Defence stocks experienced contrasting analyst reactions as Goldman Sachs issued sell ratings while Systematix initiated coverage with buy recommendations. Mazagon Dock Shipbuilders Ltd. and Garden Reach Shipbuilders & Engineers Ltd. fell on Thursday after Goldman Sachs initiated coverage with Sell ratings, warning that low order replenishment and the end of major project deliveries could weigh on earnings. According to reports from Essential Business Intelligence, Garden Reach shares dropped 4.33%, while Mazagon Dock declined 4.18%. Goldman Sachs set 12-month price targets of ₹1,515 for Garden Reach and ₹1,855 for Mazagon Dock, citing further downside risk as both companies approach a weaker phase of their earnings cycles. However, Systematix has initiated coverage on Astra Microwave Products Ltd. and Data Patterns India Ltd. with Buy ratings, setting target prices of ₹2,600 for Astra Microwave (68% upside) and ₹5,100 for Data Patterns (31% upside) from their respective market prices of ₹1,544 and ₹3,885.
The brokerage expects earnings before interest, taxes, depreciation and amortisation (Ebitda) at the two shipbuilders to contract through FY29, even as India's naval expansion plans point to longer-term demand. As reported by Essential Business Intelligence, Goldman Sachs expects Ebitda at Mazagon Dock and Garden Reach to decline at a compound annual growth rate of 19.3% between FY26 and FY29, compared with projected growth of 26% for other aerospace and defence companies under its coverage. For Mazagon Dock, the brokerage pointed to a low book-to-bill ratio and the long gestation period of shipbuilding contracts, stating that major events that could drive a re-rating of the stock appear to have played out. Garden Reach faces the risk of an earnings decline as delays in the next-generation corvette order push back the timing of new business, according to Goldman Sachs analysis.
According to the brokerage, Mazagon Dock's book-to-bill ratio stands at 1.37 times, while Garden Reach's is 1.87 times, both at cyclical lows. The companies are also nearing the end of major programme deliveries, raising the importance of fresh orders in sustaining future revenue. As reported by Essential Business Intelligence, India accounts for less than 1% of the global shipbuilding market, with defence and military vessels making up about 75% of India's domestic shipbuilding market compared with around 22% globally. The low ratios point to a weaker order pipeline relative to the companies' revenue, making fresh contracts increasingly important to sustaining future earnings. Long periods between order placement, construction and revenue recognition also make the timing of new business critical for shipbuilders.
Indian Navy capital expenditure has more than doubled from ₹33,300 crore in FY22 to ₹70,000 crore in the Union Budget for FY27, according to Goldman Sachs. However, the brokerage expects incremental spending to be concentrated more on aircraft carriers and amphibious ships than on surface vessels, potentially delaying orders for other ship types. The Indian Navy aims to expand its fleet to 200 ships by 2035, but programmes such as the P-17A frigates and P-75I submarines require multi-year tendering and gestation periods before they generate revenue. Despite longer-term opportunities, Mazagon Dock and Garden Reach trade at a premium to global shipbuilders on a market capitalisation-to-order book basis, as noted by Goldman Sachs. The brokerage identified unmanned and autonomous platforms, ship repair and commercial shipbuilding as potential growth areas, with private shipbuilders having an advantage in commercial shipbuilding due to greater exposure to the segment.
Systematix highlighted that Astra and Data Patterns occupy pole positions in India's defence electronics space spanning radar, electronic warfare, communications and space, underpinned by strong in-house IP and research and development capabilities. According to Systematix, Astra Microwave is at an inflection point of an unprecedented structural transformation, having evolved from a sub-tier radio frequency component supplier into a Tier-1 Systems and Development-cum-Production Partner. Data Patterns has emerged as a capability leader amongst private defence players, with focus on indigenous design supported by the largest private sector R&D team. FY27 could mark an inflection point, as years of investments and capability building translates into substantial order inflows running into thousands of crores, as reported by Systematix. The brokerage noted that global and Indian defence spending is on an upswing, driven by multiple conflicts worldwide, with India's defence budget expected to grow at double digits while the private sector could outpace industry growth.
