Garden Reach Shipbuilders & Engineers (GRSE) reported in-line Q2FY21 revenues at Rs2.7bn (down 38% YoY). Margin performance was better than expected with near YoY doubling of EBITDA. This was driven by continued resilience in gross margins (56% vs 41% YoY). Around 33% YoY reduction in employee costs also helped the EBITDA beat. Substantial reduction in trade receivables and increase in customer advances helped working capital in H1FY21. Comfortable working capital / cashflow dynamics make GRSE stand out in the defence sector results witnessed till date for Q2FY21. Company's shipbuilding orderbook is currently at ~Rs262bn and enjoys ~20x '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.
- Undertaking strategic capacity-addition projects. GRSE is planning to increase its building capacity from 20 (eight large and 12 medium) ships to 24 ships p.a in 3-4 years. Recent commissioning from the shipyard include the ASW Corvette and the FPV for coastguard.
- Comfortably placed on working capital. H1FY21 witnessed substantial reduction in trade receivables - by Rs 3269mn (trade receivable days declined from 136 days in FY20 to 97 post H1FY21), and Rs10,200mn increase in other current liabilities. Increase in other current liabilities presumably represents customer advances. This is a key positive takeaway from the result, given the concerns on constrained budgetary environment in FY21.
- 'Book to bill' ratio at ~20x remains key investment thesis. GRSE has a strong orderbook of >Rs262bn 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 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 in Q1FY21. However, certain things are working for the company: i) confirmed orderbook at ~Rs262bn 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 defence sector.
Shares of Garden Reach Shipbuilders & Engineers Ltd was last trading in BSE at Rs.192.5 as compared to the previous close of Rs. 192.95. The total number of shares traded during the day was 9676 in over 295 trades.
The stock hit an intraday high of Rs. 196.9 and intraday low of 191.75. The net turnover during the day was Rs. 1876614.