ABG Shipyard (ABGS) and Bharati Shipyard (BSL) intent to acquire Great Offshore (GOL) is same i.e. diversify from the long-cycle shipbuilding business and own captive customer to remain partially insulated from the cyclicality in shipbuilding business. But, given the risks faced in core business and higher leverage, the short to medium term risks far outweigh long-term benefits expected to accrue from GOL acquisition.
With an underlying assumption that 39.5% economic interest eventually rests with BSL, in consideration of the revised open offer price of Rs403/Share for 20.0% interest (higher probability of gaining control), we have factored the value of GOL in BSL target valuations and valued ABGS for its core shipbuilding business.
In BSL, we have factored the benefits of additional business flow of Rs2.5 bn/Year from FY13E onwards from its captive customer (assumed down cycle in FY10-12E). Thus, we have revised the value of core shipbuilding business from Rs45/Share to Rs88/Share and valued the 39.5% economic interest in GOL at 20.0% discount to EMKAY target equity valuation of Rs16.2 bn, which translates into Rs83/Share (adjusted for interest on acquisition of 39.5% holding). Consequently, target value for BSL is revised from Rs79/Share (report dated 8th May 09) to Rs171/Share (similar to Rs175/Share –indicated in our communication dated 3rd June 09). We upgrade our rating from 'REDUCE' to HOLD – on underlying assumption that BSL will acquire additional 20.0% stake at Rs403/Share in GOL.
In ABGS, we have not considered the value of 35.8% economic interest in GOL. We continue to value ABGS for the core shipbuilding business. Considering the FY09 performance and reducing mid-cap risk premium, we are revising our DCF value from Rs63/Share to Rs148/Share. We continue to maintain our SELL rating.
| Company | Reco | CMP (Rs) | TP (Rs) | |
| ABG Shipyard | SELL | 204 | 148 | |
| Bharati Shipyard | HOLD | 167 | 171 | |
| Great Offshore | BUY | 421 | 435 |
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