Garden Reach Shipbuilders & Engineers Ltd. has bagged a price target hike from Goldman Sachs after signing contracts worth Rs 53,866.50 crore with the Ministry of Defense (MoD) for the acquisition of eight Next Generation Corvettes (NGCs) for the Indian Navy.
However, even after raising GRSE's price target to Rs 1,640 per share from Rs 1,515, the brokerage has maintained a 'sell' call on the stock. The revised TP too implies a potential downside of 21.8% from the last closing price.
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"The commissioning of these eight NGCs should support the replacement and modernization of the Indian Navy's 23-corvette fleet, which, as highlighted in our shipbuilders initiation report, has an ageing profile, with seven vessels already beyond their expected life cycles and another six approaching theirs," GS outlined.
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The new order helped raise GRSE EBITDA estimates for FY28 and FY29 by 11% and 40%, respectively, but GS still believes that the stock is trading at a significant premium to global shipbuilders that have far attractive book/bill ratio and better order book/market cap.
Further, the defense PSU is at a juncture where the delivery of major vessels has largely concluded and earnings are in a declining phase, according to Goldman Sachs.
The brokerage expects EBITDA margins to be lower over the next 3 years, as it does not see the tailwinds from early delivery of vessels materialising.
Order Win
GRSE, headquartered in Kolkata, and Goa Shipyard Limited, based in Goa, will undertake the construction of the eight Next-Generation Corvettes. The vessels will feature an indigenous stealth design developed by the Indian Navy.
Each warship is expected to have a displacement of around 2,000 tonnes and attain a maximum speed of approximately 30 knots. Designed as high-speed surface combatants, the corvettes will be equipped to undertake multiple maritime security and combat operations.
The first vessel is targeted for delivery by 2030, with efforts underway to accelerate the construction schedule, according to the report.
The project is expected to strengthen the manufacturing capabilities of India's public sector defence shipyards while providing a boost to the domestic defence supply chain.
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