Buy Garden Reach Shipbuilders, target price Rs 230: ICICI Securities

ICICI Securities has given a buy rating to Garden Reach Shipbuilders & Engineers with a target price of Rs 230. The share price moved down by -1.62 per cent from its previous close of Rs 154.35. The last traded stock price is Rs 151.85.

According to the brokerage, Garden Reach Shipbuilders & Engineers (GRSE) has reported impressive Q4FY20 earnings, beating topline and margin estimates. Revenues were 3 per cent higher than expected. Margins have surprised significantly on the back of gross margin expansion. Gross margin expanded to 53.2 per cent in Q4FY20 from 40.3 per cent year on year. This led to 7.6 per cent EBITDA margin in the quarter – highlighting what execution can achieve in terms of profitability for the company. The trend of higher subcontracting expenses continues – increasing 35 per cent for FY20 against a revenue growth of 3.3 per cent.

Investment Rationale

The brokerage values Garden Reach at 10 times on FY22E EPS. It continues to factor in muted execution in FT21E given the currently constrained budget environment. However, certain things are working in the company's favour like confirmed order book of around Rs 270 billion and current book to bill ratio of 20 times. Also the practicality of platforms (requirement) under delivery, allowing little sense to delay them indefinitely (unlike, say, aircraft carriers). The brokerage considers Garden Reach one of its top picks in the sector.

The brokerage maintains buy with a target price of Rs 230/share, based on FY22E P/E of 10 times. It acknowledges risks of further deferment in ASW SWC (anti submarine warfare) project scope as well. Yet, the confirmed order book of Rs 274 billion implies a deferment rather than revenue lost. Given the current book to bill ratio of 20 times, the bulge in revenue may be more pronounced in FY23E.

Financials

For the quarter ended March 31, 2020, the company reported standalone sales of Rs 456.69 crore, up 23.55 per cent from last quarter sales of Rs 369.63 crore and down -6.65 per cent from last year's same quarter sales of Rs 489.21 crore. The company reported net profit after tax of Rs 49.69 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 74.50 per cent stake in the company as of March 31, 2020, while FIIs held 1.47 per cent, DIIs 16.67 per cent and public and others 7.36 per cent.