All you wanted to know about the Garden Reach Shipbuilders IPO

Publish Date: September 25, 2018

The initial public offering (IPO) of the Government of India-owned Garden Reach Shipbuilders & Engineers Ltd (GRSE) is here. About 2.92 crore shares are available within a price band of Rs 115 to Rs 118. The shipbuilding company, which is under the administrative control of the Ministry of Defence (MoD), primarily caters to the shipbuilding needs of the Indian Navy and the Indian Coast Guard. The company has niche competency and a large order book. Let us find out about the pros and cons of the GRSE IPO.

Company and business

Though GRSE caters to the Indian Navy and the Indian Coast Guard, it also engages in activities related to engineering and engine production. So, as a part of its engineering offerings, GRSE makes deck machinery items and pre-fabricated portable steel bridges, among other things. However, its core business and main revenue earnings are from its shipbuilding division. The company derived 94.14% of its gross revenue from the shipbuilding division in FY18.

It has three facilities for shipbuilding, all located in Kolkata. GRSE is a Schedule B and Mini Ratna Category company. Over the years, it has built over 750 vessels. Do note that the timelines in defence shipbuilding range from two to five years. For this reason, the revenue and profit recognition can be very lumpy in nature.

GRSE is not the only shipbuilder in India. There are others like L&T Shipbuilding and Reliance Naval and Engineering. Some of its competitors have more resources. Some others have a lower cost of operations.

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The aim of the GRSE public offer is to enable disinvestment by the Government of India (sale of its 25.5% stake). The company will not receive any proceeds from the IPO. All proceeds will go to the Government of India.

Competitive strengths

First and foremost is GRSE's modern manufacturing platform. It boasts of integrated shipbuilding facilities. Over the years, the company has simplified its processes and procedures. It has also adopted modern practice and technology as well as enhanced capacity. Today, GRSE can produce eight large ships and twelve medium/small ships simultaneously.

Second, GRSE enjoys established relationships with the Indian Navy and the Indian Coast Guard. These relationships have been forged over the last five decades. They enable the company to secure shipbuilding projects. Till date, GRSE has delivered a total of 96 ships to the Indian Navy and the Indian Coast Guard. The company enjoys an aggregate order book of Rs 20,300 crore as on 31 July 2018. The shipbuilding segment alone contributes Rs 20,000 crore.

Third, GRSE is well-placed to gain from the 'Make in India' initiative. Being Indian and government-owned, GRSE enjoys a clear advantage over global shipyards when it comes to bagging contracts to build vessels for the Indian Navy and the Indian Coast Guard. GRSE qualifies for the 'Make in India' scheme.

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Future strategies

GRSE plans to continue strengthening its strong relationships with the Indian Navy and the Indian Coast Guard. It is also planning to ramp up focus on the repair and refitting of Indian Navy and Indian Coast Guard vessels. Additionally, GRSE may also increase its research and development spends to boost efforts in the development and design of warships along with engineering product development.

GRSE is well aware that it needs to adjust processes to meet the requirements of the shifting market environment. It intends to tap the global market for products.

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Key concerns

From an IPO point of view, the company's business model raises a few concerns.

As explained earlier, over 90% of its revenues are from building vessels. So, GRSE has a substantial reliance on the Indian Navy and the Indian Coast Guard for revenue. This means any drop in orders from the Indian Navy and the Indian Coast Guard will cause discomfort. For any business that has a high dependence on a limited number of customers, this issue is common. Such declines in orders could be due to reprioritisation of funding in the Indian defence budget, or because of delays.

Also, the manufacturing business has some risks. GRSE, like many others, is not entirely immune to them. These risks emanate from the reporting of losses under fixed-price contracts. This could be due to cost overruns, delays in order delivery, or failure to fulfil contract requirements. The company could face the imposition of liquidated damages.

There is also the risk of GRSE being unable to keep up with the technology changes. The organisation may not have sufficient resources for research design and development.

Lastly, GRSE's business operations are based out of a single location (Kolkata). This means the loss or shutdown of its operations at its shipyard due to unexpected interruptions can theoretically have an adverse impact on business, finances, and operations.

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