Mar 17, 2008

IPO Watch - Gammon Infrastructure Projects

Company: Gammon Infrastructure Projects

Issue Size: Rs 276-331 crore

Price Band: Rs 167-200

Date: March 10-13, '08

Rating: **1/2

Gammon Infra's IPO is expensive compared to its listed peers. Investors can get the stock cheaper in the secondary market

GAMMON INFRASTRUCTURE Projects (GIPL), one of India's leading infrastructure project developer and promoter, is coming out with an IPO of 16.5 million shares of face value Rs 10 each. The issue is being made via a 100% book-building route and represents 11.45% of the post-issue paid-up equity capital of the company. Retail and high net worth individuals can pay only Rs 50 on application, and the balance can be paid by the due date. GIPL is raising money to invest in upcoming BOT projects and repay its loan to Gammon India (GIL). At its offer price, the stock looks expensive compared to its listed peers, even as it offers good growth prospects in the long term. But considering weak market sentiment, it may be difficult for investors to make listing gains. We advise retail investors to avoid the issue as they may get the stock cheaper in the secondary market.

BUSINESS: Promoted by GIL and incorporated in '01, GIPL undertakes projects on a public private partnership (PPP) basis. Post-issue, GIL's equity stake in GIPL will fall to 73% from over 82% now. All projects are promoted through the respective SPVs and GIPL acts as their holding company. It is currently working on projects in highways, ports, hydroelectric power and biomass power sectors on a PPP basis and plans to bid for projects in urban infrastructure, airports, mass rapid transit systems, power transmission lines and SEZs.

Its current portfolio includes 14 projects, of which, four projects (three in highways sector and one in ports) are already operational. Seven other projects are in development or construction phases. These include the 99.5-km stretch of road on NH-3 connecting Mumbai and Nasik, and construction and development of offshore container berths and container terminal at Mumbai Harbour for Mumbai Port Trust for an initial period of five years. In the first half of FY08, annuity revenues from highways projects accounted for nearly 75% of GIPL's revenues, while 13.6% came from port operations. Toll revenues (2.3%) and operations & maintenance income (9%) constituted a small portion of GIPL's revenues.

FINANCIALS: The first half of FY08 was not too great for GIPL as its revenues and profits were half that in FY07. FY09 may be much better, with expected commissioning of five more projects. By FY11, a total of 11 projects are expected to be operational.

VALUATIONS: At its upper price band, the issue is valued at around 70 times its FY08 estimated EPS, 25-30% higher than the P/E of listed peer, IRB Infra, and nearly double that of umbrella infrastructure developers such as L&T and HCC. Our estimate is based on the assumption that GIPL will continue to grow at the pace shown in H1 FY08 and FY07. Such high valuation minimises the possibility of post-listing gains. But GIPL claims that at the offer price, its m-cap will be only 50% of the gross value of its assets, which will generate consistent cash flows in the long term.  Source - ET