Avoid Gayatri Projects IPO: Angel Broking

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The Hyderabad-based Gayatri Projects is open for subscription with an IPO of 29,00,000 equity shares of Rs 10 each for cash, at a premium to be decided through the book-building process. 

The price-band for the issue has been fixed between Rs 275 and Rs 295. It closes on September 29, 2006.

The money raised from the issue will be invested in a special purpose vehicle, SPV for execution of the Meerut-Muzaffnagar NHAI BOT/BOOT project and for repayment of debt.

The book running lead managers to the offer are Allianz Securities Limited and IL&FS Investsmart Limited.
 
The Angel Broking report on Gayatri Projects IPO:

Company overview

Gayatri Projects was promoted by T Indira Reddy and Sandeep Kumar Reddy. This Hyderabad-based company is entering the capital markets with a public offer of 29 lakh equity share, of which 19 lakh shares are offer for sales by the Videocon group and the rest being fresh offer.
Allianz Securities is the lead manager of the issue.

The company has constructed over 600kms of highways and 1,113kms of irrigation canals (16 years in the field). The company has a minor interest in building ports, airports, industrial works, etc. It has also built seven dams. However, we have concerns regards the company's management. Post dilution (equity dilution of 10%), equity of the company would be Rs 10 crore.

Stretched financials

• The company's balance sheet size compared to its peers like Simplex Infrastructure, IVRCL and Madhucon Projects is very small.
• Its debt/equity ratio is on the higher side compared to competition. Debt/Equity ratio of Gayatri Projects stood at 2.7 in FY2006 whereas Madhucon, IVRCL and Simplex Infrastructure had a debt/equity ratio of 0.25, 0.58 and 1.91 respectively, for FY2006.
• The company has an order book of Rs 2,400 crore, which is executable over a period of three years. However, working capital requirement for execution of the order is high. Hence, we may see equity dilution in the future as well.
• Even though the company is using part of the issue proceeds for repayment of debt, we do not see a significant reduction in the debt/equity ratio of the company going forward mainly on account of its working capital requirements.
• Post dilution too, the company may not be able to bid for higher infrastructure projects on account of not meeting the prequalification bidding criteria.

Key concerns

• In FY2006, the company entered into related party transactions with various promoter group companies amounting to Rs 249.4 crore. It may be noted that many of the group companies are incurring losses and some have also been referred to the BIFR.
• The company incurred excess expenditure over revenue of Rs 134 crore with respect to the work carried on behalf of the IJM-Gayatri JV, for which the company raised a debit note. If these claims are not realized, then the company will have to provide for a loss of Rs 53.7 crore, to the extent of its participation in the JV. As of March 2006, these losses have not been provided for.
• The company has defaulted in depositing the Provident Fund and TDS amount.
• Several litigations against the company are pending.

Valuation and outlook

On a post diluted equity base, the company is quoting at an EPS of Rs 18.0, which tantamounts to a PE of 15.1x at the lower price band and 16.4x at the higher price band of Rs 295. At the back of envelope estimates, the company is trading at 10 - 11x FY2007E earnings.

This IPO is a pure exit route for Videocon and borrowing for the SPV. The company's financials are by no means sound. Also, there are too many litigations pending which reflects at the poor management. Apart from being a player in the construction sector, which has good future growth prospects, nothing else about the IPO is attractive. We advise investors to ignore the issue.