Reliance Defence’s (RDE, erstwhile Pipavav Defence) Q1FY17 revenues were | 70.3 crore (vs. I-direct estimate: | 120 crore). Revenues in Q4FY16, Q1FY16 were at | 94.7 crore, | 107 crore, respectively. Lower execution in the quarter led to decline in operating expenses resulting in positive EBITDA of | 1.8 crore (I-direct estimate: positive EBITDA of | 1 crore). Lower employee expenses coupled with reversal of costs for revenue recognised earlier, accelerated EBITDA growth. The positive EBITDA performance was completely offset by higher interest expense that during the quarter grew 18%YoY (7% QoQ) to | 132 crore. Subsequently, PAT for Q1FY17 was at a loss of | 135 crore (I-direct estimate: loss of | 160 crore).

RDE’s management expects total naval defence order inflow of ~| 112500 crore for private shipyards in the next 10 years. Technological tieups with a slew of foreign partners SAAB, DCNS, Babcock, etc, position BDE at a vantage point. Near term financials continue to remain subdued. However, the sector opportunity justifies a valuation of 2.5x FY18 P/BV. A slower-than-expected ramp up in the order book results in a downward revision of our target price to | 68. We have a BUY recommendation.