Prabhudas Lilladher - Gammon India

Prabhudas Lilladher report on Gammon India:

Result Snapshot

Gammon India reported Q4FY07 and FY07 results in line with expectations. Revenues (adjusting JV revenues) in Q4FY07 rose 54% y-oy to Rs 6268 million. However, due to higher tax on account withdrawal of 80IA benefits, net profit in the quarter was lower by 24% at Rs 220 million. For the full year (adjusting for JV revenues) was higher by 57% and net profit was higher by 20% at Rs 18.6 billion and Rs 984 million respectively. Given its strong order book of Rs 76 billion and a expected strong order inflows, we are projecting revenues of Rs 27.3 and Rs 35.7 billion for FY08E and FY09E. We have valued Gammon's 82.5% stake in GIPL at Rs 114 per share. However, we believe that that there is an upside to this valuation and would look and revisiting this at a later date. Adjusted for GIPL and other subsidiaries value of Rs 124 per share, Gammon is currently trading at 21x and 16x FY08E and FY09E earnings respectively. While valuations do appear a bit on the higher side, given the strong order book and the likely value unlocking on account of GIPL we maintain our 'OUTPERFORMER' rating on Gammon.

Result Highlights

Revenues in Q4FY07 grew by 54% y-o-y and 65% sequentially to Rs 6.2 billion. Driven by strong EBIDTA margins of 9.6% for the quarter, EBIDTA increased 71% to Rs 603 million. EBIDTA margins were higher on account more projects reaching the profit-booking threshold. Gammon has provided for tax at 60% of PBT as adjustments for tax rates for the previous three quarters reflected in Q4FY07. As a result, net profit for the Q4FY07 fell by 27% y-o-y to Rs 220 million. For the full year gross revenue was at Rs 21 billion and net revenue (adjusted for JV income) grew by 57% to Rs 18.6 billion. Gammon now accounts for income from JV's based on profit sharing, which implies that only the profits from the JV are included in the overall revenues. For the full year the revenues from the Oman JV was at Rs 2.4 billion and the profit from the JVs is at Rs 131 million. As EBIDTA margins for the year were lower at 9.9% as against 13% last year, EBIDTA for the full year grew at 20% to Rs 1.85 billion. The slower growth in EBIDTA is on account of the large base of last year, which also includes some claims that the company had received. Depreciation for the year grew at 19% to Rs 352 million on account of a total capex of Rs 1.7 billion during the year largely on new equipment. Gammon has provided for tax at 31% for the full year. In light of the clarifications on the applicability of 80IA benefits, Gammon has provided for income tax for previous years. This amounts to Rs 500.9 million and also includes the interest on the amount. As a result, for the full year, recurring net profit increased 20% to Rs 984 million. Adjusting for the short provision in tax, profit for the year was at Rs 445 million, which is lower by 47%.

Order Book

Gammon has an unexecuted order book position of Rs 76 billion of which a third each is distributed across the power and transportation segments and the balance within irrigation, water, industrial structures etc. While order inflows in the current year have been relatively slower, we expect this momentum to pick. Moreover, Gammon would also add to the order inflows once GIPL received the LoI for the Mumbai Offshore Port and the HEPs. Currently, approximately 20% of the total outstanding order book comprises projects awarded to the parent by GIPL. Going forward the management has indicated that this share should increase as more projects are awarded through the Public Private Partnership route. Moreover, order intake from the mega real estate developments should also likely provide momentum in overall order intake.

Gammon Infrastructure Projects

In March 2007 the Securities Appellate Tribunal (SAT) passed an interim order directing SEBI to process GIPL's draft 'Red Herring Prospectus' expeditiously. SEBI has thereafter directed the company to refile the DRHP. The management has indicated that they are in the process of working out the fund raising format for GIPL and will make available the details shortly. Currently GIPL has 13 BOT projects totalling a project value of Rs 55 billion. Of this GIPL has yet to receive the formal LoIs for 3 of these projects, namely the Mumbai Offshore and the Hydel Power projects. GIPL currently has a networth of Rs 2.6 billion.

Real Estate

During the year, GIL incorporated Gammon Realty Ltd, as a subsidiary of the parent company, with the objective to carry on the business, developers, builders and construction of residential, commercial and industrial premises etc. However, the company has yet to formally announce its real estate development plans.

Valuations

Given its strong order book of Rs 76 billion and a strong order inflow pipeline, we are projecting revenues of Rs 27.3 and Rs 35.7 billion for FY08E and FY09E. We have valued Gammon's 82.5% stake in GIPL at Rs 114 per share. However, we believe that there is an upside to this valuation and would look and revisiting this valuation at a later date. Adjusted for GIPL and other subsidiary valve of Rs 124 per share, Gammon is currently trading at 21x and 16x FY08E and FY09E earnings respectively. While valuations do appear a bit on the higher side, we believe that given the strong order book and the likely value unlocking on account of GIPL we maintain our 'OUTPERFORMER' rating on Gammon.