Rating Rationale 17 Sept 2020 Garden Reach Shipbuilders & Engineers Ltd. Brickwork Ratings reaffirms the ratings of both the long-and short-term bank loan facilities of Garden Reach Shipbuilders & Engineers Ltd (“GRSEL” or the “Company”) along with an enhancement in total exposure. Particulars: Amount (₹ Crs) Ratings* Facility@ Tenure Previous Present Previous (Sept,2019) Present BWR Fund based Long BWR AAA/Stable, 45.00 105.00 AAA/Stable, Limit Term Reaffirmed Reaffirmed Non Fund BWR A1+, Short BWR A1+, based Limit 3,205.00 3,455.00 Reaffirmed Reaffirmed Term (INR Three Thousand Five Hundred and Sixty Total 3,250.00 3,560.00 Crores Only) *Please refer to BWR website www.brickworkratings.com/ for the definition of the ratings ​ ​ @Complete details of bank facilities are provided in Annexure-I RATING ACTION/OUTLOOK Brickwork Ratings (BWR) has essentially relied upon the audited financials of Garden Reach Shipbuilders & Engineers Ltd (GRSEL or the company) for FY19 and FY20, and projections for FY21 and FY22, and other information as available in the public domain, as well as information/clarifications provided by the company and its bankers, to arrive at the present ratings. ​ ​ Based on an annual review, BWR has reaffirmed the rating for the long-term bank loan facilities ​ ​ of Rs.105.00 Crs (enhanced from Rs.45.00 Crs) of GRSEL at BWR AAA/Stable and has ​ ​ reaffirmed the rating for its short-term bank loan facilities of Rs.3,455 Crs (enhanced from ​ Rs.3,205 Crs) at BWR A1+ (aggregate rated amount enhanced to Rs.3,560 Crs from Rs.3,250 ​ ​ Crs). The outlook has been retained at Stable as BWR believes that the business risk profile of GRSEL ​ will be maintained over the medium term. The Stable outlook indicates a low likelihood of a rating change over the medium term. The rating outlook may be revised to Negative if there is any substantial decrease in the operating income or if there are any material changes to GRSEL’s www.brickworkratings.com page 1 of 8 strategic importance, or in the case of a substantial dilution in the Government of India’s shareholding, which could result in the entity no longer being classified as a public sector entity. The rating reaffirmation draws strength from the fact that the company is owned by the Government of India (GOI) (74.50%) and is of strategic importance to the Ministry of Defence (MOD), which has a strong control over the company. The rating also takes comfort from the company’s healthy revenue visibility, as evidenced by the current outstanding order book position of Rs.26,457.87 Crs as of 1QFY21, and the company’s long hands-on experience in warship building. The rating also derives comfort from the company’s steady revenue growth and healthy credit metrics, the favourable outlook arising out of the Ministry of Defence orders, and the company’s adequate liquidity position. The rating is, however, constrained by competition from private shipyards on account of competitive bidding. The rating also factors in liquidated damages in the case of any delay in the delivery of ships, as well the dip in the 1QFY21 performance due to the current pandemic situation. Going forward, the company’s ability to sustain overall performance at the present level in a competitive environment, while maintaining leadership in warship building and retaining its largely debt-free status along with comfortable liquidity, will be the key rating sensitivities. KEY RATING DRIVERS Credit Strengths: Owned by Government of India and of strategic importance to defence ministry: GRSEL is a ​ premier warship building company in India and is one among the four public sector undertakings for shipbuilding, under the administrative control of the Ministry of Defence. Currently, 74.50% of shares are with the Government of India, following the dilution of 25.50% shares to the public in October 2018. It is also listed with the National Stock Exchange and Bombay Stock Exchange. A substantial portion of its turnover (~ 97.98 %) is on account of the construction of warships for the Indian Navy and Coast Guard, and therefore, it is a strategically important entity. Strong control by ministry: GRSEL operates under the Ministry of Defence. The board members ​ are nominated by the GOI, and its accounts are audited by a chartered accountant appointed by the Comptroller and Auditor General of India. As per reports published under its Annual Report for FY20, there are no negative comments either from the Statutory Auditors or from the Comptroller and Auditor General of India. Healthy revenue visibility and hands-on experience in warship building: The company ​ operates in the shipbuilding industry and specialises in building naval ships for the GoI. It is primarily dependent on government spending and the existing security policies of the government. As in 1QFY21, the current outstanding work order position in hand is around Rs.26,457.87 Crs, which is 18.45 times the total operating income for FY20. The current outstanding orders are to be executed between April 2023 and October 2026. Overall, 97.98% of these outstanding orders are www.brickworkratings.com page 2 of 8 from the Indian Navy. Steady revenue growth: The company’s revenue growth continued during FY20 as well, and ​ revenue for FY20 was 3.38% higher than that in FY19. GRSEL booked a total operating income of Rs.1433.30 Crs during FY20, which improved from Rs.1386.42 Crs in FY19. The improvement in revenue was on account of the healthy execution of work orders. The company delivered four ships to the Indian Navy/Indian Coast Guard during FY19-20. On 18 February 2020, the company ​ ​ achieved a milestone by completing the ASWC project and delivering the last ‘Kamorta’ class ship. Healthy credit metrics: The company’s credit metrics continued to remain strong owing to zero ​ utilisation of the fund-based cash credit limit. The company’s ISCR improved to 30.25 times during FY20, as against 8.24 times in FY19. The improvement was on account of a decrease in finance costs. The net financial leverage of the company continued to remain in a net cash position on account of zero debt and healthy cash balance of Rs.2611.31 Crs during FY20 (FY19: Rs.1989.40 Crs). The DSCR of the company also stood comfortable at 145.93 times during FY20 (FY19:27.80 times) on account of the absence of long-term repayment obligations. Total outside liabilities to tangible net worth, however, turned modest at 4.19 times during FY20, against 3.05 times in FY19. This was on account of an increase in contract liabilities to Rs.3520.75 Crs in FY20, from Rs.2533.37 Crs in FY19. Favourable outlook on Indian defence orders: The company’s operations relate to the ​ manufacturing of ships, and that too particularly for the Indian Navy. Defence spending is largely dependent on government investment in national security, which cannot be compromised. A strong order book for the construction of 15 warships concurrently for the Indian Navy at this juncture bodes well for GRSEL. Furthermore, the recent policy announcement by the Raksha Mantri declaring 101 items in the negative list of imports over the next five years in the defence segment provides huge opportunities to the Indian industry as part of the larger objective of the Atmanirbhar Bharat Abhiyan. The defence shipbuilding segment continues to look promising on account of the ambitious acquisition plans of the Indian Navy and Indian Coast Guard, which is quite encouraging for Indian shipbuilders. A number of RFPs for various shipbuilding projects have been floated by the Ministry of Defence during the last one year, and some more are expected to come out in the near future. Furthermore, the Ministry of Defence's plan to increase the export of defence products to USD 5 Bn by 2024 augurs well for all shipbuilding companies. Credit Weaknesses: Competition from private shipyards: The defence industry has undergone structural changes that ​ have enabled private players to participate. As a result, the nomination-based era has given way to the competitive bidding era. All bidders need to undergo a bidding process on a merit basis only (technical capability, financial capability and L1). However, the company continues to maintain its edge over new emerging competitors by way of capacity, design, technology, processes and cost advantages. Moreover, the company continues to improve its competitive advantages through the augmentation of its own infrastructure, as well as the adoption of the latest process management tools and technologies in various areas of operations. To compete with other players, the company www.brickworkratings.com page 3 of 8 has increased its fund-based limits to Rs.105.00 Crs from Rs.45.00 Crs and non-fund based limits to Rs.3,455 Crs from Rs.3,205 Crs. Liquidated damage: Since contracts are time-bound, any delay in project execution and the repair of ships during the guarantee period will result in cost overruns and liquidated damages, as per contract. This may have an adverse impact on the company’s profitability margin; however, this is offset by the provisions made by the company for liquidated damages. Dip in 1QFY21 performance on account of pandemic: As of 1QFY21, the company had booked ​ a total operating income of Rs.109.95 Crs (1QFY20:Rs.167.95 Crs), along with an EBITDA loss of Rs.40.43 Crs (1QFY20:Negative Rs.8.07 Crs). The dip in revenue was on account of the nationwide lockdown due to the COVID-19 pandemic. As per the clarification provided by the company in its audit report, it was under lockdown upto the first week of June 2020 due to the pandemic, as per government directives.