Motilal Oswal neutral on Gammon India, target of Rs 117

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Motilal Oswal neutral on Gammon India, target of Rs 117

Motilal Oswal has maintained neutral rating on Gammon India with a target price of Rs 117, in its June 14, 2011 research report.

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Motilal Oswal has maintained neutral rating on Gammon India with a target price of Rs 117, in its June 14, 2011 research report.

"Gammon India is plagued by several woes: low-margin legacy orders, working capital needs which increased debt, depressed FY11 order intake and earnings and a loss-making power business. Although Gammon India might overcome many of its problems, we do not expect meaningful re-rating in the absence of major growth catalysts, in the near term. In the domestic construction segment Gammon India is speeding up the execution of low-margin legacy projects with a view to exiting them at the earliest, which has increased its revenues at the cost of blended margins. Gammon India posted revenue CAGR of 24% over FY09-11 but EBITDA margin declined from 9.3% in FY09 to 8.6% in FY10 and to 4.7% in FY11 (including demurrage loss of Rs 320m from the ATSL). Gammon India's FY11 BTB at 2.7x was the lowest in the past six years. Low-margin legacy projects account for 10% of the order book and will continue to impact margins in 1HFY12. We expect muted FY12 order book growth of Rs 153b (up 2%) and Rs 158b in FY13 (up 3.2%). We expect intake of Rs 69b in FY12 and Rs 81b in FY13."

"Gammon India's need for working capital increased its debt, which impacted FY11 margins. At the end of FY11, its debt was Rs 22b, up Rs 9b (70%) from that a year earlier. It avoided interest-bearing advances on new orders, resulting in higher borrowing. We do not see a significant improvement in FY12 margins due to rising interest costs. Gammon's standalone DER was 1.1x FY11 from 0.7x FY10. Gammon India's foreign acquisitions lost 9m euros in CY10 and are in the red due to poor execution and muted intake growth led by (i) a slowdown in order awards, and (ii) delay in providing bank guarantees. Gammon India hopes for a favorable Supreme Court verdict on a bid it made as part of a consortium, for an NTPC bulk tender. The company has not participated in another NTPC bulk tender (9 x 800MW) bid. Gammon India has also been looking to introduce strategic investors in its European offshore subsidiary, Gammon Holding BV, to expand its power business."

"Gammon India trades at 6.1x FY12E and 4.8x FY13E earnings after adjusting for BOT assets and global subsidiaries. The stock appears attractive but we expect no meaningful re-rating in the absence of major near-term growth catalysts. Maintain Neutral with an SOTP-based target price of Rs 117. We value the core construction business at Rs 60/share on the basis of 5x FY13E EV/EBITDA, BOT at Rs 48/share and Rs 9/share from the power division," says Motilal Oswal research report.

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