Bharati Shipyard –Buy- Pabhudas Lilladher

| May 4, 2010 | 1 Comment

Bharati Shipyard (BHSL) reported revenues of Rs3,231 million, growth of 13.6% on a y-o-y basis. However, the revenues are flat sequentially; this was in-line with our expectations. The company’s order book stands at Rs2,490 crore at the end of FY10 which translates to order book/sales of 1.4xFY11. One of BHSL’s order, received from a German company ‘Opielok Bereederungs’, for a PSV sized at Rs118 crore, has been cancelled by them. This vessel is in the delivery stage and therefore, BHSL has filed for an arbitration on the same.

BHSL reported margins of 17.1%, a sequential decline of 150bps, as the company did not book profits on the order that has been cancelled and is currently under arbitration. The company’s PAT, with and without subsidy, stood at Rs355.7 million and Rs180.8 million, respectively.

BHSL booked subsidy to the tune of Rs250 million, though has not received any disbursals as yet. However, several private sector shipbuilding companies have started receiving subsidy disbursals from the government which gives us confidence that BHSL shall receive its due soon.

The company year-end debt stands at Rs2,100 crore which translates into a DER of 3.5 without subsidy numbers and 2.26 with subsidy numbers. Over the next year, the key lies in how the company is able to de-leverage its balance sheet and thereby, reduce its interest outgo.

Valuation of BHSL is now being calculated on the basis of sum of the parts (SOTP). We are valuing BHSL’s stake in GOFF at 8x FY11 PER which translates to Rs289/share. After a 20% holding company discount, the per share value translates to Rs232. Further, we are valuing BHSL’s core business at PER of 6x FY11. Adjusting for dividend from GOFF as well as subsidy, while taking into account the interest cost on account of acquisition of GOFF’s shares, we get a value of Rs93/share. Our SOTP value, thereby, stands at Rs325. We maintain BUY.

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