ABG Shipyard NEUTRAL. Performance Highlights CMP. `337 Target Price - 3QFY2011 Result Update Ship Building. Investment Period -

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1 3QFY211 Result Update Ship Building February 9, 211 ABG Shipyard Performance Highlights Y/E March (` cr) 3QFY11 2QFY11 qoq chg (%) 3QFY1 yoy chg (%) Net sales (13.) EBITDA (43.7) OPM margin (%) (171)bp 18.5 (918)bp PAT (5.1) 82 (35.) Source: Company, Angel Research For 3QFY211 (consolidated), ABG Shipyard (ABG) reported subdued performance, with cost pressures weighing on margins. During the quarter, ABG witnessed revival in order inflow (~`2,37cr in 3QFY211) compared to a listless FY21. The company s unexecuted order book (OB) stands at ~`7,6cr and executable by FY214. Following ramp up at the Dahej yard, ABG s execution has been healthy and it delivered ten vessels during 9MFY211. ABG s current net debt has increased to ~`2,2cr (D:E - 1.8x) in 3QFY211 compared to ~`1,825cr in 2QFY211 (D:E - 1.5x). Moreover, headwinds like increase in input costs continue to dog the industry and uncertainties of the subsidy scheme persist. At current levels, the stock trades at fair valuations in line with its global peers. We remain Neutral on the stock. Faster execution, strong OPM: ABG s revenue (ex subsidy) grew 12.7% yoy (down 13.% qoq) to `482cr as it sustained the pace of order execution by delivering three vessels in 3QFY211. ABG also partially recognised revenues from the new `2,cr rig orders as construction of one rig was already underway. However, OPM declined by 918bp yoy and 171bp qoq to 16.8% as other expenditure spiked 53.5% qoq (22.1% yoy) on account of increase in over-heads associated with ramped up Dahej facility. ABG booked subsidy to the tune of `58cr v/s `65cr in 3QFY21 and `1.1cr in 2QFY211 due to lower revenue contribution from the rig segment. Depreciation increased 24.% qoq (flat yoy) to `17cr due to project capitalisation (Dahej Shipyard) since the last two quarters. Pertinently, other income was negligible vis-à-vis a one-time gain of `34.4cr from sale of Great Offshore shares in 3QFY21. Consequently, PAT declined 35.% yoy and 5.1% qoq to `53cr. Outlook and Valuation: We believe that ABG's healthy unexecuted OB of `7,6cr (4.7x FY21 revenues) by FY214 provides strong revenue visibility. At the CMP, ABG is trading at fair valuations and in line with some of its Asian peers: PE of 7.8x, EV/EBIDTA of 7.5x and 1.6x P/BV on FY12E basis. Hence, we remain Neutral on the stock as it factors in the near-term growth opportunities. Key Financials (Consolidated) Y/E March (` cr) FY29 FY21 FY211E FY212E Net Sales 1,349 1,625 2,22 2,555 % chg Reported Net Profit % chg (14.4) 46.4 Adj Net Profit * FDEPS (`) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) Source: Company, Angel Research; Note: *excluding subsidy NEUTRAL CMP `337 Target Price - Investment Period - Stock Info Sector Ship Building Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume 1, / ,415 Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code 1 17,593 5,254 ABGS.BO ABGS@IN Shareholding Pattern (%) Promoters 6.4 MF / Banks / Indian Fls 13.9 FII / NRIs / OCBs 18.6 Indian Public / Others 7.1 Abs. (%) 3m 1yr 3yr Sensex (16.) ABG (29.2) 13.1 (45.) Param Desai Ext: paramv.desai@angelbroking.com Mihir Salot Ext: 6843 mihirr.salot@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 3QFY211 performance (consolidated) Y/E March (` cr) 3QFY11 2QFY11 qoq chg (%) 3QFY1 yoy chg (%) 9MFY11 9MFY1 yoy chg (%) Revenues (13.) Total expenditure (41) (41) (2.2) (349) 15.1 (1136) (926) 22.7 EBIDTA (43.7) EBIDTA margin (%) (918)bp 18.5 (171)bp bp Depreciation (17) (14) 24. (17).7 (45) (26) 7.3 Interest (4) (4).3 (38) 5.7 (122) (114) 7.1 Subsidy (1.8) (41.5) Other income 1 (94.2) 1 (97.7) 3 12 (74.1) PBT (11.1) 9 (9.6) Tax (28) (28).5 (42) (33.6) (75) (91) (17.) Tax rate (%) Adjusted PAT* (75.5) PAT margin (%)* (815)bp bp bp EO/Min Int. (7) 34 (21) 34 Reported PAT (5.1) 82 (35.) (15.8) Number of shares Adj EPS (`)* 3 12 (75.5) Source: Company, Angel Research; Note: *excluding subsidy Strong order book and execution capacity ABG witnessed revival in order inflow of ~`2,7cr in 9MFY211 compared to a listless FY21. This has taken its total unexecuted order book to ~`7,6cr (4.7x FY21 revenues), which is executable by FY214 providing strong revenue visibility. Notably, ABG managed to avoid any cancellations/price negotiations, even during the economic crisis. Also, capacity expansion at the Dahej Shipyard has ramped up ABG s execution capabilities, as it now undertakes ship construction on a modular basis. Thus, during 9MFY211 ABG delivered ten vessels compared to 17 in FY21 and six in FY29. Improved execution has resulted in increased stage-wise revenue recognition and corresponding cash flow from clients. Exhibit 2: Strong order inflow in 9MFY211 Date Type of Vessels Client Value of Order (` cr) April 21 2, dwt Cement Carriers (Three) M/s. Associated Bulk Carriers, Singapore 385 October 21 Diving Support Vessel Halul Offshore Services, Qatar 29 October 21 Anchor Handling Tug Supply Vessel Manravi Spa, Italy 8 November 21 Jack-up rigs (Two) M/S Drilling and Offshore Pte 2, February 9, 211 2

3 Exhibit 3: Quarterly revenue trend Exhibit 4: Quarterly EBITDA trend (`cr) (1.2) (1) (2) 3QFY1 4QFY1 1QFY11 2QFY11 3QFY11 Revenue ex-subsidy (LHS) yoy change (RHS) (%) (` cr) QFY1 4QFY1 1QFY11 2QFY11 3QFY11 EBITDA ex-subsidy (LHS) EBITDA Margin (RHS) (%) Source: Company, Angel Research Source: Company, Angel Research Exhibit 5: Quarterly profitability trend (`cr) (26.6) (5) (55.2) (6.8) (1) 3QFY1 4QFY1 1QFY11 2QFY11 3QFY11 PAT ex-subsidy & EO items (LHS) yoy change (RHS) (%) Source: Company, Angel Research February 9, 211 3

4 Investment Arguments Strong revenue visibility ABG's total unexecuted order book stands at ~`7,6cr (4.7x FY21 revenues) executable by FY214 and provides strong revenue visibility. Commendably, the company had managed to avoid cancellations/price negotiations even amidst the economic crisis. Thus, we believe that ABG's top clients are unlikely to default on vessel payments. Banking on offshore, defence segments ABG has a diverse order book mix, with high exposure to the offshore segment (4% of its order book). The sharp recovery in crude oil price has spurred the oil companies to carry out exploration and production (E&P) in turn lending a fillip to the deepwater rig contractors. There is also a constraint on the supply-side for rigs and offshore support vessels due to the ageing fleets and demand for younger vessels with higher specifications. ABG has begun focusing on the defence sector given the inherent stability in orders and pre-qualifications making it an entry barrier for other players to bid for the tenders. Subsidiary, Western India Shipyard, recently bagged a `72cr order from the defence ministry to repair a naval vessel. Currently, ~4.5% of ABG s total order book constitutes orders from the Indian Coast Guard. Improving balance sheet ABG's inventory stood at `1,2cr in FY29 and `1,66cr in FY21 due to the delayed payment from Essar and deferment of deliveries in the bulk segment. Funding for the same has been done through long-term debt, resulting in net debt-equity ratio of 3.1x with a bet debt of `2,897cr in FY21. However, timely execution and receipt of payment from clients, fresh order inflow and Great Offshore stake sale have helped ABG to improve its cash flow position. Consequently, as on date ABG s net debt stands at ~`2,2cr with D:E at 1.8x. Fairly Valued The Indian shipbuilding industry is well poised to register robust growth aided by the expected surge in sea-borne trade, availability of cheap labour in India and strong capex lined up in the offshore and defence sectors. However, compared to its global peers who operate on a larger scale, ABG seems fairly valued at current levels trading at a PE of 7.8x, EV/EBIDTA of 7.5x and 1.6x P/BV on FY212 estimates. We maintain our Neutral view on the stock. February 9, 211 4

5 Exhibit 6: Trading below Four-year avg. P/BV (one-yr forward) at 2.5x Feb 7 May 7 Aug 7 Nov 7 Feb 8 May 8 (X) Aug 8 Nov 8 Feb 9 May 9 Aug 9 Nov 9 Feb 1 May 1 Aug 1 Nov 1 Feb 11 P/BV Average BV Source: Bloomberg, Angel Research Exhibit 7: Global peer valuation Global Players Mkt Cap P/E (x) P/BV (x) RoE (%) EPS USD (mn) CY1E CY11E CY1E CY11E CY1E CY11E CAGR (%) Hyundai Heavy 3, Samsung Heavy 7, (2.7) Guangzhou Shipyard 1, Keppel Corp 14, (5.6) Sembcorp Marine 8, (5.) Yangzijang Ship. 5, Hyundai MIPO 3, (5.3) STX Offshore 2, Average ABG Shipyard* 1, Source: Bloomberg, Angel Research; Note* Financial year FY11E & FY12E;CAGR over CY1-12E February 9, 211 5

6 Profit & Loss Statement (Consolidated) Y/E March (` cr) FY28 FY29 FY21 FY211E FY212E Gross sales 885 1,349 1,625 2,22 2,555 Less: Excise duty Net Sales 885 1,349 1,625 2,22 2,555 Other operating inc Total operating income 885 1,349 1,625 2,22 2,555 % chg Total Expenditure 678 1,81 1,335 1,567 1,967 Net Raw Materials ,16 1,183 1,495 Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation EBIT % chg (.9) (% of Net Sales) Interest & other charges Other Income (% of PBT) Subsidy Income Recurring PBT % chg Extraordinary exp/(inc) (23.8) - PBT (reported) Tax (% of PBT) PAT Less: Minority Interest Less: Prior period tax adj. (.4) (1.7) MAT credit entitlement PAT after MI (reported) ADJ. PAT (ex-subsidy) % chg (36.7) (% of Net Sales) Basic EPS (ex-subsidy) Fully Diluted EPS (`) % chg (36.7) February 9, 211 6

7 Balance Sheet (Consolidated) Y/E March (` cr) FY28 FY29 FY21 FY211E FY212E SOURCES OF FUNDS Equity Share Capital Share Warrants Reserves& Surplus ,71 1,243 1,56 Shareholders Funds ,122 1,294 1,557 Shareholder s funds* ,1 Minority Interest Total Loans 522 1,768 2,897 2,797 2,797 Deferred Tax Liability Total Liabilities 1,456 2,98 4,335 4,47 4,671 APPLICATION OF FUNDS Gross Block ,88 Less: Acc. Depreciation Net Block Capital WIP 386 1,6 1,375 1,651 1,816 Goodwill Investments Current Assets 1,66 2,671 3,162 3,359 3,577 Cash Loans & Advances 1,13 1,38 1,998 2,98 2,198 Other 416 1,243 1, ,298 Current liabilities & prov ,293 1,43 1,417 1,575 Net Current Assets 865 1,378 2,119 1,942 2,3 Mis. Exp. not written off Total Assets 1,456 2,98 4,335 4,47 4,671 Note: *ex-subsidy February 9, 211 7

8 Cash Flow Statement (Consolidated) Y/E March (` cr) FY28 FY29 FY21 FY211E FY212E Profit before tax Depreciation Change in Working Capital (123) (547) (371) 52 (326) Less: Other income Direct taxes paid (12) (23) (33) (18) (148) Cash Flow from Operations 164 (272) (Inc.)/Dec. in Fixed Assets (299) (922) (519) (525) (265) (Inc.)/Dec in Investments 1 (7) (199) Eq sh Appl in Subsidiary Co. (6) () () - - Other income (24) - Cash Flow from Investing (34) (929) (718) (333) (265) Equity & warr. Issue (net of exp) 32 () Inc./(Dec.) in loans 15 1, (1) - Dividend Paid (Incl. Tax) (9) (12) (12) (48) (24) Others (41) (74) (147) - - Cash Flow from Financing 87 1, (148) (24) Inc./(Dec.) in Cash (53) (39) (2) 319 (266) Opening Cash balances Closing Cash balances February 9, 211 8

9 Key Ratios Y/E March FY28 FY29 FY21 FY211E FY212E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (GB) Inventory / Sales (days) Receivables (days) Payables (days) Wkg. cap. (ex-cash, days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Int. coverage (EBIT/Int) February 9, 211 9

10 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement ABG Shipyard 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) February 9, 211 1