Sample  write-ups  
 Garden Reach Shipbuilders & Engineers   
Vol. No. : 25    Issue No. : 34                             Friday, July 05, 2019

Building order book

The company has and is currently building huge order book, execution of which will pick up from FY21 leading to surge in revenues and profits from FY22

Related Tables
4Garden Reach Shipbuilders & Engineers: Financials
4Garden Reach Shipbuilders & Engineers: Results

Idea Garden Reach Shipbuilders & Engineers
BSE Code 542011
BSE Group B
NSE Code GRSE
ISIN Demat INE382Z01011
Bloomberg GRSE@IN
Reuters GRSE.BO
Par Value Rs 10
52-week High/Low Rs 137 / Rs 77
Current Price Rs 119 on BSE and Rs 119 on NSE
(as on 5 July 2019)

Incorporated in 1934 and acquired by the Union government from Macneill & Barry in May 1960, Garden Reach Shipbuilders & Engineers (GRSE) is a ship builder under the administrative control of Ministry of Defence and caters to the shipbuilding requirement of Indian Navy and Indian Coast Guard. The mini ratna (Category–I) PSU from 2006 is bagging the Defence Minister’s trophy for Best Performing Shipyard for four consecutive years since FY 2014. Apart from building India’s first indigenous warship, INS Ajay in 1961, other credits include being India’s first shipyard to build and deliver the Fleet tanker to Indian Navy, Hovercraft to Indian Coast Guard and landing ship to the Indian Navy.

Apart from shipbuilding, the company also offers engineering and engine production services. These include deck machinery items, pre-fabricated portable steel bridges and marine pumps.

The company is also the producer of India’s first marine sewage treatment plant also developed the integrated carbon composite superstructure with steel hull for anti-submarine warfare corvette and was the first shipyard to export a warship to Mauritius.

Presently, there are three separate facilities for shipbuilding, all of which are located in close vicinity of each other in Kolkata, West Bengal. The ships are built at the main works unit and at the Rajabagan Dockyard. The third facility is used for fitting out and repair of ships. There is capability to build vessels ranging from five tonnes to 24,600 tonnes.

GRSE is the 1st shipyard in India to deliver 100 warships.

Established Track Record and modern manufacturing platform capable of manufacturing wide product portfolio

GRSE has a long-standing relationship of more than five decades with Indian Navy and Indian Coast Guard. Over 100 ships have been delivered to Indian Navy and Indian Coast Guard so far and it is the 1st shipyard to do that.

The company also has modern plant and capabilities for inhouse design and capable of offering end-to-end solutions. It has undertaken major modernization of its infrastructure. Its facilities allow producing eight large ships and twelve medium/ small ships concurrently.

In addition, it has constructed new hull shop, module shop for mega block integration, dry dock and building berth. Its advanced modular construction technique enables the company to simultaneously build a greater number of large warships in a more truncated time period at Main Works Unit. GRSE has also recently inaugurated modern pump test bed facility at Taratala unit on June 11, 2018 for testing the pump it manufactures. Further, it completed the modernisation of its DEP unit in Ranchi in 2016. The modernisation was intended to create a new, state-of-the-art diesel engine assembly shop that would enable carrying out overhaul and assembly of engines in a dust-and-moisture-proof environment.

Currently, GRSE has collaboration with MTU Friedrichshafen GmbH, Germany, to produce MTU 396-04, 4000, 1163, 538, and 183 series diesel engines. A memorandum of understanding (MoU) has been entered into in March 2018 with an overseas entity for supply of components, equipment and services to the Bailey type portable steel bridges, an MoU was signed in April 2018 with Elbeit Systems of Israel to produce unmanned surface vessels in India and an MoU initialled in May 2018 with the ministry of defence of another jurisdiction for a shipbuilding project.

The company has a wide product range and offerings to offer. Ships ranging from small to large and advanced vessels including frigates, anti-submarine warfare corvettes, missile corvettes, landing ship tanks, landing craft utilities, survey vessels, fleet replenishment tankers, fast patrol vessels, offshore patrol vessels, inshore patrol vessels, water jet fast attack craft, hover crafts and fast interceptor boats have been delivered to Indian Navy, Indian Coast Guard, the Ministry of Home Affairs and other countries over the last five decades.

More than 750 vessels have been built to carry men and materials as well as for surveillance of the coast line. Boats, pontoons, barges, sailing dinghies, fishing trawlers, fire floats, tugs, dredgers, passenger ferries, motor cutters, deck whalers and launchers have also been constructed by the company.

Some of the key product offerings include

  • Indigenously designed Frigates with tonnage of 3650 T
  • Anti Submarine Warfare corvettes with a tonnage of 3250 T
  • Missile corvettes with tonnage of 1370 T
  • Landing craft utility vessels with tonnage of 910 T
  • Landing ship tanks designed indigenously having tonnage of 5650 T
  • Fleet replenishment tanker with 16400 T capacities
  • Offshore patrol vessels and inshore patrol vessels for rescue and marine surveillance
  • Water jet fast attack craft with tonnage of 288T
  • Hover crafts for amphibious operations and fast interceptor boats of 5T and 12T.
  • Marine Pumps
  • Portable Bridges
  • Deck Machinery items

GRSE produces ships in a more time efficient manner because of its non reliance on third parties. It is focusing on increase its market share across product verticals and geographical footprint thereby minimizing its exposure to sectors, markets, customers etc.

High level of indigenization

GRSE spends around 10-12% of PAT on R&D activities every year to enhance indigenization, design capability and operational improvements in form of reduced wastage and rework in ship construction. In line with Make in India initiative and import substitution, it has achieved 94% of indigenization in corvette and landing craft vehicle utility project during FY 19. It is also planning to attain similar level of indigenization in major projects like P17 stealth frigates and anti submarine shallow water craft.

Humongous order book, execution to pick up from FY 21 onwards

GRSE’s order book as on Mar 19 stands at Rs 21644 crore (more than 20 times FY 19 sales) as compared to order book of around Rs 7000 crore in FY 12. Post April 19, the company received orders of around Rs 6300 crore of anti submarine warcrafts.

Most of the orders in hand are at fixed prices. There is sufficient cushion to absorb any increase in raw materials prices.

Of the total order book, around Rs 300 crore of orders are from engineering and engine related orders and rest are all from shipbuilding orders.

The order book has to be executed in 15 to 60 months timeframe. Hence order booking and revenue recognition will be more skewed towards FY 21, FY 22 and FY 23 given the nature of the business.

The business is cyclical and the recognition of revenues and expenses occurs in large parts in the middle period of the project, when expensive equipment and sophisticated systems are installed in the vessels. The beginning period of a project and the end period of a project give rise to significantly lower revenues and expense recognition compared with the middle period. As a result, revenue and expense recognition is heavily weighted toward five-year cycles of one to two years of lower revenue and expense recognition, followed by one to two years of significantly higher revenue and expense recognition, followed again by one to two years of lower expense recognition.

Thus while moderate revenue growth is expected in FY 20 stupendous revenue growth will start from FY 21 onwards.

GRSE is focusing on timely execution of its large order book through integrated modular construction methodology. The company is also targeting to explore the global markets and is expected to ramp up its export of small and medium sized warship and patrol vessels to South East Asia, African countries and Latin America.

Significant opportunities continue going forward

Being qualified for the Make-in-India initiative under the defence procurement procedure grants indigenous manufacturers like GRSE a competitive advantage when supplying to the domestic market. The ministry of defence accords the highest priority to indigenously designed, developed and manufactured products for capital procurement.

Repeat customers like Indian Navy and Indian Coast Guard constitute are required to give preference to the company over global shipyards in certain circumstances. Over the next 5 years FY 19 to FY 23, there is a significant expansion in fleet ship size planned by Indian Navy and Indian Coast Guard including local construction of components as well. Indian Navy and Indian Coast Guard will acquire indigenous aircraft carrier, fleet support ships, frigates, mine counter measure vessels, fast attack crafts, patrol vessels, new-generation corvettes, survey vessels and fuel barges.

Indian Coast Guard plans to take the fleet strength to 200 ships from 130 currently and to 100 aircraft from 62 currently by 2022. As of now, 70 ships are under construction in six shipyards. The bidding process for 30 more ships is in process.

The Central government has approved around Rs 32000 crore for the Naval defence programme.

Indian Navy’s estimated capital budget for up to 2027 amounts to Rs 450000 crore.

The Coast Guard is intending to augment its existing fleet by 20 - 25 vessels over the next 10 - 15 years.

The repairs and refitting of Indian navy and coast guard vessels is another opportunity for the company. There will be substantial market opportunities in the coming decade and beyond in maintenance, repairs, refits and upgrades of Indian Navy and Indian Coast Guard warships.

The company has signed an MoU in October 2017 with an engine manufacturer for development of engines for marine applications. The scope of collaboration is to produce diesel engines in the range 50-500 kW for diesel alternators for marine applications for Indian Navy and Indian Coast Guard vessels with an aim towards self-reliance and to promote Make-in-India initiatives. All the engines will be sold to the ministry of defence by GRSE in pursuant to this MoU.

Financials will improve as the execution takes place going forward

Net sales for Mar 19 stood at Rs 489.21 crore down by 22% YoY. OPM stood at 6.4% resulting in a 12% decrease in OP to Rs 31.11 crore. Other income stood at Rs 49.96 crore down by 20% decrease in OP to Rs 49.96 crore. Interest cost was down by 68% to Rs 1.38 crore and depreciation was down by 13% to Rs 6.66 crore resulting in a PBT of Rs 73.03 crore down by 15%. After providing total tax of Rs 39.39 crore up by 141% largely due to higher deferred tax, PAT for Mar 19 quarter stood at Rs 33.62 crore down by 51%.

For FY 19, net sales were up by 3% to Rs 1386.42 crore. OPM stood at 3% as compared to -1.1% for FY 18, thus resulting in OP of Rs 42.11 crore as compared to OP loss of Rs 14.83 crore. Other income stood at Rs 171.24 crore down by 4%. Interest cost was down by 34% to Rs 5.11 crore and depreciation was down by 6% to Rs 27.08 crore. There is an EO expense of Rs 2.2 crore as compared to Nil for FY 18. PBT after EO stood at Rs 178.96 crore up by 40%. After providing total tax of Rs 69.02 crore up by 95%, PAT stood at Rs 109.94 crore up by 19%.

Valuation

For FY 20, we expect the company to register net sales and PAT of Rs 1428.01 crore and PAT of Rs 124.16 crore respectively. For FY 21, we expect the company to register net sales and PAT of Rs 1642.21 crore and PAT of Rs 143.91 crore respectively. This gives an EPS of Rs 10.8 for FY 20, Rs 12.6 for FY 21. At current market price of Rs 119, the scrip trades at 9.4 times its FY 21 projected earnings. The real pickup in sales and profits will happen from FY 22.

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Garden Reach Shipbuilders & Engineers: Financials
 
  1403(12) 1503(12) 1603(12) 1703(12) 1803 (12) 1903 (12) 2003 (12P) 2103 (12P)
Net Sales 1611.18 1562.75 1658.08 921.77 1347.76 1386.42 1428.01 1642.21
OPM (%) 7.6% 4.0% 5.7% -17.6% -1.1% 3.0% 3.1% 4.0%
OP 122.61 62.08 94.38 -162.67 -14.83 42.11 44.27 65.69
Other in. 82.05 60.96 191.47 216.99 179.23 171.24 180.00 190.00
PBDIT 204.66 123.04 285.85 54.32 164.40 213.35 224.27 255.69
Interest 0.63 5.77 6.50 7.55 7.69 5.11 4.00 3.00
PBDT 204.03 117.27 279.34 46.77 156.71 208.24 220.27 252.69
Dep. 22.73 27.11 27.80 26.65 28.96 27.08 29.25 31.29
PBT 181.30 90.17 251.54 20.12 127.75 181.16 191.02 221.39
EO 0.00 0.00 0.00 0.00 0.00 2.20 0.00 0.00
PBT after EO 181.30 90.17 251.54 20.12 127.75 178.96 191.02 221.39
Tax 64.74 38.44 87.10 8.65 35.35 69.02 66.86 77.49
PAT 116.57 51.73 164.45 11.47 92.40 109.94 124.16 143.91
EPS (Rs)* 10.2 4.5 14.4 1.0 8.1 9.5 10.8 12.6
*EPS is on current equity capital of Rs 114.55 crore of face value of Rs 10 each
(P) : Projections
Figures in crore
Source: Capitaline Database

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Garden Reach Shipbuilders & Engineers: Results
 
  1903(03) 1803(03) Var. (%) 1903 (12) 1803 (12) Var. (%)
Sales 489.21 630.51 -22% 1386.42 1347.76 3%
OPM (%) 6.4% 5.6%   3.0% -1.1%  
OP 31.11 35.28 -12% 42.11 -14.83 LP
Other income 49.96 62.14 -20% 171.24 179.23 -4%
PBIDT 81.07 97.42 -17% 213.35 164.40 30%
Interest 1.38 4.37 -68% 5.11 7.69 -34%
PBDT 79.69 93.05 -14% 208.24 156.71 33%
Depreciation 6.66 7.62 -13% 27.08 28.96 -6%
PBT 73.03 85.43 -15% 181.16 127.75 42%
EO 0.02 0.00 0% 2.20 0.00 0%
PBT after EO 73.01 85.43 -15% 178.96 127.75 40%
Current tax 39.39 16.36 141% 69.02 35.35 95%
PAT 33.62 69.07 -51% 109.94 92.40 19%
EPS* (Rs) # #   9.5 8.1  
* on current equity of Rs 114.55 crore. Face Value: Rs 10
EO: Extraordinary items, LP: Loss to Profit
EPS is calculated after excluding EO and relevant tax
# EPS can not be annualised due to seasonality in business
Figures in Rs crore
Source: Capitaline Database

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