Gammon Infra

Gammon Infrastructure Projects is entering the capital market on 10th March 2008, with a public issue of 165.50 lakh equity shares of Rs.10 each, in the price band of Rs.167 to Rs.200 per share. At the lower band, the issue size would be Rs.276 crore while at the upper band, it would be of Rs.331 crore. We felt that the issuer would have, by now, learnt the lessons from the recent debacles in the primary market and would have accordingly priced their IPO at a more realistic level. But looks like the company has either missed the point of the lesson completely or has plainly, decided to ignore it completely. One fails to understand the logic of valuing the company at an expected market capitalization of Rs.2,500 even at the lower price band of Rs.167 per share and at Rs.2,900 crore at the upper price band of Rs.200 per share. This is despite the fact that the books of the company show a debt of Rs.700 crore on completed projects and would be assuming a debt of Rs.1,886 crore for two road projects of 132 kms, one 66MW hydro power project and one bridge on river Kosi. Of these, a 100 kms road project has got just a 70% stake of the company. The present business of the company comprises of two annuity road projects of 100 kms, one 700 meter bridge and multipurpose berths at Visakhapatanam port. In the earlier three projects, the stake of the company is about 94% to 98%, while in the port project it is about 42%. The company is now going in for 10 more projects of which seven are in development phase and three are in pre-development phase. Of these 10 projects, financial closure has been made for four projects only. This implies that the balance sheet of the company, on consolidated basis, would keep ballooning with debt. The net worth of the company as at 30/09.07 was at Rs.243.07 crore of which accrued profit is just Rs.18.20 crore while Rs.224.50 crore is from share capital and share premium. Of the present equity of Rs.128 crore, shares of Rs.112 crore have been issued to promoters at par while only 1.60 crore shares have been issued at Rs.75.88 to one private equity investor. Now the public issue is being made at Rs.167 (lower band) per share. But will the public get lured into it? Maybe to attract the investors, only Rs.50 is being asked from the Retail and HNI investors on application. But we do not think that this strategy would work. If we go by the comparative peers IRB Infrastructure, a company recently having gone public, have 512 kms of road, on toll basis in operation, including Mumbai Pune Expressway of 206 kms. Even this company has market capitalisation of just Rs.6,200 crore. Apart from this, IRB has 66% interest in a 1,400 acre realty project being developed near Pune. GVK Power, a player developing the Mumbai Airport, as also having interest in various road and power projects has a market capitalization of Rs.5,300 crore. Even the promoter of the company, Gammon India market capitalization is Rs.4,100 crore. So, on all the parameters, the valuation of the company looks quite stretched and over valued. The expanded equity base of the company would be Rs.144.55 crore, which also looks quite high considering its level of activity. Even six months performance for the period from April 07' to September 07' is not good enough to attract investors. During this period, total income was at Rs.84 crore with PAT of Rs.10.95 crore. During FY07, total income was at Rs.109 crore with a PAT of Rs.29.85 crore. There are many better stocks available in the secondary market with much better and diverse business model and also at attractive valuations. Hence it is not prudent and advised to go in for this issue, even at the lower price band of Rs.167.

Gammon Infra

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