Bharati Shipyard Performance below estimates; Reduce: Emkay

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Bharati Shipyard

Performance below estimates; Retain Reduce

REDUCE

CMP: Rs 254                                       Target Price: Rs 196

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n     In Q2FY11, BSL’s net profits declined 11% yoy to Rs292 mn – below estimate (1) Sales up 9% yoy to Rs3.4 bn (2) EBITDA margin down 40 bps yoy (3) Interest costs up 169% yoy

n     Unexecuted order book continued to decline on back of no order inflows – down 18% qoq to Rs15.8 bn (equivalent to mere 1.25X FY10 revenues)

n     Retain our negative bias on core shipbuilding business amidst no revival of order inflows for BSL. There also exist downside risk to our earning estimates

n     Retain ‘Reduce’ rating with SOTP target price of Rs196/Share (Core shipbuilding @ Rs117/Share, Great Offshore Stake @ Rs79/Share). Only caveat is meaningful subsidy disbursement

Q2FY11 performance below estimates – PAT declines 11% yoy

Bharati Shipyard’s (BSL) net profits declined for the second consecutive quarter in

Q2FY11, below estimates - due to decline in operating margins and high interest costs.

(1) Revenue growth for the quarter was subdued at 8.6% yoy to Rs3434 mn due to low

opening unexecuted order backlog – marginally below estimates (2) EBITDA margins

declined 40 bps yoy to 18.4% (Vs estimate of 260 bps expansion) – attributed to high

employee costs. (3) Despite subdued revenue growth and low EBITDA margins, the

PBITDA (EBITDA + other income + subsidy) was in line with estimates at Rs1119 mn

(+46% yoy). This was due to sharp rise in subsidy income (up 185% yoy to Rs480 mn –

above estimates). (4) However, sharp rise in interest costs offset high subsidy income.

Consequently, PAT declined 10.5% yoy to Rs292 mn – sharply below estimates.

Unexecuted order book continues to decline – down to Rs15.8 bn (@

1.25X FY10 revenues)

Give the continuous drought in new order inflows, BSL’s unexecuted order book

continued to decline in Q2FY11 – down for 9 consecutive quarters. The unexecuted

order book fell 18% qoq to Rs15.8 bn – lowest in past 16 quarters. This is equivalent to

mere 1.25X FY10 revenues. The total order book remained unchanged sequentially at

Rs50.0 bn due to no delivery of vessels during Q2FY11.

Retain ‘Reduce’ recommendation

Currently, we retain our negative bias on core shipbuilding business amidst no revival of

order inflows for BSL (However, given the uptick in order inflows in global ship building

industry – we will review our call post a re-assessment of the scenario). Besides, there

also exist risks to earning estimates from (1) slow execution of existing order book with

deteriorating cover at 1.25X revenues (2) impending debt repayment amidst weak

operating cash flow and (3) high DER resulting in need for equity dilution. The only

caveat is a meaningful subsidy disbursement in immediate future. We retain our

‘Reduce’ rating with SOTP based target price of Rs196/Share (Core shipbuilding

business at Rs117/Share + Stake in Great Offshore at Rs79/Share).