CMP: Rs436.70
BUY
Gammon India Ltd. (GIL) is one of the oldest and largest construction companies in India with uninterrupted profitability for the last 32 years, displaying the
ability of the management to combat cyclicality. The order book at Rs78bn presently, translates into 6.6x its FY06 annualized turnover, being one of the highest ratios among peers. The order intake at 1.6x during FY05 annualized turnover and 3.6x FY06 annualized turnover has shown a rising trend and will help generate high growth rate in future.
GIL, through its 82.5% subsidiary, Gammon Infrastructure Projects Ltd (GIPL), is one of the largest owners of infrastructure assets in the country. GIPL holds nine BOTs, four operational and the rest in development phase, including four
roads, two bridges, two power projects and a port project. The revenue stream is diversified too, with a mix of toll, annuity and grants. We value these BOTs at
Rs57.7 per share of GIL, which forms 15.5% of the CMP.
While we have valued the BOTs at the book value of equity infused by GIL, we foresee significant unlocking of value with the listing of GIPL, which has filed its draft red herring prospectus with the Securities and Exchange Board of India. The IPO would also help resolve the varied and long term funding needs of GIPL for BOTs.
Driven by an order book increase by Rs40.6bn between CY04 and Q1 FY07 and an order intake of 1.4x FY07E turnover, we expect GIL to witness a CAGR of 54% in turnover between FY06 and FY08 and a 33.2% CAGR in net profit during
the same period. The transportation segment will drive revenues accounting for an expected 52.4% of total revenues in FY07 and 50.7% in FY08.