ABG Shipyard – 3QFY2011 Result Update:: Angel Broking

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  ABG Shipyard – 3QFY2011 Result Update

Angel Broking maintains a Neutral on ABG Shipyard.

For 3QFY2011 (consolidated), ABG Shipyard (ABG) reported subdued

performance, with cost pressures weighing on margins. During the quarter, ABG

witnessed revival in order inflow (~`2,370cr in 3QFY2011) compared to a listless

FY2010. The company’s unexecuted order book (OB) stands at ~`7,600cr and

executable by FY2014. Following ramp up at the Dahej yard, ABG’s execution

has been healthy and it delivered ten vessels during 9MFY2011. ABG’s current

net debt has increased to ~`2,200cr (D:E - 1.8x) in 3QFY2011 compared to

~`1,825cr in 2QFY2011 (D:E - 1.5x). Moreover, headwinds like increase in input

costs continue to dog the industry and uncertainties of the subsidy scheme persist.

At current levels, the stock trades at fair valuations in line with its global peers.

We remain Neutral on the stock.

Faster execution, strong OPM: ABG’s revenue (ex subsidy) grew 12.7% yoy

(down 13.0% qoq) to `482cr as it sustained the pace of order execution by

delivering three vessels in 3QFY2011. ABG also partially recognised revenues

from the new `2,000cr rig orders as construction of one rig was already

underway. However, OPM declined by 918bp yoy and 171bp qoq to 16.8% as

other expenditure spiked 53.5% qoq (22.1% yoy) on account of increase in

over-heads associated with ramped up Dahej facility. ABG booked subsidy to the

tune of `58cr v/s `65cr in 3QFY2010 and `1.1cr in 2QFY2011 due to lower

revenue contribution from the rig segment. Depreciation increased 24.0% qoq

(flat yoy) to `17cr due to project capitalisation (Dahej Shipyard) since the last two

quarters. Pertinently, other income was negligible vis-à-vis a one-time gain of

`34.4cr from sale of Great Offshore shares in 3QFY2010. Consequently, PAT

declined 35.0% yoy and 5.1% qoq to `53cr.

Outlook and Valuation: We believe that ABG's healthy unexecuted OB of

`7,600cr (4.7x FY2010 revenues) by FY2014 provides strong revenue visibility. At

the CMP, ABG is trading at fair valuations and in line with some of its Asian

peers: PE of 7.8x, EV/EBIDTA of 7.5x and 1.6x P/BV on FY12E basis. Hence, we

remain Neutral on the stock as it factors in the near-term growth opportunities.

Strong order book and execution capacity
ABG witnessed revival in order inflow of ~`2,700cr in 9MFY2011 compared to a
listless FY2010. This has taken its total unexecuted order book to ~`7,600cr (4.7x
FY2010 revenues), which is executable by FY2014 providing strong revenue
visibility. Notably, ABG managed to avoid any cancellations/price negotiations,
even during the economic crisis. Also, capacity expansion at the Dahej Shipyard
has ramped up ABG’s execution capabilities, as it now undertakes ship
construction on a modular basis. Thus, during 9MFY2011 ABG delivered ten
vessels compared to 17 in FY2010 and six in FY2009. Improved execution has
resulted in increased stage-wise revenue recognition and corresponding cash flow
from clients.



Investment Arguments
Strong revenue visibility
ABG's total unexecuted order book stands at ~`7,600cr (4.7x FY2010 revenues)
executable by FY2014 and provides strong revenue visibility. Commendably, the
company had managed to avoid cancellations/price negotiations even amidst the
economic crisis. Thus, we believe that ABG's top clients are unlikely to default on
vessel payments.
Banking on offshore, defence segments
ABG has a diverse order book mix, with high exposure to the offshore segment
(40% of its order book). The sharp recovery in crude oil price has spurred the oil
companies to carry out exploration and production (E&P) in turn lending a fillip to
the deepwater rig contractors. There is also a constraint on the supply-side for rigs
and offshore support vessels due to the ageing fleets and demand for younger
vessels with higher specifications.
ABG has begun focusing on the defence sector given the inherent stability in orders
and pre-qualifications making it an entry barrier for other players to bid for the
tenders. Subsidiary, Western India Shipyard, recently bagged a `72cr order from
the defence ministry to repair a naval vessel. Currently, ~4.5% of ABG’s total
order book constitutes orders from the Indian Coast Guard.
Improving balance sheet
ABG's inventory stood at `1,200cr in FY2009 and `1,066cr in FY2010 due to the
delayed payment from Essar and deferment of deliveries in the bulk segment.
Funding for the same has been done through long-term debt, resulting in net
debt-equity ratio of 3.1x with a bet debt of `2,897cr in FY2010. However, timely
execution and receipt of payment from clients, fresh order inflow and Great
Offshore stake sale have helped ABG to improve its cash flow position.
Consequently, as on date ABG’s net debt stands at ~`2,200cr with D:E at 1.8x.
Fairly Valued
The Indian shipbuilding industry is well poised to register robust growth aided by
the expected surge in sea-borne trade, availability of cheap labour in India and
strong capex lined up in the offshore and defence sectors. However, compared to
its global peers who operate on a larger scale, ABG seems fairly valued at current
levels trading at a PE of 7.8x, EV/EBIDTA of 7.5x and 1.6x P/BV on FY2012
estimates. We maintain our Neutral view on the stock.