Garden Reach Shipbuilders & Engineers - Q4FY21 - Execution pickup expected in FY22E - ICICI Securities

Garden Reach Shipbuilders & Engineers (GRSE) signalled significant YoY improvement in execution while maintaining margins for FY22E. Rs250.8bn orderbook with meaningful capacity upgrades to speed up execution and smart outsourcing/in-house mix allows for the management confidence. We maintain BUY with a target of Rs 255/share.

- Execution details for FY21. FY21 revenue break consists of i) Rs 10.1bn in shipbuilding including Rs140mn of refits and repairs ii) Rs500mn from Bailey bridges iii) Rs170mn from Deck Machinery & Pump and iv) Rs180mn from Engine division. Shipbuilding revenue has seen contribution of i) Rs630mn from P17A ii) Rs1230mn from survey vessels (large) iii) Rs1660mn from ASWSWC iv) Rs410mn from FPV and v) Rs318mn from LCU.

- Execution scheduled for FY22/23E allows management optimism for meaningful increase in execution over the next two years. P17A and Survey vessel construction are expected to contribute materially to FY22E revenues along with Phase 1 construction of ASW SWC. 1st ship of P17A has seen meaningful maturity of outfitting, while the second ship will be commissioned by July, '22 with a much higher percentage (35%) of outfitting and onboarded equipments. Management expects to witness commissioning of the first survey vessel in August/Sept, '21, with significant outfitting/equipment onboarding and consequently addition to revenues. Second survey vessel will be commissioned in the LnT shipyard by Dec, '22 with an even higher percentage of outfitting. Construction of the first ASWSWC has started in Dec, '21. The remaining 3 ASWSWCs were expected to start in May, '21 but has been delayed to June, '21. The execution for the ocean going vessel for the government of Guyana is also expected to start in Nov, '21.

- Significant capacity augmentation across facilities will help in faster execution of the orderbook. Current orderbook stands at Rs 250.8bn comprising of 17 ships. The CNC Plasma cutting facility in the Rajabagan dockyard (RBD) set up at a cost of Rs.41mn will enhance the plate cutting capacity by 30%. The modern Hull block fabrication complex in RBD, constructed at a cost of Rs190mn will enable concurrent construction of large sized (40 te) hull blocks in a covered environment. This will facilitate modular integrated construction of warships with an enhancement in production capacity of hull blocks by 25%. Blocks thus fabricated in the RBD, will be moved through river to be assembled at the main shipyard. Thus, a concurrent in-house process of plate cutting, fabrication and assembly have allowed throughput to increase from 1000tpa to 1500tpa.

- Partnership with LnT. GRSE has outsourced construction of 3 survey vessels and 4 ASW SWC - on a limited tender basis to LnT. Order value stands at Rs1.76bn for survey vessels for hull construction, with provisions for increasing up to a percentage of the total order value for GRSE. The value of order placed for ASW SWC stands at Rs2.5bn for the 4 ships. Thus while value of construction orders placed on LnT is not material it will help speed up the execution schedule for GRSE.

- Future orders, revenue streams and margin visibility. Management expects 11 next generation offshore patrol vessels (NGOPV) order from Indian Navy, of Rs 45bn. Seven of the NGOPVs will be executed by L1 bidder and four by L2 bidder. Also Rs12bn order from Indian Navy for cadet training ships is also expected in immediate future. Management also expects order flow from next generation corvettes in the medium term. GRSE has come L1 in a US$3mn international competitive tended offer for Bangladesh. Management witnesses meaningful revenue opportunity in ship refits and have leased three drydocks from Kolkata Port trust (KPT). GRSE expects both domestic and international refit orders. Domestic orders should include LST (Landing ship tank) refit of Rs 2bn from Southern command. Management doesn't expect meaningful margin impact from high commodity prices or differing execution mix (higher ASWSWC execution) in FY22E.

- Provisions and one-offs in the results. GRSE has provided for Rs 117.5mn for P17A. Since the design of the project rests with Mazagon dock (MDL), the payment for monitoring system (named PLF) for common procurement has been provided in Q4FY21. This inflates 'other expenses - Project related' for Q4FY21. There has been an increase in 'other expenses' as well driven by i) Rs 37mn CSR expense provision ii) Rs 50mn charge for RnD iii) Rs 24mn charge for obsolete and non-moving inventory.

Maintain BUY with a target of Rs 255/share

We maintain BUY on GRSE with a target price of Rs255/share. Given the bulge in execution of the orderbook, we continue to use DCF valuation for GRSE. 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 risks. 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.181.8 as compared to the previous close of Rs. 178.55. The total number of shares traded during the day was 51124 in over 1343 trades.

The stock hit an intraday high of Rs. 185.9 and intraday low of 178.55. The net turnover during the day was Rs. 9371872.

Source : Equity Bulls

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