Garden Reach Shipbuilders & Engineers - Managed Q1FY21 quite well - ICICI Securities

Garden Reach Shipbuilders & Engineers (GRSE) has reported impressive Q1FY21 earnings despite complete closure of operations in H1Q1FY21. Gross margin came in at 58.4% against 53.2% QoQ and 71.6% YoY. This is indeed impressive given that revenues were down 76% QoQ. GRSE has been able to manage subcontracting expenses quite well against the backdrop of revenue decline. EBITDA margin was impacted by sticky employee costs @58% of topline in Q1FY21 leading to a negative EBITDA of Rs404mn. Company's shipbuilding orderbook is currently at ~Rs262bn and enjoys ~21x 'book to bill' ratio. Revenues should increase substantially from FY22E leading to margin expansion on the back of operating leverage. Company has unveiled two key projects: to increase capacity for P17A, ASWSSWC and survey vessel (large). Maintain BUY with a revised target price of Rs270/share (Rs230 earlier).

- Undertaking strategic capacity-addition projects. GRSE recently inaugurated its state of the art underwater CNC plasma cutting machine and a modern hull block fabrication complex in the Rajabagan Dockyard. The CNC plasma cutting complex will increase plate cutting capacity by 30% and the hull block complex will increase hull production capacity by 25%. This will help in the execution of P17A, ASWSWC and survey vessel (large).

- Status of P17A. GRSE, in Feb'15, had signed the contract to build three stealth frigates with the MoD for ~Rs192bn; it is the biggest order awarded to the company so far. Project 17A frigates are modernised guided missile frigates, to be built with integrated construction methodology and latest stealth features with improved weapon package. As per contractual timelines, the yard is expected to deliver the first frigate by CY23 and next two ships in CY24 and CY25 respectively.

- 'Book to bill' ratio at ~20x remains key investment thesis. GRSE has a strong orderbook of >Rs.262bn equipping it with a deep pool of revenue-generating projects. It has 18 ships including eight ASWSWC, three P17A, four survey vessels (large), one LCU (delivered in Q1FY21), two FPVs (one delivered in Q2FY21) in various stages of construction and expected to be delivered to the Indian Navy and the Indian Coast Guard as relevant.

- Maintain BUY with a revised target price of Rs270/share. We value GRSE at 10x FY22E EPS. We continue to factor-in muted execution in FY21E given the currently constrained Budget environment and the near-washout of Q1FY21. However, certain things are working in the company's favour: i) confirmed orderbook at ~Rs270bn and current 'book to bill' ratio at 20x; ii) the practicality of platforms under delivery, allowing little sense to delay them indefinitely (unlike, say, aircraft carriers). We reiterate GRSE as one of our top picks in the sector.

Shares of Garden Reach Shipbuilders & Engineers Ltd was last trading in BSE at Rs.218.55 as compared to the previous close of Rs. 234.3. The total number of shares traded during the day was 97728 in over 2921 trades.

The stock hit an intraday high of Rs. 228.1 and intraday low of 215.85. The net turnover during the day was Rs. 21700789.

Source : Equity Bulls

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