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

Garden Reach Shipbuilders & Engineers (GRSE) reported an impressive Q4FY21. While revenues were down 13%YoY, EBITDA was Rs375mn, up 9% YoY; margins at 9.4%. Both inventory and payable days for FY21 appear inflated, perhaps as a precursor to higher execution in FY22E. What has helped the outlook of working capital the most is a normalised receivable days at 57 (136 YoY). First of the three P17A stealth frigates (P17A forms the largest portion of GRSE's orderbook) was launched in Dec, '20 and will lead to accelerated revenue accretion in the next two years. Execution of 1st ASW-SWC continues to pick up pace. Overall, GRSE is well placed with ~20x book to bill with Rs 262bn orderbook to be completed by CY27; pick up in execution cycle will help unlock value. We maintain BUY with a target of Rs 255/share.

- Project updates for Q4FY21 - Execution picks up pace for 1st ASW-SWC at L&T's Katupalli shipyard. Execution is currently carried out at L&T Katupalli shipyard. The contract value of the vessels is Rs63.11bn (US$855mn). Owing to Covid-19 delays, the start of production of the first hull has slipped four months behind schedule. The tentative delivery plans of the first vessel is Oct 2022, followed by two every 12 months until deliveries complete in Oct, '26. Cochin Shipyard (CSL) is also building 8 ASW-SWC for the same value and started production on 1 Dec,'20.

- Long running (signed in Sept 2011) contract of 8 Landing craft utility (LCU) was also completed with the delivery of 8th LCU in Dec, '20. The amphibious ships are to be based out of strategic location of Andaman and Nicobar islands and are specially designed to undertake landing operations in the most difficult beaching areas.

- Contract signed with Guyana, Government of Seychelles. GRSE has contracted and subsequently delivered (in Q4FY21 and Q1FY22 respectively) a fast patrol vessel with Government of Seychelles for the country's coast guard. GRSE has also signed a contract with Government of Guyana for an Ocean going vessel at a cost of US$12.7 mn.

- Orderbook stands at Rs 261.9bn for construction of 15 warships to be completed progressively by CY27. GRSE is currently executing three major projects of the Indian Navy pertaining to construction of 3 Stealth Frigates, 4 survey vessel (Large) and 8 ASW SWCs. The last two projects were won on competitive bidding. GRSE is using advanced modular integrated shipbuilding, which has helped enhance it's capacity to construct 20 warships concurrently. First of the three P17A stealth frigates were also launched in Dec,'20. The construction of P17A (three) is the largest component of GRSE's orderbook at Rs 192bn. Based on basic design prepared by Directorate of Naval design, the construction is being done in two locations (MDL - Mazagon shipyard and GRSE) concurrently.

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.178.55 as compared to the previous close of Rs. 181.55. The total number of shares traded during the day was 29802 in over 1012 trades.

The stock hit an intraday high of Rs. 181.55 and intraday low of 173.35. The net turnover during the day was Rs. 5320771.

Source : Equity Bulls

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