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July 14, 2019

Garden Reach Shipbuilders (New Value Pick added to my portfolio) CMP 117.50

Hello Everyone,

 My next value pick is Garden Reach Shipbuilders & Engineers Ltd (GRSE).There are lot stocks now available on reasonably good valuation. A lot of investors asked about my value pick during 2017 and 2018 but the market was overvalued and was not offering value pick with a margin of safety. So, I haven't discussed anything in the blog. However, last year(Aug) I briefly provided my new growth stock list.
1)Sirca paint India Ltd  ( Avg 161)
2)Sterlite technologies ( Avg 340)
3)Vimta Labs  (Avg 215)
Sirca has doubled to 316 ( bonus adjusted) CMP 208 in a difficult market. However, Sterlite is half due to pledging and prices of fiber optics. Business performance perspective it is still a good bet. Vimta is also on track.
From my earlier picks which discussed in detail only I was not able to sell TechNVision near the top. Rest of others I was able to give sell call at the top.
e.g. Intrasoft bought around low of 45 and within a year given sell call at 500. Olympia sold around 300 and it is now around 13.
A lot of investors focus on the art of buying but forgets the art of selling.
It doesn't mean to sell a quality business. One should understand aukat of the company ( Type of company).
There are the following type of companies exits in Indian stock market
1) Ordinary Companies  (90% companies)
2) Current Bull Run/Cycle
3) Enduring quality 
If one has to do be successful then need to understand type of company and take sell call. You can't sell quality companies just because of the market cycle.

Coming back to my value pick Garden Reach Shipbuilders & Engineers Ltd . 
The first thing one will notice with the company is that the market cap of the company is 1350 crores and it has cash more than 2700 crores. Does it mean we are getting the company free along with market cap cash? No, it is not the case, we will see in the moat with the float section.

About the company:
It is Govt of India company. GRSE is a shipbuilding company in India under the administrative control of the MoD, primarily catering to the shipbuilding requirements of the Indian Navy and the Indian Coast Guard.
Look more at http://www.grse.in/index.php/our-company/about-us.html 
Go through investor presentation  from  http://www.grse.in/pdf/investors/Analyst%20Presentation_GRSE%20Analyst%20Meet.pdf 

The margin of Safety : First of it will not be the company which will show a consistent profit every year. But , GRSE has a total revenue of 1386.42 in FY 2018-19 against the huge order book of around 28000 crores. It is almost 20 x . However, we need to remember most of the orders are for more than 4-5 years execution. Still, chances of revenue of 4000 to 5000 crores revenue is very likely in the next 3-4 years. VoP is maximum during 33 months to 63 months period where some of the big deliveries are going to enter in the next few quarters. 
Visibility of revenue eliminate downside but we never know in a bear market. Still,if it gets down it will come up fast relatively.
The second margin of safety is offered by dividend yield. It has declared a dividend of 6.95 per Share which is around 6 %. Interestingly, it has declared a final dividend of around Rs 5 but not paid yet. So, our effective rice will reduce by around 5 i.e. 117.5 - 5 = 112.5 , that will make a dividend yield 6.2% if the dividend remains the same next year.
The third Margin of safety comes from the negative working capital requirement which is due to the huge float enjoyed by the company.

Moat with the float: It is true that the company is debt free and it has cash and cash equivalent current asset worth of 3000 cr against a market cap of 1350 cr . 

So, you might be thinking you are getting this company free with extra cash. But, I will stop your dreaming by saying no, that is not the case.
This 3000 cr cash is float company enjoyed. It is not retained cash from profit. 








It has current liability around 2550 crores.



Let me explain this by example.
You are a famous caterer in the city. You enjoyed moat and powerful brand. Since you have moat you take the whole deal amount in advance but gives your supplies money after a week of the event.




If you prepared a balance sheet on year-end ( 31St March)  it will show that you have cash in hand of around 10 lakhs. Will, you distribute that 10 lakhs among your shareholder/partners. The answer is No. It is not surplus cash but your float ( working capital). Same as in the case of GRSE. You are not getting business free.
Last year the company did PBT around 180 cr out of that 170 cr came from interest income of float. So, almost no contribution of business in the bottom line that's why even cash from operations will come negative. Once, VoP increases even bottom line will also increase along with float interset it will make a double impact.
GRSE also enjoyed the moat due to Govt company and expertise in the field . It is not easy for some other company to destroy this moat.
There are two main private players Larsen & Toubro Ltd and Reliance Naval & Engineering Ltd apart from five state-owned groups Mazagon Docks & Engineers, Garden Reach Shipbuilders & Engineers Ltd, Goa Shipyard Ltd, Hindustan Shipyard Ltd, and Cochin Shipyard Ltd .
Govt extremely focus and in hurry to match Indian navy capabilities with China. Govt is ready to spend around 60000 crores for it.
On 1st July, MoD issues RFPs for shipbuilding projects worth Rs 15,000 crore.
https://economictimes.indiatimes.com/news/defence/modi-wants-global-warship-makers-to-build-6-6-billion-in-new-submarines/articleshow/70196404.cms 
 Now on 12th July, Govt wants global warship makers to build 45000 crores in new submarines. The Indian shipyard selected under the process would tie up with the chosen foreign company to establish dedicated manufacturing lines for the submarines in India. 

https://www.livemint.com/news/india/pm-modi-wants-global-warship-makers-to-build-6-6-billion-in-new-submarines-1562853283630.html

Negative Points: Since it is MoD company, there is always the chance of bad capital allocator and a piggy bank for government.
IPO had struggled and merchant banker had to revise price band downward.
So far not much contributed by business in the bottom line, mostly FD interest contributing to the profit.

Conclusion : After analyzing all positive and negative points, I have included in my portfolio, it is Heads, I win; tails, I don’t lose much! type of stock pick.

I will have to give at least 4-5 years to it.



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Disclaimer :  Please treat this post as starting point of your research and not conclusion to invest in any discussed stock. As always , please take the advice of a SEBI qualified financial adviser which I am not .


Disclaimer

I am not an Investment advisor and do not provide this service via this Blog. The Blog is a personal diary and the stocks discussed on the blog represent my personal views and analysis. They are not recommendations to buy or sell stocks. I do not intend to recommend any stocks for financial or non-financial gains and may or may not be holding the stocks discussed on my blog.

In a nutshell - i am not responsible for the losses or gains made based on the information published on this Blog