Gammon Infrastructure -Broadly in-line; Alchemy

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Broadly in-line; non-operational expenses
dent the bottom-line
Top line grows 60% on adjusted basis; margins remain healthy
Gammon Infrastructure reported a top line of `788mn (down 11% YoY). However, in
FY10, the company had capitalised the periodic maintenance on the Rajahmundry and
Andhra expressway, and thus reported inflated revenue. Adjusting for that (~`400mn),
the top line grew 62% YoY. EBITDA margins at the consolidated level stood at a healthy
57%, up from 2QFY10 (38%) primarily due to consolidation of Vizag seaport and lower
operational expenses.

Higher depreciation and tax expense dent the bottom line
The compnay reported a 93% increase in depreciation expense, due to consolidation of
Vizag seaport, commissioning of Mumbai-Nasik expressway and amortisation of the
periodic maintenance incurred last year. The interest cost went up YoY, due to the
commissioning of the Mumbai-Nasik expressway. The tax expense for the quarter was
also higher than expected.

Toll collection on Mumbai-Nasik started; Punjab biomass first unit to commence
operations soon
GIPL started toll collection on the 64km stretch, of the 100km-long, Mumbai-Nasik
expressway in this quarter. The company is currently collecting toll revenue of ~`1.5mn
per day, and expects the entire 100km stretch to be commissioned before the end of
FY11. The first unit of the 9x12MW Punjab biomass project has also been commissioned
and is in the trial phase. The management expects it to be commissioned by December-
10. Apart from these, the Kosi bridge and Gorakhpur bypass projects are expected to be
commissioned in the first half of FY12.

Valuation and view
We maintain our favourable stand on the company on the back of the high RoIC and
cash-generating projects that the company has in its portfolio. As per our estimates, the
company is expected to generate an average RoIC of 16% over the next five years, and
29% over the next eight years. There remains further upside potential to our price
target, from three projects awaiting financial closure, and sale of CERs from power
projects.

We value GIPL by the SoTP method, calculating the NPV of future cash flows from
various assets (refer to Exhibit 2). The methodology gives us a price target of `34,
representing 47% upside from the current levels. We maintain a Strong Buy rating.