Defence PSU stocks have experienced a strong bull run in the last one-year period as the Indian government looks committed to reducing the import of defence products and purchasing locally produced weapons and systems.
Shares of Garden Reach Shipbuilders have delivered spectacular returns to their shareholders, gaining 114 percent over the last six months, rising from Rs. 234 apiece to Rs. 501. From its 52-week low of ₹199 apiece marked on February 24, 2022, the stock rose nearly 180 percent to reach an all-time high of ₹556.5 on December 9, 2022.
Garden Reach Shipbuilders & Engineers (GRSE) is one of India's leading defence public-sector undertaking shipyards that primarily caters to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard.
The stock increased 98 percent over the past one year, surpassing the BSE PSU index by 84.12 percent.
Even after a significant increase in the price, brokerage house ICICI Direct Research remains bullish on the stock and anticipates further gains. The brokerage has a "buy" call on the stock with a 12-month target price of ₹630 apiece, which hints towards a potential upside of 25.74 percent from the stock's Monday closing price.
The defence budget for indigenous procurement is likely to increase considerably for FY24E, with the share of imports further coming down. For FY23, Rs. 84,598 crore (68 percent of the total procurement budget) has been kept for purchasing locally produced weapons and systems.
This bodes well for the company, as it is well-placed to benefit from the Indian Navy’s big procurement plan for the next three to four years.
The order book of the company stands at Rs. 22,930 crore as of September 2022. More than 98 percent of the current order backlog comprises shipbuilding with the balance coming from diversified segments, said ICICI Direct.
It expects the company's revenue to grow at a 52 percent CAGR over FY22–25E as opposed to an 8.2 percent CAGR in FY19–22, led by significant revenue recognition in its major contracts in hand.
In addition, it expects the EBITDA CAGR at 61.8 percent during the same period, driven by strong revenue growth and an improvement in margins.
"We believe the Indian defence sector is going through a major transformational phase as the government looks committed to reducing imports and increasing indigenization of various key defence platforms, systems, and associated equipment required for these platforms," said the brokerage.
The structural shift in the Indian defence budget is clearly visible with the increased allocation for modernization platforms and equipment. In the FY23E budget, the government earmarked Rs. 1.52 lakh crore of capital outlay for defence, which has grown at 11 percent CAGR over FY20-23BE, it added.
Meanwhile, for the September quarter, the company posted an almost flat net profit of ₹58.7 crore, compared to a net profit of ₹58.8 crore at the same time last year. The revenue from operations grew 57.81 percent YoY in Q2 FY23.
The operating expenses came in higher at ₹633.8 crore in Q2 FY23 compared to ₹366.9 crore in Q2 FY22, which impacted the bottom-line profit margins of the company.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.