International Orders And Green Vessels Will Diversify Revenue, But Profit Margins May Decrease

Key Takeaways

• Strong order book, including major warship projects, is expected to drive substantial revenue growth and enhance overall revenue trajectories.
  
• Expansion into green energy vessels presents growth opportunities, potentially boosting earnings and future international revenue streams.
  
• A solid order book and strategic expansion into green energy and international markets suggest stable revenue growth and improved profitability for Garden Reach Shipbuilders & Engineers.

Catalysts

Engages in the design and construction of war ships in India.

• Investors expect that Garden Reach Shipbuilders & Engineers' significant order book, including major warship projects for the Indian Navy and export contracts, will drive substantial revenue growth over the coming years. This continuous flow of projects ensures a robust pipeline into FY'29, potentially enhancing overall revenue trajectories.
  
• With the company's strategic initiatives to enhance shipbuilding capacity and improve infrastructure facilities, there is optimism around increased efficiency and completion of projects, which could lead to improved net margins as operational costs and delays decrease.
  
• The expected expansion into green energy vessels, supported by government policies promoting sustainable shipping, presents a favorable growth opportunity. This could enhance earnings through the delivery of innovative, environmentally friendly ships.
  
• The anticipated receipt of large orders from projects such as the next-generation corvette and future contracts for the P-17 Bravo frigate projects could lead to significant future earnings gains, compelling investors to view this as a future earnings driver.
  
• GRSE's increasing focus on export markets, with current contracts in place with European clients and potential future interest, could lead to long-term international revenue streams, enhancing both revenue and profit margins due to diversified market exposure.

Garden Reach Shipbuilders & Engineers Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Garden Reach Shipbuilders & Engineers's revenue will grow by 25.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.4% today to 7.9% in 3 years time.
• Analysts expect earnings to reach ₹6.4 billion (and earnings per share of ₹47.01) by about January 2028, up from ₹3.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.8x on those 2028 earnings, down from 44.9x today. This future PE is lower than the current PE for the IN Aerospace & Defense industry at 62.2x.
• Analysts expect the number of shares outstanding to grow by 6.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.62%, as per the Simply Wall St company report.

Garden Reach Shipbuilders & Engineers Future Earnings Per Share Growth

Risks

• The strong order book of ₹24,221.37 crores, encompassing various high-profile and diverse projects, suggests a stable and potentially growing revenue stream for the coming years.
  
• Successful execution and delivery of several large projects for the Indian Navy and international clients may positively impact net margins and earnings, as these high-value contracts could lead to better profitability.
  
• Strategic expansion into the green energy segment with projects like fully electric ferries and hybrid vessels signals potential revenue growth from emerging markets, which could enhance future earnings and financial performance.
  
• Active pursuit and acquisition of significant international clients, such as the orders for multipurpose vessels from a German client, reflect potential growth in export revenues and an expanded international market presence.
  
• Consistent EBITDA and profit growth, with figures showing a 19% increase in EBITDA and a 21% rise in profit after tax, indicate ongoing operational efficiency and financial health, which could support share price stability or appreciation.

Valuation

• The analysts have a consensus price target of ₹1149.0 for Garden Reach Shipbuilders & Engineers based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1783.0, and the most bearish reporting a price target of just ₹515.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹80.9 billion, earnings will come to ₹6.4 billion, and it would be trading on a PE ratio of 34.8x, assuming you use a discount rate of 12.6%.
  
• Given the current share price of ₹1507.1, the analyst's price target of ₹1149.0 is 31.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.