CRISIL assigns valuation grade of 3/5 to ABG Shipyard

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CRISIL assigns valuation grade of 3/5 to ABG Shipyard

CRISIL Research has come out with its report on ABG Shipyard. The research firm has assigned fundamental grade of 3/5 to the company and assigned the fair value of Rs 371 per share in its October 04, 2011 report.

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CRISIL Research has come out with its report on ABG Shipyard . The research firm has assigned fundamental grade of 3/5 to the company and assigned the fair value of Rs 371 per share in its October 04, 2011 report.

ABG Shipyard Ltd (ABG), one of India's largest private sector shipbuilders, has delivered 143 vessels till date across diverse categories. It has gradually ramped up its ship-building capability to construct vessels up to 250 metres in length and 120,000 DWT, and also jack-up rigs. ABG's strong order book of Rs 158 bn provides revenue visibility over the next few years. We continue to assign ABG a fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India.

Robust order book gives revenue visibility for 4-5 years
ABG has a strong order book worth about Rs 158 bn, of which Rs 106 bn is unexecuted. The unexecuted order book is 5.1x FY11 sales, which gives strong revenue visibility for the next four to five years. With a diversified customer base, the order book ensures adequate utilisation of ABG's expanded capacity over the medium term.

Defence and offshore support vehicles to provide growth impetus
Because of its size, experience in execution of defence orders, technological tie-ups and receipt of licence for manufacturing high-end defence vessels, we expect ABG to be a strong contender for the Rs 500 bn defence orders lined up by the government of India for the next 10-15 years. We expect ABG to also benefit from an increase in global demand for jack-up rigs and offshore support vehicles (OSVs) following an increase in oil and gas exploration activities. OSV and rigs constitute ~ 17% and 26%, respectively, of the company's gross order book.

Risks: Oversupply could curtail new orders, strong competition
A) The global shipbuilding industry is currently inundated with huge orders placed prior to 2009. The order book in the bulk carrier segment is 42% of the existing fleet size. Hence, we expect new order flow to be few and far between over the next two years in this segment. B) Moreover, ABG faces strong competition from global and established shipbuilding companies, especially in the absence of a subsidy scheme.

Sales to grow at a CAGR of 16%; margins to decline
CRISIL Research expects sales to increase at a CAGR of ~16% to Rs 28.6 bn in FY13. EBITDA margins are expected to decline to 25.1% in FY12 and FY13 due to an increase in fixed costs. However, post FY14, margins are expected to drop significantly to 18-19% as the orders eligible for subsidy would have been executed by that time. Despite increase in revenues, adjusted PAT is expected to remain flat at Rs 2.1 bn in FY13 due to a drop in margins and an increase in capital cost post capacity expansion at the Dahej shipyard.

Valuations - the current price is 'aligned' with fair value
We have used the discounted cash flow method to value ABG and arrived at a fair value of Rs 371 per share. We reinitiate coverage on ABG with a valuation grade of 3/5, indicating that the market price is aligned with the fair value.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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