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Execution pickup will unlock value

Garden Reach Shipbuilders & Engineers (GRSE) reported an inline Q3FY21. While revenues were down 3%YoY, EBITDA was Rs416mn (Q3FY20 EBITDA was a –ve Rs12mn). EBITDA margins surprised at 11.6%. Keel laying has started for the first ASW-SWC in L&T’s Katupalli shipyard to bring forward the execution cycle. 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. GRSE also completed the ~10 year old execution cycle order of Landing craft utility, delivering the last LCU in Q3FY21. 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 (from Rs270/share earlier).

* Project updates for Q3FY21 – Keel laying for 1st ASW-SWC done at L&T’s Katupalli shipyard. GRSE held a steel cutting ceremony for the first of eight antisubmarine warfare shallow-water craft (ASW SWC) on order for Indian Navy at it’s partner shipyard Larsen and Toubro (L&T) in Katupalli. It is understood that five of the of the ASW-SWC hulls will be built by L&T, with GRSE handling the procurement of supplies, raw material and equipment. 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.

* 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.

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