Garden Reach Shipbuilders – IPO Analysis

Garden Reach Shipbuilders – IPO Analysis

Garden Reach Shipbuilders and Engineers Ltd (GRSE) is a leading shipyard PSU located in Kolkata. It builds and repairs commercial and naval vessels majorly catering to the requirements from Indian Navy and Coast Guard. The IPO is being released to enable the government to dilute 25 percent stake in the company. The company will not receive any proceeds from the IPO. The IPO will be open for subscription between September 24 to 26. The price band for the issue has been fixed between Rs 115-118 per share. Following are the other details related to the IPO:

Total Shares 29,210,760
Face Value Rs. 10 Per Equity Share
Issue Size 339.39 Cr.
Lot Size 120 Shares
Issue Price ₹ 115-118 Per Equity Share
Retail Discount 5
Listing At NSE,BSE
Listing Date Oct 05 2018
Minimum Investment 13800 INR

Inconsistent Earnings, Low Margins

The company has show inconsistency in topline and bottomline numbers. There is no directional growth shown over the years. The company does have a strong order book at 20,300 crores INR on March, 2018. Hence, there should be worries over revenue visibility for at least 5 years. But, the earnings remain a concern. Also, the profit margins are 5.6% which have been declining over the years. Peer companies like Cochin Shipyard have a better profit margin of around 15.5%. Hence, inconsistent revenue and earnings trend with such low margins doesn’t really excite me. 

Figures in Cr. March’18 March’17 March’16 March’15 March’14
Revenues 1523.85 1138.76 1849.55 1623.70 1693.23
Expenses 1359.45 1082.88 1565.81 1500.67 1488.57
EBIDTA 164.40 55.89 283.74 123.04 204.66
PAT 86.81 11.46 164.44 51.73 116.57

Relative Valuations look slightly high

The annual EPS for FY17-18 was 7.14 taking the stock’s price earnings multiple to 16.5. The debt of company is around 500 crores with Debt to Equity ratio of 0.49 which is comfortable. Cochin Shipyard is a peer company trading at 13.8 times price earnings. Compared to GRSE, Cochin Shipyard has better earnings record and forecast, much higher Profit margins, zero debt and upcoming expansion facilities. Given, all these considerations, the IPO doesn’t seem so attractive. 

Should you subscribe ?

Positives: Strong order book, Clear revenue visibility, focus on ship repair increasing Negatives: Poor margins, Inconsistent earnings In my view, the company business operations are not attractive enough for an investor. Also, the valuations in the IPO don’t seem like a bargain. Hence, I would avoid it and expect no listing gains in this IPO. As a contra bet, one can evaluate Cochin Shipyard as an investment option which seems like a much better company and trading at cheaper valuations. All the best !!

Disclaimer: I am not a SEBI registered analyst and not advising anyone to buy. The purpose of this article is to share my viewpoint about fundamentals and the future prospects of the company. So, please do not consider this as an investment tip. Talk to your financial advisor before taking any investing call.

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