Stock To Buy: This Multibagger Defence Sector PSU Stock Likely To Surge, ICICI Direct Sees 36% Gain

Updated: Wednesday, January 11, 2023, 22:55 [IST]

ICICI Direct has a buy on Garden Reach Shipbuilders & Engineers Limited (GRSE), a Miniratna Category 1 Public Sector company. The brokerage firm has assigned an estimated target price of 630/share to the stock of the company. Considering the estimated target price, if the stock is purchased at the Current Market Price (CMP), it is likely to give a return of up to 36%.

Garden Reach Shipbuilders & Engineers (GRSE), one of India's leading defence public sector undertaking shipyards, primarily caters to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard.

GRSE's Stock Performance and outlook

On NSE, the Current Market Price (CMP) of stock is Rs 466 apiece. The stock's 52-week high is Rs 556.80 apiece recorded on 9 December 2022 and the 52-week low is Rs 199 apiece recorded on 24 February 2022, respectively. It is a small-cap stock with a market capitalisation of Rs 5,338.12 crore.

The stock over the past 1 month has fallen 13.17%, and in the last 1 week, it has fallen 3.51%. Over the past 1 year, it gave 8.18% positive return. In the past 3 years, it gave 87.94% positive return. In the past 5 years, it gave 132.36% multibagger returns.

Business Updates

The company has delivered 107 warships to the Indian Navy, Indian Coast Guard and friendly countries till date. The shipyard has built and supplied more than 780 vessels for maritime security. GRSE's order backlog was at Rs 22,930 crore as of September 2022 (~10x TTM revenue), of which ~98% comprises ship-building segment. The company recorded the highest ever turnover of Rs 1,750 crore for FY22, reflecting YoY growth of 53%. In the last five years, revenues increased at 13.5% CAGR over FY17-22 while PAT increased at 73% CAGR.

Buy for a target price of Rs 630/share

GRSE's revenue recognition is set to increase during FY22-25E in its major contracts. Moreover, pick-up in execution will be supported by increasing indigenisation of platforms/sub-systems. Revenue is expected at 52.3% CAGR over FY22-25E vs. 8.2% CAGR in FY19-22. EBITDA CAGR is expected at 61.8% during the same period led by strong revenue growth and improvement in margins. "We initiate coverage under the Stock Tales format with a BUY rating. We value GRSE at Rs 630 i.e. 15x FY24E EPS," the brokerage has said.

Key triggers for future price performance

Defence budget for indigenous procurement is likely to increase considerably for FY24E with share of imports further coming down. For FY23, Rs 84,598 crore (68% of total procurement budget) has been kept for purchasing locally produced weapons and systems.
With an already strong order backlog of Rs 22930 crore as of September 2022 (~10x TTM revenues), GRSE is well placed to benefit from Indian Navy's big procurement plan for the next three to four years.
Revenue is expected to grow at ~52% CAGR over FY22-25E led by significant revenue recognition in its major contracts in hand (P-17A frigates, ASW-SWC, Survey Vessels).
Next generation corvettes are the largest contract opportunity in the pipeline for GRSE (value Rs 36000 crore), the RFP of which is expected by 2023 end. GRSE is expected to be the L1 with contract value of Rs 22500 crore.
A Rs 3200-crore contract expected by FY23 end for construction of Next Generation Ocean Going Patrol Vessels (NGOPV) for the Indian Navy.
Execution expected to pick up in the coming period led by indigenous manufacturing of surface warships/vessels and associated subsystems/components. Out of 1238 sub-systems notified for indigenisation, 31 such components would be indigenously procured by GRSE

Disclaimer

The stock has been picked from the brokerage report of ICICI Direct. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.