Shares of shipbuilding companies witnessed a sharp decline on Tuesday. Shares of Mazagon Dock Shipbuilders (MDL) fell 10 percent to Rs 4,206.55, while Garden Reach Shipbuilders & Engineers (GRSE) shares fell 9 percent to Rs 1,643. Shares of Cochin Shipyard (CSL) hit a lower circuit of 5 percent to Rs 1,453.80.

The BSE Sensex was also down 0.53 percent at 80,717. The stocks of these three companies are down up to 51 percent from their 52-week highs touched in July 2024.

Pressure on Cochin Shipyard

Shares of Cochin Shipyard (CSL) closed down 5 percent on the BSE. Last week, the government sold a 5 percent stake or 1.3 crore shares in the company through an Offer for Sale (OFS), raising about Rs 2,000 crore.

The company's annual report (FY24) said that Fitch Ratings has maintained a negative outlook on the shipping sector. The company's annual income may decline due to challenges in container shipping.

Prospects of the shipbuilding industry

Even though the shipbuilding sector is facing challenges, it is expected to perform better in the future. The order book is currently good, and new regulations require replacing old ships and meeting the growing demand for shipping. The time has come to replace ships built between 2005-2010, which is likely to increase new demand in the shipbuilding industry.

Analysts' opinion

Analysts at ICICI Securities believe that Mazagon Dock Shipbuilders (MDL) has shown better margins in recent times, as on-time delivery of ships has reduced costs. This high margin is likely to be sustained till FY27, as major deliveries are expected in the next 2-3 years. However, the company's earnings may become milestone-based as new orders are received, which could lead to EBITDA margins falling to 12-15 percent.

'Sell' advice on GRSE.

Analysts at Elara Capital have reiterated a 'sell' rating on Garden Reach Shipbuilders & Engineers (GRSE) as a large order for Next Generation Corvettes (NGCs) has been deferred from FY24 to FY26. This means the company's revenue growth will now be seen only after FY26. The brokerage firm has cut EPS by 22 percent and 19 percent for FY25 and FY26, respectively, due to lower gross margins and a decline in other income.