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ABG Shipyard – Smooth Sailing

January 15, 2008

On the recommendations of Citi, we first initiated coverage on ABG Shipyard 6 months ago. Now Merill Lynch has put a BUY rating on the stock with huge potential for upside. ABG Shipyard is expanding from being a manufacturer of small vessels to vessels of all categories. Order backlog at 7.5x FY08E sales, ten fold jump in capacity by FY12E to drive 63% EPS CAGR in FY07-10E. The stock, trading at 6.6x FY10E EV/EBITDA is attractive relative to peers.

Merill Lynch thinks that – the Govt. may extend a subsidy scheme which is being discussed; but not confirmed; b) ABG’s gets SEZ status for its upcoming shipyard at Dahej providing it substantial tax benefits; and c) Manages to acquire Western India Shipyard that Is still awaiting regulatory approvals.

ABG’s EPS likely to grow at 83% in FY09E and 60% in FY10E driven by 80%+ sales growth and increase in EBITDA margin. Company has reported 570bp y-o-y jump in EBITDA margin in 9MFY08 to 24%. Expect EBITDA margin to jump further to 26.2% by FY10E led by over 55% jump in vessel pricing in FY08E. The company expects to report EPS of Rs 62.15 and Rs 99.47 for FY09 & FY10. Merill has set a target price of Rs 1350.

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