Accumulate Garden Reach Shipbuilders Ltd For Target Rs.1,620 - Elara Capita
In-line Q3; overall outlook positive
Garden Reach Shipbuilders & Engineers (GRSE IN) reported in-line Q3, with robust topline growth along with margin expansion. GRSE is in the midst of the bell curve cycle in shipbuilding. GRSE reiterated its positive outlook, led by strong order visibility, which is set to replenish orderbook from FY28. We lower our SoTP-based TP to INR 1,620 as we roll forward to December 2026E. We reiterate Accumulate given the robust order pipeline and increased government thrust on commercial shipbuilding (as was visible in the Budget, of which GRSE is a key beneficiary).
Revenue up due to bell curve execution cycle: In Q3FY25, topline rose 38% YoY, driven by bell curve execution cycle of large orders, such as the P-17 Alpha. Current execution includes three P-17A ships (>50% construction), two large survey vessels (LSVs), eight anti-submarine shallow watercraft (ASW-SWC) ships, four next generation offshore patrol vessels (NGOPV), projects for central and state governments and exports orders, which are set to be completed by FY29. The management reiterated its target of 20-25% revenue CAGR in the next five years. It also seeks to double exports in FY26 and grow these 4x in the next four years from current levels.
Margin improves due to operating leverage: Gross margin declined 1070bps YoY to 28% in Q3, due to higher cost in the midst of peak execution. However, EBITDA margin improved 60bps YoY to 5.9%, led by lower operating cost. GRSE has set a PAT margin target of 7.5-8.0%, in line with the average shipbuilding industry, to be sustained in the upcoming quarters.
Reiterate Accumulate with lower TP of INR 1,620: We lower our FY25E EPS by 7% (on lower gross margin) and by 5% and 4% for FY26E and FY27E as the execution cycle nears completion. If GRSE is able to bag five NGCs (vs three), we may raise our estimates. We lower our SoTP-TP to INR 1,620 from INR 1,660 as we roll forward to December 2026E. We assume a core shipbuilding value of INR 1,406 at 34x (unchanged) and a cash value of INR 215 on 9x (unchanged) P/E
We reiterate Accumulate given the robust order pipeline on potential RFP for P-17 Bravo and NGC in FY26, and increased thrust on commercial shipbuilding backed by government incentives, of which GRSE may be a key beneficiary. We expect an EPS CAGR of 32% in FY24-27E with an average ROE of 28% in FY25E-27E.
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SEBI Registration number is INH000000933
