Garden Reach Shipbuilders share price: ICICI Securities predicts 72% downside after 122% rally in past year

Despite a remarkable 122 percent surge in the past year, domestic brokerage house ICICI Securities has maintained a 'sell' recommendation on the multibagger defence stock Garden Reach Shipbuilders (GRSE). The brokerage set a target price of ₹515, indicating a potential downside of almost 72 percent.

ICICI Securities cited anticipated delays in order execution from Bangladesh due to ongoing geopolitical tensions as a key factor in its decision. The firm also estimated earnings per share (EPS) for GRSE to range between ₹55 and ₹65 through FY32.

ICICI Securities acknowledged GRSE’s substantial order intake, including contracts worth over ₹1,500 crore in YTD FY25 and being declared L-1 for a research vessel project for the DRDO valued at ₹500 crore. However, the brokerage remains cautious, noting that while GRSE has promising growth prospects with potential future orders for NGC and P-17B frigates, the timing and extent of these opportunities are crucial. Recent delays in major Indian Navy orders further add to the uncertainty.

The brokerage further highlighted that even under the best-case scenario, with GRSE securing the NGC and P-17B frigate orders and others, EPS is projected to be constrained between ₹55–65. Competitive bidding for these orders is expected to pressure margins, although a steady margin of 6 percent to 7 percent is anticipated.

“Our TP implies a P/E ratio of 10x on FY26E EPS, which we believe is fair given the considerable uncertainties around future orders and the current order book peaking out in FY26E,” said the brokerage.

June quarter (Q1FY25) Earnings

The defence company's revenue for Q1FY25 surged by 33.6 percent year-on-year, driven by a peak revenue booking phase for its existing order book for FY25–26. However, despite the revenue growth, the EBITDA margin decreased to 5.6 percent from 6.1 percent in Q1FY24 and 8.9 percent in Q4FY24, while the PBT margin fell to 11.4 percent compared to 13.5 percent in Q1FY24 due to a decline in gross margins. 

As of the end of Q1FY25, the company's order book stood at ₹23,100 crore. GRSE secured orders exceeding ₹1,500 crore year-to-date FY25, including an export order worth $82.6 million from companies in Bangladesh and Germany. Additionally, sub-contracting expenses as a percent of revenue reduced from 14.9 percent in Q1FY24 to 13 percent in Q1FY25.

Major Contracts

In YTD FY25, Garden Reach Shipbuilders (GRSE) secured four significant contracts. These include the construction and delivery of an ocean research vessel valued at ₹840 crore for the National Centre for Polar and Ocean Research (NCPOR), with a delivery timeline of 42 months. GRSE is also building an advanced ocean-going tug for the Ministry of Defence, Bangladesh, valued at $21 million, and an advanced dredger for the Government of Bangladesh, valued at $16.6 million. 

Additionally, the company is constructing four multi-purpose vessels for Germany's Carsten Rehder Schiffsmakler and Reederei GmbH & Co KG, valued at $45 million, with delivery scheduled in 33 months. GRSE has also been declared L-1 for building a research vessel for DRDO, valued at ₹500 crore, although this contract is still under negotiation. However, given the current situation in Bangladesh, there may be potential delays in executing the orders from the Bangladeshi government.

Stock Price Trend

GRSE's stock price has seen some fluctuations in 2024 but has still given multibagger returns, surging 108 percent year-to-date. The rally is despite experiencing negative returns in three out of eight months. It declined by nearly 25 percent in August after four consecutive months of gains, which included increases of 29.3 percent in April, 38.5 percent in May, 53.3 percent in June, and 14.6 percent in July. Conversely, the stock experienced corrections with a 12.5 percent drop in February and a 6 percent gain in March, while January saw a 6.6 percent rise.

After hitting a record high of ₹2,834.60 last month, the stock currently trades at ₹1,813.90, about 36 percent below its peak. However, it has surged over 180 percent from its 52-week low of ₹648.05, recorded in October 2023.

While GRSE has delivered impressive stock performance and secured significant contracts, ICICI Securities remains cautious due to potential delays and competitive pressures on margins. The brokerage’s target price reflects the uncertainties surrounding future orders and the peak order book expected in FY26E. Investors should weigh the stock’s recent gains against the projected challenges and evolving market conditions as they consider their positions in GRSE.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.