Report Date | March 7, 2008. | |||||||
Company Name | Gammon Infrastructure Projects | |||||||
Price Band / Recommendation | Rs.167-200 | Subscribe | ||||||
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Sector | Infrastructure | Investment RationaleØ GIPL, a subsidiary of construction major Gammon India , is an infrastructure project development company with diversified project portfolio spread across roads, bridges, ports, biomass power sectors. Ø In addition to maintaining stronghold on above, GIPL is entering mass rapid transit systems, water management projects, airports, power transmission lines, SEZs and hydroelectric power projects. Ø Its product portfolio includes 14 projects, of which 4 are already in operations, 7 are in development phase and 3 are in pre-development phase. Ø Well balanced risk-return profile with mix of market-based & assured return annuity projects. As an early entrant, GIPL enjoys ROE of 24-25% on old projects with confirmed investment of Rs.5500 crore, and will derive ROE of atleast 20% on new ones. Ø Is a preferred bidder for port and hydropower project with additional investment of Rs.3000 crore. Ø Long experience, strong position in construction industry & proven engineering capabilities of Gammon Group coupled with GIPL’s experience in successful development and timely implementation of projects, provides it with competitive advantage. Ø Well placed to take advantage of huge opportunities emerging in infrastructure sector. Investment Concerns Ø Infrastructure projects require huge upfront capex and interest rate sensitivity is high. There is possibility of further equity dilution to finance new projects. Ø There are a number of implementation risks. Recommendation Ø Prima facie, the P/E is misleading as this is a long term growth story. We recommend to SUBSCRBE the issue with a long term perspective. | ||||||
BSE Sensex | 16542 | |||||||
Issue Details | ||||||||
Issue Size | 1,65,50, 000 Equity Shares | |||||||
Shares offered to Public | 1,48,95,000 Equity Shares | |||||||
Shares reserved for Retail Investors | 44,68,500 Equity Shares | |||||||
Face Value | Rs 10/- | |||||||
Funds to be raised | Rs. 276.4 – Rs. 331 crore. | |||||||
Issue opens on | March 10 2008 | |||||||
Issue closes on | March 13 2008 | |||||||
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Utilisation of Issue Proceeds | ||||||||
Particulars | Rs. Crore | |||||||
Investment for Kosi Bridge | 24.15 | |||||||
Investment for Gorakhpur bypass | 36.89 | |||||||
Investment for Rangit II Hydro electric project | 89.60 | |||||||
Investment for Mumbai Nashik Road Project | 51.00 | |||||||
Repayment of loan to GIL | 10.00 | |||||||
Investments in above mentioned projects will be done thru SPV | ||||||||
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Shareholding Pattern (%) | ||||||||
| Pre Issue | Post Issue | ||||||
Gammon Group | 86.00% | 76.15% | ||||||
Others | 14.00% | 12.40% | ||||||
Public | | 11.45% | ||||||
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Eq. Capital (Rs. Cr.) | 128.00 | 144.55 | ||||||
Historical Financial Information
| FY 2006 | % Inc. | FY 2007 | Sept. 30,2007 |
Year ended March | 15 mnths | | 12 mths | 6 months |
Net Sales | 76.78 | 140.5% | 147.70 | 77.72 |
EBITDA | 59.88 | 170.1% | 129.40 | 64.68 |
EBITDA (%) | 78.0% | | 87.6% | 83.2% |
Interest Expenses / (Income) | 23.13 | 143.0% | 44.95 | 25.54 |
Depreciation | 19.31 | 162.0% | 40.49 | 20.95 |
P.B.T. | 17.44 | 215.1% | 43.96 | 18.19 |
Consolidated PAT | 18.27 | 104.3% | 29.85 | 10.96 |
Year end Equity Capital (Rs 10/-) | 128.00 | | 128.00 | 128.00 |
Consolidated EPS (Rs) | 1.43 | 104.3% | 2.33 | 0.86 |
Fully Diluted Equity Capital (Rs 10/-) | 144.55 | | 144.55 | 144.55 |
Diluted Consolidated EPS (Rs 10/-) | 1.26 | | 2.07 | 0.76 |
Book Value (Rs) | 19.68 | | 21.96 | |
RONW (%) | 5.8% | | 10.6% | |
ROCE (%) | 7.5% | | 15.7% | |
Diluted P/E (x) on Lower Price Band | 132.16 | | 80.86 | |
Diluted P/E (x) on Higher Price Band | 158.28 | | 96.84 | |
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About Gammon Infrastructure Projects (GIPL)Ø GIPL, an infrastructure project development company, is a subsidiary of construction major Gammon India . It undertakes and develops projects such as roads, bridges, ports, biomass power projects on Public –private partnership (PPP) basis. Successful infrastructure development is dependent upon two major expertise: (i) project development, which includes appraisal, bidding, financing and project Management (ii) engineering, procurement and construction. Ø Currently, GIPL’s infrastructure project development business includes 14 projects, of which 4 are already in the operations phase, seven are in the development phase and 3 are in the pre-development phase. GIPL also provides O&M (Operation & Maintenance) and project advisory services for projects which are undertaken by project specific companies. |
Investment Rationale Ø The construction spending boom in India has been driven by massive infrastructure spending. Government’s policy to supplement its resources thru PPP projects and an immediate need for developing infrastructure in India will result in several large infrastructure projects across India . Ø GIPL is among the first companies in India incorporated exclusively to participate in infrastructure development through PPP model. As an early entrant, company has significant experience in successful development and timely implementation of projects, which provides it with competitive advantage over new entrants as company is well positioned to deal with any construction or implementation risk in the industry. Moreover, company also has flexibility to grow and allocate resources to sectors that offer more attractive margins. Ø Company’s projects (both in operational and development phase) are spread across roads, bridges, ports, biomass power sectors. Further, these projects are geographically dispersed across various states in India . Thus, sectoral and geographic diversity enables GIPL to effectively mitigate the risks associated with any particular sector and any particular State in India . Ø In addition to maintaining stronghold in sectors like roads, ports and energy, GIPL is analyzing a number of new potential projects in the infrastructure sector, including mass rapid transit systems (“MRTS”), water management projects, airports, power transmission lines, SEZs and hydroelectric power projects. Ø GIPL balances its risk-return profile with a mix of market-based projects/toll (where market risk is carried by company) and assured return projects/annuity (where the market risk is carried by the project client) and a combination of annuity as well as toll project. Consequently, company enjoys significant upside potential with market-based projects and is guaranteed stable revenues from assured-return projects. Presently, annuity based projects account for 70% of the revenue. GIPL, by virtue of its early mover advantage, enjoys ROE (return on equity) of 24-25% on old projects with confirmed investment of Rs.5500 crore, while on new projects, it will derive ROE of atleast 20%. GIPL is practically debt free company despite 4 projects operational. Ø Is a preferred bidder for port project in Gujarat and hydropower project in HP with additional investment of Rs.3000 crore. Ø GIPL has a competitive edge as a result of long experience, well entrenched position in the construction industry and proven engineering capabilities of the Gammon Group. For infrastructure development projects, while GIPL has expertise in project management and execution, it derives significant synergies from the Gammon Group, which is one of the leading EPC contractors in India . Company’s strategic relationships with global infrastructure companies such as Dragados S. P. L., China Light & Power, Alstom, Siemens and Noble Group enables it to enhance its project bidding and development opportunities. |
Investment Concerns Ø Infrastructure projects (BOT) require huge upfront capex and cash flows are back-ended. BOT projects are typically leveraged as well. Thus, interest rate sensitivity is high in such BOT projects, especially as longer-tenor loans are not easily available in India . There is also a possibility of further equity dilution to finance new projects. Ø Given long term nature of projects, there are a number of implementation risks. Other risks for BOT projects such as traffic volume risks, local or political interference risks and delays in land acquisition, impacting timely execution and thus projected IRRs. However, GIPL has history of successful development and timely implementation of projects. |
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Recommendation Ø Prima facie, the P/E is misleading as this is a long term growth story. We recommend to SUBSCRBE the issue with a long term perspective. |
Disclosures Ø The author may have held / hold the above-mentioned securities in their personal accounts or on behalf of the clients. The information contained has been obtained from sources believed to be reliable. While taking utmost care in making the report, the authors or the company does not take responsibility for the consequences of the report. All investment, information and opinion are subject to change without notice. The investment recommendations may not be suitable to all the investors. March 7, 2008 |
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