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IPO Analysis : Garden Reach Shipbuilders & Engineers

Apurva Joshi
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IPO Rating - 40 (Avoid)*

About the Issue
 

Garden Reach Shipbuilders and Engineers’ IPO will open for subscription from September 24 to September 26, 2018. The issue is purely Offer for Sale (OFS) consisting of 2,92,10,760 shares worth Rs 344.69 crore. The face value is Rs 10 per equity share. The minimum lot size for subscription is 120 shares with issue price ranging from Rs 115-118 per equity share. For the retail investors and employees, a discount of Rs 5 per share would be offered. Post-allotment, the company would get listed on both BSE and NSE. 

Purpose of the Issue 

The object of the offer includes –

  1. To carry out disinvestment of 29,210,760 equity shares by the selling shareholder

  2. To achieve the benefits of listing the equity shares on the stock exchanges

The promoter of the company is the President of India acting through the Ministry of Defence. The promoter currently holds 100% of the pre-offer paid up equity share capital of the company. The company will not receive any proceeds from this offer and all proceeds shall go to the selling shareholder. 

Company Background 

Garden Reach Shipbuilders Limited is a shipbuilding company working under the administrative control of the Ministry of Defence of India. It caters to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard. Additionally, it is engaged in engineering and engine production activities, which include manufacturing of deck machinery items, pre-fabricated portable steel bridges and marine pumps. As of FY18, the company’s 94.14% revenue was generated through the shipbuilding division. 

On September 5, 2006, the company was conferred with the status of Schedule B and Mini Ratna-Category I company by the Department of Public Enterprises under the Ministry of Heavy Industries and Public Enterprises, Government of India. 

In the last five decades, the company has built and delivered 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, WJ-FAC, hover crafts and fast interceptor boats to the Indian Navy, Indian Coast Guard, MHA and governments of other countries. It has built and supplied 750 vessels to carry men and materials for the surveillance of the coastline. 

The company has three separate facilities for shipbuilding, all of which are located in close vicinity of each other at Kolkata, India. The ships are built at the Main Works Unit and the Rajabagan Dockyard. The third facility, the FOJ Unit, is primarily used for fitting out and repair of ships. 

As on July 31, 2018, the company’s order book stood at Rs 20,313.61 crore, comprising gross order value in the shipbuilding segment, engineering segment and the engine segment of Rs 20,029.42 crore, Rs 85.17 crore and Rs 199.02 crore, respectively. Under the shipbuilding segment, the three orders of P17A-class frigates are worth Rs 19,300 crore. The delivery of the first P17A-class frigate is expected to be rolled out on April 2023 and the final one in April 2025.

Financial Performance



Over the period from FY14 to FY16, the company’s revenue growth has been muted, while PAT over the same period had been cyclical. During FY17, a sudden dip in revenue and PAT was seen as the company upgraded its facilities with latest technology. So far, over the last few years, FY18 has been a good year delivering robust YoY growth as compared to major dip in FY17. The latest order book is 15 times the FY18 revenue. It has been paying dividend consistently since past few years. For FY16, FY17 and FY18 it paid dividend of 42.9%, 43.6% and 44.3% respectively. 

Valuation and peer comparison 

Considering the upper price band of Rs 118 and with EPS of Rs 7.14 of FY18, the company’s P/E works out at 16.5x. The RoNW for FY18 was 8.5%. There are very few listed players in India which are engaged in the same line of business. Cochin Shipyard is another such PSU which is engaged in shipbuilding and repairs in India. On TTM basis, Cochin Shipyard’s P/E is 13.8x. 

Our View 

Both Indian Navy and Coast Guard are expected to grow their fleet to about 200 vessels by 2027. Therefore, the company’s management is optimistic of winning large orders over the next 8-10 years. The current order book is robust and has given revenue visibility over the medium term for the company. But, all the contracts are on fixed price basis which might affect the profitability. Also, the growth has been cyclical and the margins too have not been consistent. Also, the volatility in metal prices can exert pressure on the margins. On the valuation front, the company seems to be fairly priced but considering all other factors, this issue appears to be risky and thus investors can avoid investing in this IPO. 


*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment 
  
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