Garden Reach Shipbuilders & Engineers - Execution pickup to unlock value - ICICI Securities

Key takeaways from Garden Reach Shipbuilders & Engineers (GRSE) conference call are i) Significant scope of margin accretion possible through internal efficiency measures, apart from the operating leverage benefits ii) progressively higher revenues, with FY22E revenues being significantly higher than FY21E; 12 ships under construction in FY22E iii) management doesn't foresee any stress in working capital as GRSE stays on course to execute Rs 259bn of orderbook by FY27 and with revenues peaking out in FY23/24E iv) Next prospective domestic order is new generation missile vessels, where technical evaluation is complete and outcome awaited and v) schedule of execution of orderbook has helped GRSE, as design and hull construction could continue in the pandemic - outfitting would have been substantially more difficult in abscence of foreign vendors. Maintain BUY.

- Margins surprised. Management highlighted that even in nominated orders; GRSE has all the flexibility to improve margins through design optimisation, improvement in supply chain, internal efficiency improvement measures etc. That is also showing in the margins post pandemic despite supply chain disruptions. The same will be applicable for competitively bid projects like ASW SWC. Major liquidated damages (LD) provisions have already been provided for the projects under execution.

- Outlook - significant uptick in revenues expected in the next few years. Q4FY21 will be better than Q3FY21. Topline will still be lower YoY in FY21E, because of revenue lost due to lockdown, labour availability and issues with availability of equipment in H1FY21. Management expects FY22E revenues to be significantly better than FY21E. Existing orderbook of Rs 259bn will have to be completed by FY27, with peak execution (skewed bell curve) in FY23/24E.

- Rs 259bn orderbook and the execution schedule. GRSE has completed the execution of the LCU project. Focus on export orders have led to US$26mn export orderbook consisting of i)1700te vessel to Government of Guyana and ii) FPV to Government of Seychelles. The export orders, along with 15 warship for Indian navy and coast guard, allow GRSE to work on construction of 17 ships for a total orderbook of Rs 259bn. The biggest component of the orderbook is P17A (three frigates). The first frigate has been launched two months ahead of schedule and will enter the second phase of outfitting by Nov-Dec 2021. Hull construction, of second and third frigates, is also underway. First survey vessel will be delivered by mid CY22. Execution of the export orders will start within the next two months. Construction of first ASW-SWC has started in Dec, '20 while second and third ASW-SWC will see hull construction from Apr, '21. In FY22, management expects that there will be 12 ships under construction leading to significant uptick in revenue booking - led by first P17A entering the cost intensive outfitting (phase 2).

Maintain BUY

We maintain BUY on GRSE with a target price of Rs255/share. Given the bulge in execution of the orderbook, we continue to value GRSE using DCF methodology. At the target price, the implied P/E for FY23E comes to 4x. We would continue to look at DCF as well as P/E to account for the sharp bulge in execution for FY23-27E.

Key risk. Key upside risks are continued traction on orderbook, increased indigenisation leading to better margins, better working capital dynamics through governmental support. Key downside risks are higher delays leading to increased liquidate damages and lower margins, not enough visibility on orderbook accretion leading to softening of multiples.

Shares of Garden Reach Shipbuilders & Engineers Ltd was last trading in BSE at Rs.199.2 as compared to the previous close of Rs. 198.3. The total number of shares traded during the day was 72746 in over 852 trades.

The stock hit an intraday high of Rs. 204 and intraday low of 198.1. The net turnover during the day was Rs. 14576793.

Source : Equity Bulls

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