Gremach Infrastructure Equipments and Projects, provider of construction and earthmoving machineries to medium and large companies on rental, is open for subscription with a public issue of Rs 59 crore through 100% book building process.

The price band has been fixed between Rs 75 and 90 per equity share of Rs 10 each. The issue closes on March 14, 2007.

The Keynote Capitals report on Gremach Infrastructure IPO:

Recommendation - Subscribe with a medium term view

• Gremach Infrastructure Equipments & Projects (GIEPL) is into renting of construction equipment and machineries to companies engaged in construction of roads, power projects, multiplexes and industrial complexes etc.
• Present market size of the equipment rental industry is estimated at Rs12.5bn, (CAGR of 13.0% during 2001-06) expected to grow to Rs15bn by 2011. The industry is dominated by several small local players in the unorganized sector, with an estimated 85% market share. The organized sector is represented by players like Quipo Infrastructure Equipment Ltd., NAC Infrastructure Equipment Ltd. (both promoted by Srei Infrastructure Finance Ltd.) and GIEPL.
• GIEPL has a strong client base including L & T, Gammon India, HCC, Shapoorji Pallonji & Co. and Punj Lloyd, most of which give repetitive orders.
• Share of owned equipment will move up from 17% currently to 36% in FY08 and to 45% in FY09. Since renting of own equipment offers better margins, the proposed purchase of Rs61Cr worth of new construction equipment will enable it to improve EBITDA margins.
• While Quipo may have a much better brand equity, a larger network and bigger size, we believe the rapidly-growing equipment rental market in India can not only afford adequate growth opportunities to smaller players like GIEPL, but easily accommodate a couple of more players.
• In addition to the growing pie, another major positive for this business segment is the growing share of organized sector players like Quipo and GIEPL. We believe with their national presence, depth of management and brand equity, players like Quipo and GIEPL will be able to take away a significant market share from the unorganized sector, going forward.
• The unconfirmed placement by Quipo to some investors would translate into a valuation of $200mn, or Rs 890 crore approximately. This translates into a price-to-sales ratio of around 5.8x, assuming a topline growth of 70% in FY07 for
  Quipo, making it substantially more expensive that GIEPL, at 1.2x.
• However, in our view, the unlisted Quipo which is undoubtedly the market leader, with its high EBITDA margins clearly deserves this richer valuation. We expect Quipo's growth trajectory to be much higher than that of GIEPL's. However, till such time as Quipo goes public (for which no timelines have been announced), we believe GIEPL can be a good play on the booming equipment rental market in India.
• In view of the valuation of 11.6x FY08E and 7.1x FY09E, we believe investors can consider this IPO with a medium term view.

Investment Concerns

• In FY06, 83% of total rental income was attributable to re-hiring of equipment, which offers lower margins.
• Some companies belonging to the promoter group are in the same line of business, which may lead to a conflict of interest with GIEPL.
• GIEPL does not have any long-term contract with clients and the work orders depend upon the client's requirement of construction equipments.