State-run Garden Reach Shipbuilders and Engineers will open its initial public offering for subscription from September 24 with a price band of Rs 115-118 per share. The subscription will end on September 26.
The public issue consists offer for sale of 2,92,10,760 equity shares by Government of India. The company aims to raise Rs 3.35 billion at the lower end of price band and Rs 3.44 billion at the higher end of the price band.
This would be third IPO from the government in the current financial year 2018-19 after IRCON International and RITES. The center is diluting 25 per cent stake through the IPO, which will not involve any fresh fundraising.
So, should you invest in the public offer? Here's a list of what top brokerages have to say.
Over the years, GRSE (Garden Reach Shipbuilders & Engineers) has developed niche capabilities for in-house design & shipbuilding and made the considerable contribution to the indigenous warship construction programme of India. Its shipbuilding product lines span from technologically sophisticated frigates and corvettes to fast patrol vessels. In addition to a firm order book of Rs 203.13 billion, GRSE is the lowest bidder for four survey vessels (large) and eight anti-submarine warfare shallow water craft (ASW SWC) from MoD and one ocean-going passenger and cargo ferry vessel. GRSE also has a strong balance sheet with nil debt and cash of Rs 10.22 billion.
Timelines in defense shipbuilding range from 23-66 months. Accordingly, revenue and profit recognition is very lumpy in nature. At the upper band of Rs 118, the stock is fairly priced at FY18 P/E of 15.6x and P/B of 1.3x.
Modern manufacturing platform and integrated shipbuilding facilities, end-to-end solutions provider, strong and established relationships with Indian Navy and Indian Coast Guard and a strong order book are the key competitive strengths for the IPO.
However, on valuation front, at higher price band, the company is demanding a P/E valuation of 15.6x (to its restated FY18 EPS of Rs 7.6) as against the peer average of 13.6x. Considering the lumpy business cycle, highly labor-intensive industry and poor financial performance, we believe the demand valuation by the company is not justified. Also, since the majority of the contracts are on a fixed price basis - there would be pressure on profitability due to rise or volatility in the raw material prices. Thus we assign an “AVOID” rating to the issue.
As of July 31, 2018, GRSE has a robust order book of Rs 203 billion for manufacturing and delivering 13 ships, comprised of one ASW corvette, four landing craft utilities, five fast patrol vessels, and three P17‐A class frigates.
GRSE’s facilities located in Kolkata have been modernized over the years, which has helped simplify processes and enhance capacities. The company undertook its major modernization in 2013, where it developed a new integrated shipbuilding facility at its Main Works Unit. This allowed it to use modular construction for building warships, which reduced shipbuilding time, improved quality through implementation of integrated construction technology and helped construct ships in line with global industry practices. The company can produce eight large ships and twelve medium/small.
However, GRSE order booking and revenue heavily depends on Indian Navy and ICG. Hence, any reduction in order flow from these two entities would significantly impact the company.
The company had a strong order book position of Rs 203.14 billion. This provides revenue visibility for the next multi years. Moreover, the management expects massive orders worth Rs 4.5 trillion from the Indian Navy through a nomination basis and competitive bidding over next one decade. Also, the Indian Coast Guard plans to take its fleet count to 200 ships by 2022 from 130 ships currently & this may boost additional spending. We believe a robust order book, increasing budgetary allocation, and a strong balance sheet with robust cash & bank balance will place GRSEL in a sweet spot to capture the future market opportunity.
At the upper price band, the company’s stock trades at 16.6x its FY18 EPS of Rs 7.1. We recommend to SUBSCRIBE the issue from a long-term perspective.
Canara Bank Securities
GRSE has sizable order book to fund further growth. As of 31st March 2018 the company had an EPS of Rs 7.14 and NAV of Rs 88.69. The company would trade at 16.53x P/E and P/B of 1.33x for FY18 earnings. We believe that the stock is fairly priced. One may subscribe to the IPO for long-term gains.