Garden Reach Shipbuilders & Engineers (Stock In Ramesh Damani Portfolio) is a buy for target price of Rs 630 (36% gain): ICICI Direct

Execution picking up; strong growth ahead…

About the stock: Garden Reach Shipbuilders & Engineers (GRSE), one of India’s leading defence public sector undertaking shipyards, primarily caters to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard

► The company has delivered 107 warships to the Indian Navy, Indian Coast Guard and friendly countries till date. The shipyard has built and supplied more than 780 vessels for maritime security

► GRSE’s order backlog was at Rs 22,930 crore as of September 2022 (~10x TTM revenue), of which ~98% comprises ship-building segment

► The company recorded the highest ever turnover of Rs 1,750 crore for FY22, reflecting YoY growth of 53%. In the last five years, revenues increased at 13.5% CAGR over FY17-22 while PAT increased at 73% CAGR

What should investors do? GRSE’s revenue recognition is set to increase during FY22-25E in its major contracts. Moreover, pick-up in execution will be supported by increasing indigenisation of platforms/sub-systems. Revenue is expected at 52.3% CAGR over FY22-25E vs. 8.2% CAGR in FY19-22. EBITDA CAGR is expected at 61.8% during the same period led by strong revenue growth and improvement in margins

► We initiate coverage under the Stock Tales format with a BUY rating

Target Price and Valuation: We value GRSE at Rs 630 i.e. 15x FY24E EPS

Key triggers for future price performance:

► Defence budget for indigenous procurement is likely to increase considerably for FY24E with share of imports further coming down. For FY23, Rs 84,598 crore (68% of total procurement budget) has been kept for purchasing locally produced weapons and systems

► With an already strong order backlog of Rs 22930 crore as of September 2022 (~10x TTM revenues), GRSE is well placed to benefit from Indian Navy’s big procurement plan for the next three to four years

► Revenue is expected to grow at ~52% CAGR over FY22-25E led by significant revenue recognition in its major contracts in hand (P-17A frigates, ASW-SWC, Survey Vessels)

► Next generation corvettes are the largest contract opportunity in the pipeline for GRSE (value Rs 36000 crore), the RFP of which is expected by 2023 end. GRSE is expected to be the L1 with contract value of Rs 22500 crore

► A Rs 3200-crore contract expected by FY23 end for construction of Next Generation Ocean Going Patrol Vessels (NGOPV) for the Indian Navy

► Execution expected to pick up in the coming period led by indigenous manufacturing of surface warships/vessels and associated subsystems/components. Out of 1238 sub-systems notified for indigenisation, 31 such components would be indigenously procured by GRSE