ABG Shipyard: SELL, Target: Rs 228

ABG Shipyard

 

Pain continues, Maintain SELL

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SELL

 

CMP: Rs 299                                  Target Price: Rs 228

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ABG Shipyard (ABGS) disappointed at the operational level - (1) 10% yoy decline in revenues to Rs4278 mn and (2) lower growth in operating profits at 21% yoy to Rs793 mn. But, 420% yoy rise in subsidy income to Rs650 mn in the quarter despite lower order booking – led to net profit growth at 4% yoy to Rs479 mn – subsequently ahead of estimates. We give thumbs-down to the quality of earnings performance. ABGS order backlog remained unchanged on qoq basis at Rs122 bn - in line with expectations. Increase in working capital and capital investments raised ABGS' borrowings to Rs25 bn – up 41% since Mar'09 and net DER increased from 1.9X in Mar'09 to 2.1X in on Dec'09. The downside risks to ABGS earnings estimates have increased manifold - due to extremely high DER. high working capital requirement and lacklustre order inflows. We continue to maintain our SELL recommendation on ABGS with revised DCF target price of Rs228 (from Rs148 earlier) consequent to change in base year from FY09 to FY10E. Only risk to our SELL recommendation is faster disbursement of subsidies – which adds Rs80/Share to DCF target price.

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