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Execution falls short of expectations

Revenue rises 32% in Q3FY24

Garden Reach Shipbuilders & Engineers’ (GRSE IN) Q3 revenue rose 32% YoY to INR 9.2bn, 17% below our estimates. Current execution includes three P-17A frigates, four survey vessels, eight anti-submarine warfare shallow water craft (ASW-SWC), six patrol boats for Bangladesh, next-generation electric ferry for West Bengal government, and two next-gen offshore patrol vessels (NGOPVs), but fell short of expectation.

Pipeline robust but large next-gen corvette orders deferred

GRSE's pipeline is supported by many upcoming naval projects, such as the request for proposal (RFP) for an oceanography & survey ship for Defence Research and Development Organisation (DRDO) at ~INR 7.5-10.0bn. The request for information (RFI) has been issued for: 1) 18 next-generation fast patrol vessels (FPVs) for INR 50bn with an RFP by CY25-26, 2) 21 water jet fast attack craft (FAC) for INR 2bn with an RFP by CY24, 3) two multi-purpose vessels for the Navy RFP by CY24 for an order value of ~INR 15bn, 4) eight next-generation corvettes (NGCs) worth INR 360bn with an RFP likely in CY24 (earlier timeline from March 2024), 5) five next-generation survey vessels worth INR 24-25bn with an RFP likely by CY25, and 6) seven P-17 bravo frigates worth INR 170bn, with an RFP likely by CY25.

Valuation: reiterate Sell with a higher TP of INR 720

We cut FY24E EPS by 11% on lower-than-expected execution in the past six months, leading to margin compression. But we raise our FY25E/26E EPS by 5%/4% on execution ramp-up. We raise our TP to INR 720 from INR 695, on SOTP, assuming core shipbuilding value of INR 577 at 16x (unchanged) December 2025E P/E, in-line with defence shipbuilding P/E multiple, and a cash value of INR 144 at 8x (unchanged) P/E as we roll forward to December 2025E earnings.

We maintain Sell, due to deferment of a large order in NGC to CY24 (from FY24), which may defer revenue growth beyond FY26, and given 11% stock outperformance versus the Nifty index in the past six months. We expect an EPS CAGR of 38% in FY23-26E and improvement in ROE/ ROCE by 940bps to 27% and by 880bp to 25% in FY24-26E, respectively.

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