Garden Reach Shipbuilders IPO: All You Need To Know

Garden Reach Shipbuilders & Engineers Ltd., a state-run shipbuilding company, launched its three-day initial public offering today as the government seeks to offload a portion of its holding.

The government plans to raise nearly Rs 345 crore by selling 25.5 percent in Garden Reach. The company is offering 2.9 crore equity shares at Rs 115-118 apiece.

Business

Garden Reach is a shipbuilder under the administrative control of the Ministry of Defence and adheres to requirements of Indian Navy and Indian Coast Guard. The company is also involved in engineering and engine-production. The company has three shipbuilding facilities in Kolkata, from which it generates over 90 percent of its revenue.

The company, as of July 31, had an orderbook of over Rs 20,000 crore that provides a revenue visibility of more than 15 years. There's a threat to its profitability—given that most of its contracts are of fixed price—due to cost-overruns, delays in delivery or failure to meet contract specifications.

The company has also been declared as the lowest bidder for:

• Four survey vessels,
• Eight anti-submarine warfare shallow water craft
• One ocean-going passenger vessel
• One cargo ferry vessel.

These orders aren't included in the company's order book.

Financial Highlights

The net worth of the company, as of March 31, was a little over Rs 1,000 crore, translating to a book value of Rs 89 per share. Its cash balance stood at Rs 1,022 crore.

Garden Reach's revenue and net profit declined at an annualised rate of 2.5 percent and 8 percent respectively, through fiscal years 2013 and 2018. The revenue declined mainly due to a slowdown in order execution.

Earnings before interest, tax and depreciation and amortisation remained negative for the last two fiscals due to higher material and employee costs. Despite reporting operational losses the company was able to report a net profit due to higher other income.

The company said it will focus on garnering more repair orders and lowering material costs to boost margins.

Peer Comparison

Garden Reach is a debt-free company with high cash on books and has been paying dividend since the year ended March 2014. It has only one comparable peer, Cochin Shipyard Ltd.

Cochin Shipyard, which undertakes commercial ship repairs as well, has a cash balance of close to Rs 3,500 crore, but it also has a planned capital expenditure of Rs 2,700 crore. Return ratios of the company remained weak due to operational losses for the last two years.

Garden Reach's order book is also strong compared to Cochin Shipyard—which doesn't translate into good profitability as the contracts are of fixed price.

Valuations

Garden Reach's earnings per share for the year ended March 2018 was Rs 7.6. Its price-to-earnings ratio, according to BloombergQuint's calculations, is 15.6 at the upper end of the price band.