For 3QFY2009, Bharati Shipyard clocked 44.6% y-o-y growth in topline to Rs254.9 crore (including subsidy).
Subsidy booked during the quarter was Rs24.2 crore (Rs15.6cr). Primary reason for the increase in revenue was higher execution rate of its order book during the quarter. The company’s rig operations contributed around Rs76 crore to overall revenues.
OPM declined by 180bp to 25.5% (27.3%) primarily due to higher employee costs, as a percentage of sales. However, the increase in labor cost was to some extent offset by the decline in raw material costs.
The company envisages no problem in growing its order book as it caters to the niche offshore vessels segment where demand continues to be strong due to cooling crude prices.
The company also does not envisage any order cancellations as its charges all its customers a 20% advance at the time of booking the order, and ship-building being a very long process entailing 2 to 3 years, the buyer has to make bookings with a long-term perspective.
It is also ramping up its production capacity to execute these orders on schedule. The biggest risk to our call remains the possibility of order cancellations or contract price re-negotiations that may occur in wake of the sharp fall in the value of ships and the general global economic downturn.
We are downgrading our diluted EPS estimate for FY2010E to Rs46.7 (Rs49.4) on the back of expected increase in labour and other operating costs.
At Rs64, the company is currently trading at 1.4x and 0.2x FY2010E EPS and BV respectively, which we believe is fairly attractive.
However, in view of the current adverse economic scenario, we are downgrading our target multiple from 5x to 3x. We maintain a BUY on the stock, with a revised target price of Rs140 (Rs247).