ABG Shipyard (ABG) is the largest of the private sector shipyard in India. It boasts of a strong unexecuted order book, which stands at 8.1x its FY08 revenue. The company has been rapidly expanding manufacturing capacities at its shipyards to capitalize on the huge requirement of ships across the world.
ABG has a strong order book of Rs8,985 crore (94 vessels) with deliveries spread over the next five years. Currently, Rs7,135 crore of the order book remains unexecuted, which is over 8.1x FY08 revenue of Rs885.2 crore (excluding subsidy).
Further, 44% of the order book constitutes repeat orders, which signifies ABG’s ability to procure additional orders from existing clients.
The company is in the process of expanding its manufacturing capacity in Gujarat. Post expansion, ABG will have capacity to construct 68 vessels, four off-shore rigs and repair eight ships of various sizes and types simultaneously, on a modular basis. This capacity expansion is estimated to be completed by FY10E.
However, open position in metals, execution risks, oil prices, risk of penalties and removal of subsidies coupled with non-grant of EoU status are some of the key concerns.
The stock is trading at 9.8x and 6.6x FY09E and FY10E Earnings, respectively. We see value in the stock on account of its strong order book and robust prospects of the global shipbuilding market. We maintain a BUY on the stock, with a 12-month target price of Rs445 per share.