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Execution picks up; setting up for a strong FY23

Garden Reach Shipbuilders & Engineers (GRSE) reported a lower-than-expected Q3FY22 performance. Q3FY22 witnessed ~35.4% YoY revenue growth. Top-line growth was ~63.5% YoY for 9MFY22. Q3FY22 gross margin is up ~14.8% YoY and 9MFY22 EBITDA is up ~3.2x over 9MFY21. Q3FY22 EBITDA margin is ~10.7% as against ~11.6% YoY. Execution appears to be shifting to FY23E; 9MFY22 performance led to FY22E earnings downgrade. Overall, GRSE is well placed with ~20x book to bill with Rs262bn orderbook to be completed by CY27; pick-up in execution cycle will likely help unlock value. Having modernized its infrastructure facilities, GRSE is in a position to construct 20 warships concurrently using advanced modular integrated shipbuilding technology. We maintain HOLD with a target of Rs 250/share.

Indian Navy (IN)’s utilisation of budget is highest among three forces at 138%. Naval fleet budget (BE vs BE) has increased 84% YoY. This is a combination of orderbook execution by GRSE, Mazagon, Cochin. We beleive certain budgetary commitment has been kept for SSBN (3rd ship has been recently launched at the shipbuilding centre in Vizag) and P75 (I). Naval other equipment budget is also up 9% YoY and this would have earlier included predator drones, more P81 allocation – but the import component would be substantially lower now.

Increased focus on exports: Currently exports account for ~7% of the top line (Rs~11.4bn in FY21). GRSE aims to increase its share of exports to ~25-30% in next 4-5 years. Further, GRSE aims commercial ship orders from the Indian market as well as overseas market. GRSE has signed preliminary pacts with DCNS of France and Gibbs and Cox of the US for collaboration in design of ships to boost the exports.

GRSE lays keel for its first Indian ASW corvette: ‘Sandhayak’, the first of the four survey vessels (large) project being built by GRSE, Kolkata for Indian Navy was launched in Dec 2021. The ship has taken its name from the first ship of the erstwhile Sandhayak class Survey ships. The contract for building four survey ships was signed between MoD and GRSE on October 30, 2018 at a total cost of Rs24.4bn. As per build strategy adopted by GRSE, first ship is being built at GRSE Ltd and construction of balance three ships is envisaged at M/s L&T Shipbuilding, Kattupalli.

Maintain HOLD with a target of Rs250/share. We maintain HOLD with a target price of Rs250/share. Given the bulge in execution of the orderbook, we continue to use DCF valuation for GRSE. We would continue to look at DCF as well as P/E to account for the sharp bulge in execution for FY23-27E.

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