Execution capability added positive; initiated with ‘Buy’ and target price of Rs 354.
Garden Reach Shipbuilders & Engineers (GRSE) is a defence shipbuilder in business since 1961. Investment thesis on the company revolves around:
(i) its current orderbook worth Rs 274 bn implying a book to bill ratio of ~20x, with 19 ships to be delivered to Indian Navy/Coast Guard;
(ii) long-term design and execution capability supported by order continuity from Indian Navy; and (iii) integrated offering and competitive margin profiling, which positions GRSE as a key beneficiary amongst Indian peers. We initiate coverage on the stock with a Buy rating and target price of Rs 354/share based on FY22e P/E of 10x (at a 25% discount to its global peer-set given the lower return ratios and stretched budget for the Indian Navy). Strong orderbook will translate into revenue increasing by ~4-5x: Current orderbook provides a book to bill ratio of 20x and is to be executed over the next few years. This implies peak execution at Rs 40-50 bn in any given year against the FY19 topline of Rs 13.9 bn.
Long-term design and execution capability an added positive: Relative to Indian shipbuilders, GRSE’s (i) mature design capabilities, (ii) uninterrupted history of execution , and (iii) integrated offering of deck machinery and equipment manufacturing as well as engine assembling facility creates a better visibility of execution.
Initiate with BUY: Risks to our call may arise from execution alone. Also, budget allocations for Naval fleet have been erratic in the past and the current budget of Rs122 bn (BE for FY20) looks committed to the hilt. The key is to guesstimate whether GRSE’s share of the budget can increase.