From Research Desk - SEBI order impact on the Gammon group

We spoke to Mr. Parvez Umrigar, Managing Director of Gammon Infrastructure Projects Ltd (GIPL) to seek clarification on the recent order issued by the Securities and Exchange Board of India (SEBI). The following are the key take-aways:

Gammon India and Mr. Abhijit Rajan are not allowed to sell shares of GIPL for a period of three years from the date of allotment in the public issue of GIPL. There are however, no restrictions on GIPL to raise money from the market. The IPO of GIPL, as stated by Mr. Umrigar, is on track as per schedule. GIPL is a debt free company with a networth of around Rs2.5bn. It can leverage if it wants but plans to strengthen its networth further before raising any more debt. Plans for GIPL are unaffected by the SEBI
order.

Gammon India Ltd (GIL) and Mr. Abhijit Rajan cannot access the capital market directly or indirectly for one year from date of the order. Mr. Umrigar mentioned that GIL is comfortably placed with a networth of over Rs10bn and negligible net debt/equity ratio. The management of GIL has an internal target of not raising money through equity issuance till March 2009, which means that the company will not be constrained financially, by the SEBI verdict.

Mr. Umrigar also said that even if GIL de cides on raising money (which it has no plans for currently), it could do so by borrowing from banks or through the private equity route.

The working of GIL is unaffected and the management maintains its target of 35% turnover growth conservatively and stretch target of 50% during FY06-08.

GIL plans to become a US$1bn company during FY09. The company plans on contesting the SEBI order.

We had recommended a BUY on GIL in our construction sector report dated October 18, 2006 (India Under ‘Construction’) at Rs385 with a target price of Rs454. Our target price was achieved and the stock hit a high of Rs487 on December 05, 2006. The last 13 trading sessions have seen a sharp fall and with the declaration of the SEBI order, the GIL stock has predictably taken a beating this morning - down 7.7%, CMP Rs379 (December 22,
2006: 12.05pm).

We believe that this fall presents an opportunity for long term investors to enter a leader in the construction space with a long track record, order book/FY06 sales of 6.7x and high
expected growth rate in topline. The stock trades at a P/E of 24.3x FY07E and 16.5x FY08E EPS, adjusted for value of BOT investments. We recommend a BUY and our revised target price of Rs476 represents an upside of 25.6% in one year.