April 6, 2023
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GARDEN REACH SHIPBUILDERS & ENGINEERS, a ship building company in India, under the administrative control of the Ministry of Defence.
Call & Research Report by HDFC Securities
Sector: Ship Building
CMP Rs. 455.4, Target Rs. 540 (19% upside potential)
Target Period: 12 Months
Garden Reach Shipbuilders & Engineers Ltd (GRSE) is a ship building company in India, under the administrative control of the Ministry of Defence. The company is engaged in shipbuilding and ship repairing, engine assembling and testing, and engineering products and has built more than 107 warships for various roles, starting from state-of-the-art frigates and corvettes to fast patrol boats. The company has a total of eight units, of which seven (shipbuilding and repair, engineering and training) are located in and around Kolkata, and one (engine division) assembles and tests new diesel engines and repairs and reconditions old engines of Naval and Coast Guard Ships) is located in Ranchi, Jharkhand.
GRSE’s order book stood at Rs 22,242 crore comprises of six ship building projects with 23 platforms, as of Dec 31, 2022. These include 15 ships for the Indian Navy. That is three ships of the P‐17 Alpha Advanced Frigate (P‐17A), eight ships of the Antisubmarine Warfare Shallow Water Crafts (ASW SWC), and four ships of the Survey Vessel Large (SVL) project. The company is executing an order for the Indian Coast Guard for a Fast Patrol Vessel (FPV). GRSE is also executing a project for the Government of Bangladesh comprising of six Patrol Boats, one Passenger cum Cargo Vessel for the Co‐operative Republic of Guyana, and one project for a next‐generation electric ferry for the Government of West Bengal. Recently, the company signed contract of Rs 3,500 crore (approx.) on competitive bidding, boosting the Shipyard’s credentials for building next generation warships indigenously, with the first next generation off-shore patrol vessels (NGOPV) scheduled to be delivered in 44 months.
The company continues to hold a strong order book of close to Rs 22,242 crore, which is ~9 times its TTM revenue. Recently, the company launched six ships (one P 17 Alpha, one Anti‐Submarine Shallow Water Craft (ASW SWC), two Survey Vessels, a Fast Patrol Vessel and one vessel that is being exported to the Government of Guyana. The company expects deliveries and execution to be better in the next 2-3 years because of the large-value projects, currently under execution. That apart, with metal and energy prices easing, margins could be better, supporting higher earnings in the coming quarters. Notably, the company is sitting on a cash and cash equivalents of close to Rs 3,900 crore (part of this is contract signing amount), as of Sept 30, 2022. With the elevated interest rates, treasury income should grow, thus supporting earnings further.
The Indian defence sector is going through a major transformational phase as the government looks committed to reducing imports and increasing indigenisation of various key defence platforms, systems and associated equipment required for these platforms. The defence shipbuilding segment continues to look promising on account of ambitious acquisition plan of Indian Navy and Indian Coast Guard which is quite encouraging for the Indian Shipbuilders and the entire eco-system. A number of Requests for Proposals (RFPs) for various shipbuilding projects have been floated by the MoD during last one year and some more are expected to come out in the near future. Further, the MoD plans to increase export of defence products to $3.59 billion by the end of 2024-25. Being a shipbuilder, GRSE could be one of beneficiaries.
Valuation & Recommendation:
The company has ability to sustain the overall performance at the present level in a competitive environment, while maintaining leadership in warship building and retaining its largely debt-free status with comfortable liquidity. Growth momentum is expected to continue in the coming quarters. The company is currently working on seven projects, comprising 15 ships for the Navy, Coast Guard, and others. While the company can pass through the higher cost, a sudden spike in prices of raw materials, like steel and energy, can impact profitability.
Investors could buy in the Rs 450-460 band and add more on dips to Rs. 401-409 band (10.5x FY25E EPS). Base case fair value of the stock is Rs 501 (13x FY25E EPS) and the bull case fair value of the stock is Rs 540 (14x FY25E EPS) over the next two to three quarters. At the CMP of Rs 455 the stock trades at 11.8x FY25E EPS.
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