Garden Reach Shipbuilders And Engineers

With India beefing up its Indian Navy and orders pouring in from other countries, GRSE has been notching up its profits while gunning for innovation and high-end technologies

Garden Reach Shipbuilders and Engineers Ltd. (GRSE) is a shipbuilding company located in Kolkata, India. Founded in 1884 as a small engineering workshop, the company has since grown into a major shipyard that specialises in the design and construction of naval vessels and commercial ships. GRSE’s facilities cover over 100 acres and include modern shipbuilding infrastructure such as slipways, dry docks and workshops. The company’s shipbuilding capabilities range from small patrol boats to large frigates and submarines. GRSE has also diversified into the construction of engineering products such as diesel engines, marine gearboxes and deck machinery.

GRSE has built over 100 warships for the Indian Navy, including anti-submarine warfare corvettes, landing craft and missile frigates. In addition, the company has exported vessels to countries such as Mauritius, Sri Lanka and Myanmar. GRSE has also been involved in several technology transfer initiatives with foreign partners, including collaborations with Naval Group of France and Damen Shipyards of The Netherlands. These collaborations have helped GRSE to acquire advanced shipbuilding technology and design expertise, enabling the company to produce state-of-the-art vessels that meet the evolving needs of its clients.

In recent years, GRSE has undertaken several modernisation and expansion initiatives to further enhance its shipbuilding capabilities. The company has invested in new technologies such as 3D printing, robotic welding and virtual reality design software to improve efficiency and reduce costs. GRSE has also expanded its facilities to include a new covered shipbuilding hall and a state-of-the-art paint shop. Overall, GRSE’s reputation as a reliable and innovative shipbuilder has made it a leading player in the Indian and global shipbuilding industry. The company’s commitment to quality, safety and sustainability has earned it several accolades, including the prestigious ‘Best Shipyard Award’ from the Indian Ministry of Shipping. GRSE’s continued success is a testament to its dedicated workforce, strong leadership and unwavering commitment to excellence.

Sector Analysis

India holds a significant position as one of the strongest military powers globally. The military fixed wing, naval vessels, surface combatants, missiles and missile defence systems are the top three largest market segments in the Indian defence sector. Other segments such as military rotorcraft, submarines, artillery, tactical communications, electronic warfare and military land vehicles are also well-known. The Indian defence manufacturing industry is a vital sector for the economy, and rising concerns over national security are likely to accelerate its growth.

The demand for defence equipment in India has been increasing due to ongoing territorial disputes with Pakistan and China over the ownership of Kashmir and Arunachal Pradesh, respectively. Over the last five years, India has been ranked among the top importers of defence equipment to gain technological advantages over rival countries. To reduce dependence on external procurement and modernise its armed forces, the government has introduced several initiatives to promote ‘Make in India’ activities via policy support. India ranks fourth in terms of firepower according to the Global Power Index with a target of USD 25 billion in defence production by 2025, including USD 5 billion from exports. India is one of the world’s largest defence spenders, with a total outlay of USD 66 billion, accounting for 13.31 per cent of the total budget, indicating an increase over the budget estimates of 2021-22. The Ministry of Defence has set a target of 70 per cent self-reliance in weaponry by 2027, providing significant prospects for industry players. The introduction of the Green Channel Status Policy (GCS) promotes and encourages private sector investments in defence production. The government’s emphasis on easing restrictions on foreign investment to achieve India’s goal of a self-reliant nation suggests a strong growth trajectory for the Indian defence sector.
 

Government Initiatives

To promote self-reliance in defence manufacturing it is necessary to develop robust government policies. In the Union Budget 2022-23:

● The Ministry of Defence has been granted a budget of ₹525,166 crore which includes expenses related to the salaries of armed forces and civilians, pensions, modernisation, production  establishments, maintenance and research and development organisations.

● The Ministry of Defence has been given the highest allocation of funds (13 per cent) among all central government ministries.

● Def-Expo 2022, held in Gandhinagar, Gujarat from October 18–22, 2022, showcased 430 strategic and tactical weapon systems, defence equipment and technologies developed by the Defence Research and Development Organisation (DRDO).

● As of April 30, 2022, 40 of the planned 68 artificial intelligence (AI) projects in the field of defence have been completed, according to data released by the Department of Defence Production.

● The Ministry of Defence has allocated 25 per cent of the domestic capital procurement and acquisition budget, totalling ₹21,149.47 crore for the domestic private industry in the fiscal year 2022-23 to encourage private industry, MSMEs, and start-ups in the defence production ecosystem.

Financials

In the third quarter of FY23, there was a significant increase in consolidated sales by 43.6 per cent as compared to the same quarter in the previous year, with revenue reaching ₹699.15 crore. The EBITDA level rose by 1.55 per cent from the December 2021 quarter, standing at ₹97.09 crore. The net profit of the company surged 1.55 per cent from the corresponding quarter last year, amounting to ₹63.92 crore. The company achieved its highest-ever revenue from operations and profit after tax in both a nine-month period and a particular quarter. As of December 31, 2022, the company’s order book amounted to a healthy ₹22,242.42 crore with almost 98 per cent to 98.5 per cent of this order book coming from its core business of war shipbuilding. 

The order book consists of six shipbuilding projects, which include three projects for the Indian Navy: the P17 Alpha Advanced Frigate with three ships, an eight-ship antisubmarine shallow watercraft project and a four-ship survey vessel large project. The company is also executing three other projects: one for the Cooperative Republic of Guyana, an export project for the Government of Bangladesh and an electric passenger vessel for the Government of West Bengal. In total, the company is handling six projects and 23 platforms.

In FY 2022-23, the company achieved a significant milestone by recording an annual turnover of ₹2,550 crore (provisional and unaudited) – the first time in its 63-year history as a DPSU. The company showed remarkable revenue growth of 45 per cent and signed a contract worth ₹3,500 crore for the construction of four Next Generation Offshore Patrol Vessels (NGOPVs). The company maintained its momentum by effectively managing resources, improving internal efficiencies and surpassing its previous year’s revenues in Q3FY22-23.

Garden Reach Shipbuilders and Engineers has distributed an interim dividend of ₹63 crore for the fiscal year 2022-23 to its shareholders. The company has announced an interim dividend of ₹5.50 per equity share with a face value of ₹10 for the fiscal year 2022-23, an increase from the previous year’s ₹4.95 per share. GRSE has a long-standing history of paying dividends to its shareholders, having done so every year for the past 29 years.

Outlook

In 2022, GRSE successfully launched multiple ships, including the Dunagiri, the second P17A advanced frigate as well as two anti-submarine warfare shallow water crafts, two large survey vessels, one ocean-going passenger and cargo vessel for the Cooperative Republic of Guyana and a fast patrol vessel for the Indian Coast Guard. The company collaborated with over 20 firms, including MSMEs and start-ups, and partnered with Rolls Royce Solutions of Germany to produce high-quality marine diesel engines. GRSE’s strategic initiatives focus on increasing self-reliance in the maritime domain, such as developing autonomous vessels and Close in Weapon Systems (CIWS) for maritime use. Currently, GRSE is executing six shipbuilding projects, intending to complete them by FY27 with a clear execution plan. The company has sufficient capacity to meet the current order book and is open to utilising capable private shipyards’ spare capacity through strategic partnerships. Over the next 4-5 years, the company plans to undergo capex and is expected to spend between ₹200-250 crore. 

While the company’s core business remains in domestic warship building, it has expanded to ship repairs, where margins are higher, and entered the export market with promising results, securing orders from an Asian country and a Caribbean country. The company is looking for further opportunities abroad and is confident it can benefit from this area. GRSE has excellent prospects for additional orders in the future. The stock currently trades at a PE of 24.6 and remains fundamentally strong with an ROCE of 20.5 per cent and an ROE of 15.1 per cent. Looking ahead, GRSE is poised to maintain its growth trajectory and deliver exceptional value to its customers, shareholders and stakeholders. Hence, we recommend BUY.