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Last Updated : Sep 24, 2018 12:55 PM IST | Source: Moneycontrol.com

Garden Reach Shipbuilders IPO opens: Should you subscribe?

Garden Reach is a shipbuilding company in India under the administrative control of the MoD and primarily adhere to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard

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State-owned ship building company Garden Reach Shipbuilders and Engineers (GRSEL) has opened its Rs 345-crore initial public offering for subscription on Monday.

The price band is fixed at Rs 115-118 per share for the issue which will close on September 26. This is the third IPO from the government in financial year 2018-19 after IRCON International and RITES.

The public issue consists offer for sale of 2,92,10,760 equity shares by government of India. Retail investors and employees will receive shares at a discount of Rs 5 per share on final offer price.

Garden Reach is a shipbuilding company in India under the administrative control of the MoD and primarily adhere to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard.

In addition, it is engaged in engineering and engine production activities. Shipbuilding division contributed a significant revenue from operations - 94.14 percent, 90.13 percent, 92.19 percent and 94.76 percent to gross revenue from operations in Fiscals 2018, 2017, 2016 and 2015 respectively.

Most brokerage houses recommend subscribing the issue for long term and not for listing gains, considering company's strong order book, business diversification, strong and established relationships with Indian Navy and Indian Coast Guard, and strong balance sheet with robust cash & bank balance.

Here are views from several brokerage houses on the IPO:

Rudra Shares & Stock Brokers

Indian Navy and Coast Guard are expected to grow their fleet to about 200 vessels by 2027. Therefore, the company is optimistic of winning large orders in future which would be beneficial for the company as it is primarily involved into meeting the shipbuilding requirements of the Indian Navy and the Indian Coast Guard.

The company also intends to explore the global market for products. It anticipate exporting small and medium sized warship and patrol vessels to South East Asia, west Asia, African countries and Latin America which provides an opportunities to develop export business.

An the upper-end of price band of Rs 118 with EPS of Rs 7.61 for FY18, P/E works out at 15.50x.

Moreover, taking into consideration, company's strong order book (As on July 31, 2018, order book stood at Rs 20,313.61 crore), Make in India initiatives, business diversification, strong and established relationships with Indian Navy and Indian Coast Guard (Company have delivered 96 ships to the Indian Navy and Indian Coast Guard on an aggregate basis), we recommend to Subscribe the IPO for long term benefits.

Asit C Mehta

GRSEL's strong order book position provides revenue visibility for the next multi years. Moreover, the management expects massive orders worth Rs 4.5 lakh crore 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 robust order book, increasing budgetary allocation, and strong balance sheet with robust cash & bank balance will place GRSEL in a sweet spot to capture future market opportunity.

We recommend to Subscribe the issue from a long-term perspective.

SMC Research

The company earns more than 90 percent of its revenue from ship-building, but is also looking at increasing its other engineering activities, and to tap the potential of the proposed inland waterways transportation in the country.

The company is focusing on garnering more repairs and retrofit works and lowering material costs to boost margin. Along term investor may opt the issue.

Canara Bank Securities

GRSE has sizable order book to fund further growth. As of 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.

GEPL Capital

Garden Reach stands to gain from operating leverage and also raise Stability from government infrastructure projects. At a P/E of 16.5x we believe that GRSEL is fairly valued. We assign a Subscribe rating to the IPO.

Angel Broking

On the valuations front, GRSE’s pre-issue P/E works out to 15.6x FY2018 annualized earnings (at the upper end of the issue price band), which is higher compared to its peer Cochin Shipyard (trading at 14x its FY2018 annualised earnings).

Further, the company’s return ratios are also lower versus other peers. Thus, we recommend Neutral rating on the issue.

Choice Broking

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 labour intensive industry and poor financial performance, we believe the demand valuation by the company is not justified.

Also, since majority of the contracts are on 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.

Disclaimer: The views and investment tips expressed by brokerage houses on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Sep 24, 2018 12:55 pm
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