India’s warship boom has a catch: Why Goldman Sachs is betting against Mazagon Dock, GRSE

Goldman Sachs has assigned ‘Sell’ ratings to the two key shipbuilder stocks, warning that the completion of major programmes, delays in fresh orders and easing margin benefits could weigh on earnings through FY29.

Goldman Sachs has initiated coverage of both Mazagon Dock Shipbuilders and Garden Reach Shipbuilders & Engineers (GRSE), setting 12-month target prices of Rs 1,855 for Mazagon Dock and Rs 1,515 for GRSE. The brokerage expects EBITDA at the two shipbuilders to decline at a compound annual growth rate (CAGR) of 19.3% between FY26 and FY29, compared with projected growth of 26% for the other aerospace and defence companies under its coverage.

The report’s concern is not a lack of long-term demand for Indian warships. Rather, Goldman Sachs argues that the timing of new contract awards, the pace of current project completions and the companies’ valuations leave them exposed to a period of weaker earnings.

Goldman Sachs writes: “India accounts for less than 1% of the global shipbuilding market, with defense and military vessels accounting for almost 75% of the domestic market vs. 22% globally.”

Goldman Sachs says both companies are approaching the end of major delivery programmes, with their trailing book-to-bill ratios at cyclical lows. The ratio compares new orders received with revenue recognised, indicating whether incoming business is replacing completed work.

The brokerage puts the trailing book-to-bill ratio at 1.37 times for Mazagon Dock and 1.81 times for GRSE. It argues that high revenue in the current phase partly reflects the execution of older contracts rather than a continuing increase in the order pipeline.

Goldman Sachs writes: “Consequently, trailing Book-to-Bill has fallen to cyclical lows (1.37x for MAZG; 1.81x for GRSE), signaling that current record revenues reflect peak billing on depleted backlogs rather than sustainable momentum.”

The distinction is central to the brokerage’s assessment. Shipbuilding contracts typically take years to move from tendering to execution and delivery. A company can report strong revenue while its order book declines, leaving a gap between the completion of current work and the start of new programmes.

Goldman Sachs also says both companies trade at a premium to global shipbuilding peers on a market capitalisation-to-order book basis, despite having smaller order books and weaker near-term earnings prospects. It expects the earnings decline and uncertainty around fresh awards to constrain their valuations.

Source: Goldman Sachs Research. Figures rounded where appropriate; FY29E denotes estimates.

Goldman Sachs expects Mazagon Dock’s revenue to decline to Rs 11,678 crore in FY27 from Rs 13,006 crore in FY26, and further to Rs 10,642 crore in FY28. The brokerage forecasts a recovery to Rs 14,666 crore in FY29, but expects the intervening period to bring lower earnings.

Its EBITDA estimates fall to Rs 3,189 crore in FY27 and Rs 2,998 crore in FY28 from Rs 3,405 crore in FY26, before rising to Rs 3,903 crore in FY29. Earnings per share are projected to decline to Rs 54.97 in FY28 from Rs 64.04 in FY26, then recover to Rs 70.56 in FY29.

Goldman Sachs writes: “We initiate coverage of Mazagon Dock Shipbuilders (MAZG) with a Sell rating and 12m TP of INR 1,855/sh.”

The brokerage identifies a declining order book and the fading contribution from early deliveries and reversals of liquidated-damages provisions as risks to near-term earnings. Mazagon Dock’s order book fell to Rs 18,200 crore at the end of Q1 FY27 from around Rs 50,000 crore in FY21, according to Goldman Sachs.

The report also examines the contribution of liquidated-damages provision reversals to reported profitability. Such reversals accounted for around 13% to 28% of additional EBITDA during FY24-FY26, while a reversal of Rs 304 crore in FY24 related to two P-75 submarines.

Goldman Sachs expects Mazagon Dock’s EBITDA margin to be around 11% in FY27. Its concern is that earnings could lose some of the support provided by these earlier benefits as the company works through its current programme cycle.

GRSE faces a similar challenge, with Goldman Sachs identifying uncertainty over the Next Generation Corvette (NGC) contract as a key risk. Delays in the award could leave the company with fewer new projects ready to replace programmes approaching completion.

The brokerage forecasts GRSE’s revenue to rise to Rs 7,980 crore in FY27 and Rs 8,470 crore in FY28 from Rs 7,000 crore in FY26, before falling to Rs 5,060 crore in FY29. EBITDA is expected to increase to Rs 1,310 crore in FY27, then decline to Rs 1,250 crore in FY28 and Rs 1,080 crore in FY29.

Earnings per share are forecast to rise to Rs 81.01 in FY27 from Rs 65.29 in FY26, before declining to Rs 77.23 in FY28 and Rs 65.73 in FY29. Goldman Sachs says margins could also come under pressure as the benefit from early vessel deliveries fades.

Goldman Sachs writes: “We believe that GRSE is at a juncture where the delivery of major vessels has largely concluded, earnings are in a declining phase, and continued uncertainty persists regarding the NGC order award.”

The report notes that GRSE delivered eight frontline naval vessels and strategic warships in FY26. It also says the final vessel under the P-17A programme was expected around November 2026, while deliveries under the Survey Vessel Large programme had been completed.

The company’s execution record is therefore not the main point of concern. Goldman Sachs is focused on the timing of replacement work and whether the next round of contracts will arrive soon enough to support revenue and profitability.

India’s long-term naval plans remain substantial. Goldman Sachs estimates that Indian Navy capital expenditure rose to Rs 70,100 crore in FY27E from Rs 33,300 crore in FY22. The Navy’s stated ambition is to expand its fleet to 200 ships by 2035.

However, the brokerage expects incremental spending to be more concentrated in aircraft, weapons and ammunition than in surface vessels. It also points to multi-year tendering and gestation periods for prospective programmes, including P-75I, NGC and P-17B, before they generate revenue.

Goldman Sachs writes: “While the Indian Navy’s long term ambition is to expand the force fleet size to 200 ships by 2035, near-term platform awards (P-75I, NGC, P-17B) face multi-year tendering and gestation periods before generating revenue.”

This means higher naval spending cannot be treated as an immediate guarantee of higher shipbuilding revenue. The timing of awards, the share of contracts won by individual yards and the time required to execute them will determine when the expenditure reaches company accounts.

Goldman Sachs identifies three areas of opportunity for Indian shipbuilding beyond the construction of conventional defence vessels: unmanned and autonomous platforms, ship repair and commercial shipbuilding. It argues, however, that unlisted private shipbuilders may be better placed to capture these opportunities than Mazagon Dock and GRSE, which do not yet have a meaningful presence in these areas.

The report cites estimates from the Ministry of Ports, Shipping and Waterways that India’s annual ship-repair market is around Rs 2,000 crore, against potential of Rs 6,000 crore. The domestic market could exceed Rs 14,000 crore over the next decade, while more than 30% of commercial ship repair is currently undertaken outside India.

Goldman Sachs writes: “We view ship repair as a relevant white space for Indian shipyards, given its more recurring revenue profile relative to the inherently lumpy new-build cycle.”

Repair and refit work could offer a steadier source of revenue than large new-build contracts, but Goldman Sachs says it remains a small part of the two companies’ businesses. Ship repair contributed around 6% of Mazagon Dock’s FY25 revenue and 11% of GRSE’s, compared with 38% for Cochin Shipyard and 37% for Hindustan Shipyard.

India accounts for less than 1% of global shipbuilding output, while defence vessels make up around 75% of the domestic market, compared with 22% globally. Commercial shipbuilding therefore represents a potential area for expansion, but the report does not treat it as an established earnings driver for the two listed companies.

Goldman Sachs’ ratings rest on the combination of weaker near-term earnings forecasts, uncertain contract timing and valuations it considers high relative to global peers. The brokerage’s 12-month target price for Mazagon Dock implies potential downside of approximately 9.7%, while its target for GRSE implies potential downside of around 27.4% from say October 21 closing price.

The long-term shipbuilding opportunity remains tied to naval expansion, repair work and the development of commercial and unmanned platforms. But the report argues that these opportunities do not automatically translate into near-term profits for the two companies.

For Mazagon Dock and GRSE, the next phase will depend on the pace of new contract awards, the execution of replacement programmes and the ability to sustain margins as existing projects end. Goldman Sachs’ central warning is that the industry’s growth prospects and the earnings path of its listed shipbuilders are not necessarily moving at the same speed.

Ultimately, Goldman Sachs’ caution centres on the gap between India’s long-term naval ambitions and the near-term earnings outlook for its listed shipbuilders. Higher defence spending and a growing need for naval platforms may sustain the industry’s prospects, but Mazagon Dock and GRSE must secure fresh contracts in time to replace programmes nearing completion and maintain profitability as earlier margin benefits fade. Until new orders translate into a stronger revenue pipeline, the scale of the sector’s opportunity alone may not justify the valuations attached to these companies. The key test for both shipbuilders is whether they can convert future contract wins into sustained earnings growth, rather than rely on the promise of orders that have yet to arrive.

Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.