Reblog: IPO Review – Garden Reach Shipbuilders and Engineers
Garden Reach Shipbuilders and Engineers is entering the primary market on Monday 24th September 2018, with an offer for sale (OFS) of up to 2.92 crore equity shares of Rs.10 each by the Government of India (GoI), in the price band of Rs. 115 to Rs. 118 per share, with a discount of Rs. 5 per share for retail category. Representing 25.50% of the post issue paid-up share capital, total issue size is Rs. 340 crore at the upper end of the price band. Issue closes on Wednesday 26thSeptember and listing is likely on 5th October.
Company Overview:
Garden Reach Shipbuilders and Engineers is a Mini-Ratna Category 1 company under the Ministry of Defence, manufacturing warships for Indian Navy and Indian Cost Guard (90%+ revenue derived from them) under its ship building division. It also has an engineering division, accounting for less than 10% of revenues, manufacturing deck machinery for ships, pre-fabricated steel bridges and marine pumps. With 3 manufacturing facilities in Kolkata, company’s order book position (31-7-18) of Rs. 20,314 crore is very healthy, as it includes order for 3 ships for the Indian Navy, aggregating Rs. 19,300 crore, to be delivered from FY24 onwards. This will contribute to revenues meaningfully from FY21 onwards, as company is yet to commence work on these orders. Till then financial performance may be subdued as revenue peaks in the middle of the typical contract duration of 5-6 years.
Financial Performance:
In the immediate past, company’s financial performance has been lackluster with revenue dipping to Rs. 1,347 crore in FY18 and to Rs.929 crore in FY17, from consistently being in the Rs.1,600 crore range in FY16 and in earlier fiscals. As a result, bottomline was adversely impacted, contracting to Rs. 87 crore in FY18 (6.4% margin) from Rs. 164 crore in FY16 (9.9% margin). FY17 was an exceptional year with merely Rs. 11 crore PAT (1.2% net margin) due to company’s R&D schedule going haywire. FY18 profitability was such that interest income on bank deposits of Rs. 170 crore exceeded reported PBT of Rs. 128 crore, implying core operations are still loss making, despite YoY jump in revenue. Such weak profitability and poor fundamentals do not put the company in good light. Thus, lumpiness of revenue accretion and nature of order book have led to inconsistent growth.
FY18 EPS stood at Rs.7.14. As of 31-3-18, net worth stood at Rs. 1,016 crore, with BVPS of Rs. 89. Company is absolutely debt free with cash and equivalents of more than its net worth too, at Rs. 1,022 crore, translating into cash per share of Rs. 89. Return on net worth (RoNW) for FY18 stood at Rs. 8.5%, down from historic range of 12-15% between FY13-16.
Objects of Issue and Shareholding Pattern:
Since the IPO is a 100% OFS, no proceeds will flow into the company. GoI shareholding will decline to 74.50% post listing, from current 100%.
Valuation:
At Rs. 118 per share, company’s market cap will be Rs. 1,352 crore and EV at Rs. 330 crore due to high cash on hand, which leads to a PE multiple of 16x, on historic FY18 basis. Since current order book majority comprising 3 ships for Indian Navy (worth Rs. 19,300 crore) to be delivered between FY24-26, material revenue contribution will be between FY21-23. In this backdrop, FY19 is expected to be flat, while FY20 may only fare better than FY18. Thus, there are no immediate triggers for the stock. No point taking a call on low EV/EBITDA multiple of 2x or dividend yield of 3.8% or low EV of Rs.330 crore, as PSU stocks have in general been under-performers and currently out of flavor on the bourses.
Company can be compared to listed peer Cochin Shipyard, a 75% subsidiary of GoI under the Ministry of Shipping, having market cap and EV of Rs. 5,500 crore and Rs. 2,200 crore respectively. Cochin is undertaking expansion of new dockyard and ship repair facility along with building India’s first Indigenous Aircraft Carrier (IAC), reporting 16% net margin for FY18. Its RoE of 12% is superior to Garden Reach’s 8.5%, with FY18 PE ratio of 13x much lower than Garden Reach’s 16x. Based on FY19E performance, Cochin is ruling at PE multiple of 11x versus 12x for Garden Reach. Hence, valuation of Garden Reach is not compelling either, considering immediate future.
Conclusion:
Shaky financials and lack of near term triggers do not provide comfort on the stock. Neither are the valuations too supportive. Given utterly bearish secondary market sentiments, particularly for PSU stocks, better to avoid this IPO.
The original IPO review is by Geetanjali Kedia, appears on sptulsian.com and is available here.