Garden Reach IPO review (May apply)

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Review By Dilip Davda on September 12, 2018

• Company under Ministry of Defense and serving to Navy/Cost Guards.
• Suffered setback for FY17 for up gradation/technology adoption.
• Has order on hands worth Rs. 20300 crore plus.
• Asking price at a P/E of around 16, No listed peers to compare with.
• Appears a worthy bet for long term.

ABOUT COMPANY:
Garden Reach Shipbuilders & Engineers Ltd. (GRSE) is a shipbuilding company in India under the administrative control of the MoD (Ministry of Defense) and primarily adheres to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard. In addition to its ship and warship building capabilities, company is engaged in engineering and engine production activities. As a part of GRSE's engineering division, it manufactures deck machinery items, pre-fabricated portable steel bridges and marine pumps. Its shipbuilding division contributes a significant majority of revenue from operations. Company has derived 94.14%, 90.13%, 92.19% and 94.76% of its gross revenue from operations in Fiscals 2018, 2017, 2016 and 2015 respectively from shipbuilding division. GRSE enjoys 'Mini Ratna' status.

Company has established capabilities for in-house design and shipbuilding and has made considerable contributions to the indigenous warship construction program of country under 'Make-In-India'. Its shipbuilding product line spans from technologically sophisticated Frigates and Corvettes to Fast Patrol Vessels. In last five (5) decades, GRSE 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. GRSE has built and supplied more than seven hundred fifty (750) vessels to carry men and materials as well as for the surveillance of the coast line. Over the years, it has responded to the varied shipbuilding requirements of the Indian Defense Services and has evolved from building simpler vessels to building bigger and technically advanced warships. In fact GRSE participated in construction of New Railway Bridge at Elphistone (WR) and the rebuilding of recently collapsed bridge at Kolkata.

ISSUE DETAILS/CAPITAL HISTORY:
For divestment and listing gains, GRSE is coming out with a maiden IPO via offer for sale of 29210760 equity shares of Rs. 10 each via book building process. It has fixed the price band of Rs. 115-Rs. 118 per share. Minimum application is to be made for 120 shares and in multiples thereon, thereafter. Issue opens for subscription on 24.09.18 and will close on 26.09.18. Post allotment, shares will be listed on BSE and NSE. Company has reserved 572760 shares for eligible employees. From the rest, it has reserved 50% for QIBs, 15% for HNI and 35% for Retail. GRSE is offering a discount of Rs. 5 per share to employees and retail investors. Issue constitutes 25.5% of the post issue paid up capital of the company. GRSE mulls mobilization of Rs. 330.53 cr. to Rs. 339.30 cr. (based on lower and upper price bands on net basis post discount) through this secondary offer. Post issue it's paid up equity capital remains same at Rs. 114.55 cr. Its entire equity is issued at par. Average cost of acquisition of shares by the promoters is Rs. 4.00 per share. BRLM's to this issue are IDBI Capital Markets & Securities Ltd. and Yes Securities (India) Ltd. while Alankit Assignments Ltd. is the registrar to the issue.

FINANCIAL PERFORMANCE:
On financial performance front, for last four fiscals, GRSE has posted turnover/net profits of Rs. 1629.44 cr. / Rs. 51.73 cr. (FY15), Rs. 1856.06 cr. / Rs. 164.45 cr. (FY16), Rs. 1146.31 cr. / Rs. 11.47 cr. (FY17) and Rs. 1525.75 cr. / Rs. 86.81 cr. The company suffered a setback for FY17 on account of up gradation of its facility to adopt new latest technology. However, the company is now on track as indicated by FY18 earnings and is now in full swing.

It has order on hand worth Rs. 20313 cr. as on 31.07.18. In addition to firm order book, as of the date of RHP, GRSE has also been adjudged the lowest bidder for four (4) Survey Vessels (Large) and eight (8) Anti Submarine Warfare Shallow Water Craft (ASW SWC) from MoD and one (1) Ocean Going Passenger and Cargo Ferry Vessel, which presently does not form a part of its order book as letters of award have not been issued.

Issue is priced at a P/BV of 1.33 on the basis of its NAV of Rs. 88.69 as on 31.03.18. For last three fiscals, GRSE has posted an average EPS of Rs. 6.10 and an average RoNW of 7.01%. Based on FY18 earnings asking price is at a P/E of around 16, thus on the given performance, issue appears fully priced. However, one has to make a note for orders on hand that will keep this company busy for at least next 5 to 7 years.

COMPARISION WITH LISTED PEERS:
It has not listed peers to compare with.

BRLM'S TRACK RECORDS:
On BRLM's front, two merchant bankers associated with the offer have handles 15 public issues in the past three years out of which 4 issues closed below the issue price on listing date.

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