Buy Garden Reach Shipbuilders & Engineers, target price Rs 265: Yes Securities

Yes Securities has given a buy rating to Garden Reach Shipbuilders & Engineers Ltd with a target price of Rs 265. The share price moved up by 11.44 per cent from its previous close of Rs 150.75. Garden Reach Shipbuilders & Engineers Ltd. stock last traded price is Rs 168.

Though Garden Reach Shipbuilders lost 2months of execution thanks to Covid-19 crisis, the brokerage is building in flat earnings growth in FY21 as Q1 is a seasonally weak quarter forming only 11-13 per cent of annual sales. P17A’s execution is ahead of schedule with the launch of first frigate in Dec’20. The brokerage sees a sharp jump in revenues from FY22 with revenues of Rs 60 billion+ by FY24 driven by peak execution of strong order book.

Investment Rationale

The brokerage believes Garden Reach’s ROE can touch its historical levels of 25 per cent+ by FY23E driven by strong execution, margins expansion of ~200bps and better profitability. GRSE has a robust balance sheet including net cash of Rs 26.7 billion (about 90 per cent is attributed by stage payments). A healthy increase in order inflows resulted in a proportionate increase in stage payments received for these orders, thus resulting in negative NWC.

At CMP, the stock is attractively trading at 6 times FY22E EPS. The brokerage retains a buy rating with discounted cash flow based target price of Rs 265, implying P/E of 10.5 times on FY22 estimates.

Risk: Prolonged impact of disruptions related to Covid-19 on Garden Reach’s execution beyond the first half of FY21.

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.