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Garden Reach Shipbuilders & Engineers (GRSE) reported lower than expected Q1FY23 revenues (up 6.5% QoQ, 91% YoY). Q1FY23 revenue run-rate does not inspire confidence in a sharp uptick in FY23 and brings back expectations of 20- 25% YoY revenue growth possibility (as was alluded to by management last quarter). Gross margin and EBITDA margin also moderated significantly in Q1FY23 with 1,230bps and 228bps QoQ compression respectively. As revenue contribution from P17A moderates (as other projects pick up execution pace), margin performance may face headwinds. We downgrade GRSE to HOLD (from Add) given the ~12% run-up in stock price seen in the past 1 month.

* Orders at hand at ~Rs240bn: These orders are: 1) Three P17 Alpha advanced frigate programme for Indian Navy with an order balance of ~Rs155bn; 2) four Survey Vessel Large (SVL) ships with an order balance of ~Rs17bn; 3) eight ASW Shallow Water crafts for Indian Navy with an order balance of ~Rs59bn; 4) one Fast Patrol Vessel for the Indian Coast Guard; 5) one Ocean-Going Passenger cum Ferry Vessel for the Republic of Guyana; and 6) eight patrol boats for Fisheries Department of the Government of Bangladesh. GRSE has been declared L?2 in a bid for next-generation ocean-going patrol vessels for the Indian Navy. As per the tender condition, GRSE will be concluding a contract for four of these OPVs during FY23 with an order value of ~Rs32bn.

* Projects planned for FY23. First P17A vessel (launched in Dec’20) is now undergoing outfitting and has already achieved ~40% physical progress. The second P17A ship has been launched in Jul’22, with a percentage construction of ~30%. The third vessel is on track for launch three months ahead of schedule, i.e. during May’23. The first ship of ‘The Survey Vessel (Large)’ project was launched in Dec’21 and has now achieved 50%+ physical progress in construction. The second ship has been launched in Q1FY23, and management intends to launch the third ship in Nov’22 and the last in Apr’23. Concurrent construction of four out of eight ships of anti-submarine shallow water craft has already started – first and second ship will be launched by Oct’22 and Mar’23 respectively. The ocean-going passenger cum ferry vessel for the Republic of Guyana is well on track: it has been launched in Q1FY23 and delivery is planned for Feb’23. Fast Patrol Vessel for the Indian Coast Guard, has already reached ~70% physical construction and was launched in Q1FY23, and delivery is planned for Jan’23.

* FY23E-FY25E is expected to witness peak execution. Maximum revenue from operations, or value of production (VOP), is accrued when the ship moves from ~35% to 60% construction. This is the phase when the equipment and weapon platforms are integrated. Hence, peak performance in terms of execution of orders and then translating it to VOP is expected in FY23E-FY25E.

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