Hold Reliance Naval and Engineering; target of Rs 56: ICICI Direct

ICICI Direct's research report on Reliance Naval & Engineering

Reliance Naval & Engineering (RNEL) reported weak Q2FY18 results, which were below our estimates on all fronts Revenues came in Rs 83.3 crore, down 15.2% YoY. We estimated revenues of Rs 180 crore for the quarter on the back of revenue booking of patrol boats delivered to the Indian Navy during the quarter EBITDA came in at Rs 4.4 crore (I-direct estimate: Rs 16.2 crore). Interest expenses came in at Rs 167.7 crore, up 25.9% YoY, 11% QoQ as debt increased by Rs 80.7 crore over the past two quarters. The debt figure is now at Rs 8418 crore vs. 8337.3 crore in Q4FY17 Subsequently, the overall PAT performance continued to remain stressed at a loss of Rs 150.7 crore. The company has also approved a rights issue up to Rs 1500 crore.

Outlook

Post acquisition of ~36.84% stake by Reliance Infrastructure in FY16, RDEL has focused on debt management via refinancing its debt and part conversion into equity. Going forward, RDEL’s ability to keep debt under serviceable levels remains a key monitorable. To improve its execution, RDEL has recruited a number of industry stalwarts in the core management team. Thus, going forward, execution of the current order book, fresh inflow of large orders and debt management are likely to act as key triggers for the stock. With dilution on the cards, we now value the stock at 2.6x P/BV and arrive at target price of Rs 56. We maintain our HOLD recommendation on the stock.

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