February 20, 2012ICICI Securities Ltd | Retail Equity ResearchResult UpdateWHAT’S CHANGED…PRICE TARGET…………………………………………….Changed from | 373 to | 427EPS (FY12E)……………………………………………...Changed from | 43.6 to | 35.2EPS (FY13E)……………………………………………...Changed from | 51.6 to | 49.1RATING……………………………………………………………………...UnchangedCore EBITDA margin, order book qualityimproving…ABG Shipyard (ABG) reported a better-than-expected performance inQ3FY12 on the topline front while net profit was marginally lower thanour estimates. ABG reported revenues of | 619.3 crore vs. ourexpectation of | 609 crore and net profit of | 46.5 crore (I-direct estimate:| 51.6 crore) for Q3FY12. EBITDA margin (including subsidy) improved by75 bps QoQ and was higher than our estimate of 23.5% at 24.6%. Theheartening factor in ABG’s performance is the improvement in the coreEBITDA margin (excluding subsidy), which has improved by 100 bps on aQoQ basis to 23.5%. However, higher depreciation (up by 5% QoQ) andinterest cost (up by 18% QoQ) continue to dampen the net profit. OverQ1FY12 to Q3FY12, ABG’s core EBITDA margin has risen by 430 bpssignifying an improvement in the core operational performance. Withexecution also picking up gradually, profitability is expected to seeaccelerated growth in FY13.Order book quality improvingABG’s total order book stands at ~ | 15500 crore, of which theunexecuted order book is at ~ | 10500 crore. Though more than 20% ofthe order book comprises orders placed by ABG’s group companies,recently, the heartening factor has been ABG’s ability to bag prestigiousorders. During Q1FY12, the company had secured an order of | 970crore for construction of two cadet training ships for the Indian Navy. InJanuary 2012, ABG bagged an order worth | 500 crore from ShippingCorporation of India for construction of six anchor handling tugs cumsupply vessels (AHTS). These orders from top notch Indian PSU clientsbode well for potential order inflows from these marquee clients andprovides strong revenue visibility, going ahead.ValuationAt the CMP of | 434, the stock is trading at 8.8x FY13E EPS of | 49.1 and1.32x FY13E book value of | 328. Considering the improvement in coreEBITDA margin and order book quality, we have valued the stock at 1.3xFY13E book value (Q1FY12: 1.1x) to arrive at a price target of | 427 andrecommend a HOLD rating. Existing investors can also continue to holdthe stock.Exhibit 1: Financial Performance(| cr) Q3FY12 Q3FY12E Q3FY11 Q2FY12 YoY Gr. (%) QoQ Gr.(%)Net Sales 619.3 609.3 540.2 581.6 14.6 6.5EBITDA 152.1 143.2 139.2 138.5 9.3 9.8EBITDA Margin (%) 24.6 23.5 25.8 23.8 (121 bps) 75 bpsDepreciation 25.6 25.0 17.4 24.4 47.4 5.0Interest 51.4 43.0 40.2 43.4 27.6 18.4Reported PAT 46.5 51.6 53.5 48.4 -13.1 -3.9EPS (|) 9.1 10.1 10.5 9.5 -13.1 -3.9Source: Company, ICICIdirect.com ResearchABG Shipyard (ABGSHI)| 434Rating matrixRating : HoldTarget : | 427Target Period : 12 monthsPotential Upside : -2%Key Financials(| cr) FY10 FY11 FY12E FY13ENet Sales 1812.4 2136.9 2352.0 2698.2EBITDA 472.5 518.1 560.1 661.8Net Profit 218.1 194.0 179.2 250.2EPS (|) 42.8 38.1 35.2 49.1Valuation summaryFY10 FY11 FY12E FY13EPE (x) 10.1 11.4 12.3 8.8Target PE (x) 10.0 11.2 12.1 8.7EV to EBITDA (x) 10.7 7.9 6.7 3.1Price to book (x) 2.0 1.7 1.5 1.3RoNW (%) 19.6 15.3 12.7 15.3RoCE (%) 10.9 12.2 13.5 16.6Stock dataMarket Cap. (| cr) 2209Debt( FY11) (| cr) 2391Cash (FY11) (| cr) 664EV (| cr) 393652 week H/L (| cr) 463 / 322Equity capital (| cr) 50.9Face value (|) 10DII Holding (%) 6.4FII Holding (%) 11.3Price movement150250350450550Feb-12Nov-11Aug-11May-11Mar-114,0004,5005,0005,5006,0006,500ABG Shipyard (R.H.S) Nifty (L.H.S)Analyst’s nameBharat Chhodabharat.firstname.lastname@example.org
ICICI Securities Ltd | Retail Equity Research Page 2Exhibit 2: Topline performance trend540.2 581.6 619.31723.52352.02698.2050010001500200025003000Q3FY11 Q2FY12 Q3FY12 9MFY12 FY12E FY13E|cr RevenueSource: Company, ICICIdirect.com ResearchExhibit 3: EBITDA performance trend152.1406.4560.1661.8138.5139.224.523.823.624.623.825.8080160240320400480560640Q3FY11 Q2FY12 Q3FY12 9MFY12 FY12E FY13E|cr05101520253035%EBITDA OPMSource: Company, ICICIdirect.com ResearchExhibit 4: PAT performance trend53.5 48.4 46.5134.9179.2250.29.57.87.18.104.22.16850100150200250300Q3FY11 Q2FY12 Q3FY12 9MFY12 FY12E FY13E|cr0.05.010.015.020.025.0%PAT NPMSource: Company, ICICIdirect.com ResearchABG Shipyard recorded its highest ever quarterly turnoverin Q3FY12 signifying a pick-up in executionCore EBITDA margin (excluding subsidy) has seen a 430bps improvement over Q1FY12-Q3FY1297128 14336919.222.5 23.521.9050100150200250300350400Q1FY12 Q2FY12 Q3FY12 9MFY120510152025EBITDA excl subsidyEBITDA margin excl subsidy (%)Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 3Exhibit 5: Revenue expected to improve in FY12, FY131413.01812.42136.92352.02698.2050010001500200025003000FY09 FY10 FY11 FY12E FY13E|cr RevenueSource: Company, ICICIdirect.com ResearchExhibit 6: Subsidy accounted182985191010.14.0 3.61.7 1.40.020.040.060.080.0100.0120.0140.0160.0180.0200.0FY10 FY11 Q1FY12 Q2FY12 Q3FY120.02.04.06.08.010.012.0Subsidy subsidy as % of revenuesSource: Company, ICICIdirect.com ResearchExhibit 7: Operating margin to stabilise after declining in FY12331.6472.5518.1560.1661.824.523.822.214.171.124100200300400500600700FY09 FY10 FY11 FY12E FY13E|cr05101520253035%EBITDA EBITDA %Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 4Exhibit 8: PAT expected to improve in FY13171.2218.1194.0179.2250.21212989050100150200250300FY09 FY10 FY11 FY12E FY13E|cr036912151821%PAT PAT %Source: Company, ICICIdirect.com ResearchExhibit 9: Debt equity ratio to improve, going ahead1770.92897.42542.42285.319126.96.36.199.01.61.10500100015002000250030003500FY09 FY10 FY11 FY12E FY13E|cr0.00.51.01.52.02.53.0Debt Debt-EquitySource: Company, ICICIdirect.com ResearchExhibit 10: Shareholding pattern61.811.36.420.519.56.512.361.7010203040506070Promoters FII DII Others%Sep-11 Dec-11Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 5ABG’s total order book stands at ~ | 15500 crore, of which theunexecuted order book is at ~ | 10500 crore. Though more than 20% ofthe order book comprises orders placed by ABG’s group companies,recently, the heartening factor has been ABG’s ability to bag prestigiousorders. During Q1FY12, the company had secured an order of | 970 crorefor construction of two cadet training ships for the Indian Navy. InJanuary 2012, ABG bagged an order worth | 500 crore from ShippingCorporation of India for construction of six anchor handling tugs cumsupply vessels (AHTS). These orders from top notch Indian PSU clientsbode well for potential order inflows from these marquee clients andprovides strong revenue visibility, going ahead.ValuationAt the CMP of | 434, the stock is trading at 8.8x FY13E EPS of | 49.1 and1.32x FY13E book value of | 328. Considering the improvement in coreEBITDA margin and order book quality, we have reduced the discount tothe CY12E global average price to book value multiple from 32% to 28%while valuing ABG. We have valued the stock at 1.3x FY13E book value(Q2FY12: 1.1x) to arrive at a price target of | 427 and recommend a HOLDrating. Existing investors can also continue to hold the stock.Exhibit 11: Valuation parameterValuation based on Global average Target multiple Target price (|)Price to book value (x) 1.81 1.30 427Average target price (|) 427Current market price (|) 434Upside (%) (1.6)Source: ICICIdirect.com ResearchExhibit 12: ValuationSales Sales EPS EPS PE EV/EBITDA RoNW RoCE(| cr) Growth (%) (|) Growth (%) (x) (x) (%) (%)FY11 2136.9 17.9 38.1 -11.1 11.4 7.9 15.3 12.2FY12E 2352.0 10.1 35.2 -7.6 12.3 6.7 12.7 13.5FY13E 2698.2 14.7 49.1 39.7 8.8 3.1 15.3 16.6Source: Company, ICICIdirect.com ResearchExhibit 13: Revised estimates(| cr) FY12E FY13E FY12E FY13ESales 2420.4 2698.2 2352.0 2698.2EBITDA 559.7 619.8 560.1 661.8Net Profit 221.8 262.5 179.2 250.2EPS 43.6 51.6 35.2 49.1Old NewSource: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 8Exhibit 14: Recommendation History050100150200250300350400450500Feb-12Jan-12Nov-11Oct-11Aug-11Jul-11May-11Apr-11Mar-11Price Target PriceExhibit 15: Recent ReleasesDate Event CMP Target Price Rating8-Apr-11 Q4FY11 Result preview 393 293 SELL3-Jun-11 Q4FY11 Result update 374 344 HOLD8-Jul-11 Q1FY12 Result preview 370 344 HOLD23-Aug-11 Q1FY12 Result update 341 338 HOLD22-Nov-11 Q2FY12 Result update 388 373 HOLD6-Jan-12 Q3FY12 Result preview 392 373 HOLDGlobal Valuation (Shipping)CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12E CY10E CY11E CY12EShipbuildingDaewoo Shipbuilding* South Korea 2.0 1.2 1.0 10.0 11.7 9.7 8.3 9.4 8.7 21.5 10.6 11.7Hyundai Heavy Industries* South Korea 3.1 1.2 1.0 11.8 8.5 8.0 11.7 6.9 6.4 30.3 14.5 13.8Keppel Corp. Ltd* Singapore 2.8 2.2 2.0 15.3 12.5 12.2 13.3 11.2 9.7 19.6 19.7 18.4Samsung Heavy Industries* South Korea 2.9 1.7 1.5 11.4 12.5 10.3 8.9 7.8 6.7 28.5 14.0 15.2Sembcorp Marine* Singapore 5.3 3.9 3.5 16.7 15.5 16.0 10.6 10.9 10.4 34.4 27.0 24.1ABG Shipyard# India 1.7 1.5 1.3 11.4 12.3 8.8 7.9 6.7 3.1 15.3 12.7 15.3Pipavav Defence & Offshore Engineering Co# India 3.1 3.0 2.7 - 73.6 28.1 43.6 20.9 13.8 2.5 4.1 9.6Bharati Shipyard# India 0.3 0.2 0.2 2.6 4.7 17.7 7.9 6.9 9.8 9.3 6.9 0.5*consensus# With regards to Indian companies, three year data represents FY11, FY12 and FY13 (financial year ending in March)EV/EBITDA (x) ROE (%)Company CountryP/BV (x) P/E (x)
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