASW [indiscernible] FY '21, because ASW construction will start only by mid-FY '21, because we signed the contract on April 30, '19. And construction has to start from 18 months from the date of signing the contract. So it will be June '21. So around June, July, we start the construction. So around INR 600 crores will be from ASW.

See, right now, ASW is in the design phase and the design drawing approvals and phase is going on. The steel procurement and major initial procurements will also happen. But we start booking revenues when we actually move into physical construction, that is 18 months from the date of contracted plan. So that is why this is the case.

Got that, sir. Sir, on the bid -- contract, which you already won, what kind of growth visibility do we have on shipbuilding revenues for FY '21?

'21, other than IAC and ASW, there are other small vessels also, which we are currently under construction. So that will -- so altogether we take that also is around INR 3,900 crores will be the total shipbuilding turnaround for FY '21.

You said INR 3,000 crores? Sorry, I didn't get the number.

Around INR 3,900 crores.

Got that. And sir, given that we are now moving out of IAC in revenues in FY '21, but do you see the project mix changing in a manner that margins should be different in FY '21 for shipbuilding segment? Or do you expect the similar strength in margin to continue?

See, IAC will be the -- though the delivery of IAC is scheduled in FY '21, actually, the ship -- the delivery will be -- turnover will be there up to FY '24. Because after delivery, the ship will be here for another 2 years because phase 3 contract of IAC, the total consideration cost around INR 2,400 crore is for predelivery activity, that will be the -- now delivery as we have scheduled it February '21 -- mid '21, then post-delivery for the trials of the arms and ammunition the ship will be here. So we can see revenue from IAC till FY '24.

Sure. So the margin profile should be steady in FY '21 for the shipbuilding segment? Do you see any project mix variations happening?

No, FY '21, IAC will be in peak. So the margin will be in the same range.

The next question is from the line of Jonas Bhutta from PhillipCapital.

Congrats on a great set of numbers. Sir, I joined the call a bit late, so I don't know if you've already given the breakup of your shipbuilding revenue for the current quarter broken up between IAC and non-IAC and within IAC cost-plus or fixed price lease?

Yes, Jonas. Jose here. The total shipbuilding turnover [indiscernible] quarterly INR 747 crores.

Sir, sorry to interrupt, this is the operator. Sir, your voice -- I mean, you were not audible. Can you speak a little louder, please?

Yes. See, for the -- am I audible now?

Yes, sir.

Okay. Total shipbuilding turnover for the quarter is INR 747 crores, out of that, INR 635 crores is from IAC and INR 112 crores from non-IAC. And ship repair is INR 149 crores. So the total turnover put together shipbuilding and ship repair, it is INR 896 crores.

And within the IAC INR 630 crores, cost plus would be how much? INR 450 crores?

Yes, cost plus is INR 371 crores and fixed price INR 264 crores. So total INR 635 crores.

Okay. And for the current year, based on what you've been guiding us at the start of the year, do you think that you will close the year higher than what you thought about in terms of IAC revenue? Because at that time, you had broadly given us a guidance of closer to INR 2,000 crores to INR 2,100 crores. Does that still stay? Or you expect some higher revenue in this project?

Around that level, but it can go up to INR 2,200 crores also.

Okay. So then Q4 will be quite weak? Is that a correct assumption? I mean, just against the INR 630 crores that you've done in the current quarter, about INR 350 crores odd in the fourth quarter?

Yes, yes, yes.

Okay. And for next year, you've guided for almost INR 2,500 crores on the IAC?

Yes.

Okay. Fair enough. And I don't know, sir, if you've given the breakup of the ship repair revenue. So this year, you're expecting almost INR 50 crores coming out of Bombay. I heard that you've shipped out -- you've repaired almost 20-plus vessels so far. Do you think that we'll reach to that number by year-end as in INR 50 crores revenue out of Bombay?

Mumbai -- the total turnover from Mumbai this year will be around INR 70 crores, INR 75 crores.

INR 75 crores?

Yes, INR 75 crores.

Okay. And including that INR 75 crores, you'll do INR 610 crores as for revenue?

Correct, correct.

Okay, okay. And that same number, the comparable number, which is INR 610 crores minus INR 75 crores, so roughly INR 550 crores will become INR 750 crores next year? Or what is the comparable number of Cochin yard, sir, excluding Bombay or any other things, sir, like-to-like number for next year?

Yes. See, this year, it is around INR 535 crores. Next year it will be around INR 570 crores.

Okay. And INR 100 crores out of Bombay?

Yes. Around INR 100 crores to INR 120 crores from Mumbai next year.

Okay. And ISRS starts contributing or no, next year?

Next year, only from FY '22 onwards.

Only from FY '22? Got it. And lastly, sorry, it's 2 more questions quickly. Rajesh, I missed out on one of the programs where you've already bid. One was the hovercrafts project, which is about INR 550 crores. Then was the NGMV, which is INR 13,000 crores. The first one, which was about INR 600 crores, what was that, sir?

That was 8 fast petrol vessels for coastguard.

Okay. And lastly, sir, just wanted your comments on the recent interview by the Chief of Defense staff, sir, that he gave at the DefExpo where he almost clearly mentioned that we may not need another aircraft carrier. And if he's in charge of sort of determining the priorities of defense spending, what is your take on that, sir?

Jonas, honestly, we have no comment there. What -- there is also no official or formal thing that has been initiated on the carrier, but there have been informal discussions. And at least from what we gather, the senior levels, the top level in the Navy seem to be extremely confident and come to ask all as well during the Expo and he was keenly listening to the readiness of the new dry dock, which is coming up in CSL, which is specifically the dock floor loading and things like that have been designed for our next-generation carrier. So during those interactions, we didn't sort of feel anything negative, but we are unable to comment on some -- on what he has stated. We feel that the country would need a third carrier because that's what's been the logic all through. So we're just waiting.

The next question is from the line of Anuj Jain from ValueQuest Capital.

Sir, you mentioned that for IAC, there is some order book for post-delivery activities. Can you quantify that portion of order book?

That is from the fixed price part, it's around INR 825 crores. And there will be some associated cost plus also, that will be around the INR 2,000, INR 2,500 crores.

Okay, okay. So that means like after FY '21, starting FY '22, there will be like huge drop in shipbuilding revenues, right?

Pardon me? Can you repeat the question?

Starting FY '22, when the IAC will be completed or will be delivered, there will be like a huge drop in shipbuilding revenues?

Not huge drop because IAC revenue will peak in FY '21. We are expecting around INR 2,500 crores. Thereafter, for the next 3 years the revenue from IAC will taper down, maybe around INR 1,700 crores to next year -- FY '22 around INR 1,700 crores, FY '23 around INR 1,300 crores like that, it will taper down.

Okay. Understood. And sir, in the fixed price part of the order, how is the cost escalation works? Like what would be the cost for -- the loss for cost escalation?

Hello?

Hello?

Hello?

Yes. Can you hear -- hello? Did you get that?

Yes, I can hear you. Can you hear me, sir?

Yes. We can hear you. Yes.

So my question is, in the fixed price part of the project, who bears the cost escalation part?

In fixed price, there is no cost escalation. I was referring to cost-plus contract.

That is -- this is the second question, sir, like in case of, let's say, for IAC, if there has been any cost escalation due to the delay of the project, who bears that cost?

No, see, all materials required for the projects are under cost-plus for IAC. The fixed price is solely relating to our labor, overhead and profit. So there is no value for that, we will not get any escalation, it is a fixed price. But in the case of material, if there is an escalation, it is automatically covered under us also.

Understood, understood. And sir, last question regarding the ship repair margins. What are the sustainable levels for the ship repair margins?