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Gammon India
High sales growth at what cost?
Gammon's high sales growth exceeding that of industry peers is impressive, but
hasn't resulted in any benefit in PAT, due to high working capital costs. We
believe weak order inflow should add pressure on profitability. With no evident
profits at international subsidiaries, we maintain a Sell with revised EPS and TP.
High sales growth, but margins collapse
Despite in-line sales and EBITDA, normalised PAT for the standalone entity for 3QFY11 was
30% lower than our forecast, due to higher interest costs (up 13% qoq). However, the
EBITDA margin declined about 174bp yoy and 66bp qoq to 8.1%. Profitability remains under
pressure despite good execution performance as higher working capital and lower margins
led to a 33% yoy decline in PAT. Net debt at the end of the quarter was Rs24.2bn (Rs12.2bn
at the end of FY10), and net working capital was at Rs31bn.
Management guides for bad margins and slow growth ahead
During the 3Q results conference call, management stated that sales growth would be muted
for at least the next two to three quarters (4QFY11F flat yoy) as management attempts to
control interest costs. We therefore cut our sales forecasts 9-10% for FY11-12 and reduced
our EBITDA margin forecasts marginally. We also increased our interest cost forecasts,
resulting in reductions in our EPS forecasts of 37% for FY11 and 31% for FY12.
Maintain Sell, with a revised target price of Rs106.7
The stock price has corrected sharply, by 35% (vs Sensex down 10%), over the past three
months as the sector faces execution issues. Visibility on order book growth is very low, with
the 3QFY11 order book at the FY10 end level, which we believe will affect revenue growth
and keep margins under pressure. We believe higher debt coupled with higher interest costs
should affect the PAT even further. We feel that the outlook for profits is bleak for
international subsidiaries, with high debt on their books (marginal loss for CY10). We
increase our subsidiariesí valuation to Rs30.1 from Rs11.6 as the peer set valuation multiple
rises for international subsidiaries. We value the parent business at 8x FY12F EPS (20%
discount to sector leader Nagarjuna), and our SOTP-based target price drops to Rs106.7.
With about 13% potential downside, we maintain a Sell.
Tough times ahead for growth and
profitability
The 3QFY11 PAT results were lower than our forecast due to higher interest costs despite
handsome top-line growth. We believe that given low order inflow, the company will
struggle with revenue growth and profitability in the coming quarters.
3QFY11 standalone PAT was 30% below our forecast on higher interest costs
! Net sales were Rs13.7bn, up 35% yoy and up 16% qoq. RBS forecast was Rs13.6bn.
! EBITDA came at Rs1.1bn, up 11% yoy and up 8% qoq. RBS forecast was Rs1.2bn.
! EBITDA margin declined 174bp yoy and 66bp qoq to 8.1%. RBS forecast was 8.5%.
! At Rs244m, depreciation was in line with our forecast.
! Net interest was Rs509m, up 50% yoy and 13% qoq. RBS forecast was Rs380m.
! Tax expenses were Rs86m and the tax rate declined to 26% from 35% in the 2Q. RBS
forecast was 33%.
! Normalised profit was Rs247m, down 33% yoy and up 14% qoq. RBS forecast was Rs351m.
! Taking into account a forex loss of Rs146m, reported profit was Rs102m, down 51% yoy and
58% qoq.
! Normalised EPS for the 3Q was Rs1.8 per share.
Higher depreciation and interest costs also affected the 9MFY11 performance
! Net sales were Rs38.6bn, up 37% yoy.
! EBITDA was Rs3.2bn, up 11% yoy.
! The EBITDA margin was 8.4%, down about 200bp yoy on higher raw material costs.
! Depreciation was Rs669m, up 29% qoq.
! Net interest cost rose 22% yoy to Rs1.33bn.
! Higher depreciation and net interest led to a 25% yoy normalised PAT decline of Rs787m.
! Reported net profit declined 29% yoy to Rs644m.
Management call highlights
! Order book as of the end of the quarter was Rs145bn, flat from the end-FY10 level as order
inflow remained muted throughout 9MFY11.
! Order book breakup: 35% transportation; 40% energy and 25% others.
! Management said growth in the next to three quarters will be muted as management attempts
to maintain debt, which has been affected by high working capital, at the current level.
! Management said EBITDA and PAT margins would continue to remain under pressure for the
next three quarters due to low revenue growth, lower-margin projects and high interest cost
pressure.
! Net debt at the end of the quarter was Rs24.2bn, and net working capital was Rs31bn.
Debtors were at Rs20.6bn.
! The company expects its international (Italian) subsidiaries to post a marginal loss for CY10.
Its CY11 revenue guidance is Ä450m on an order book (at Dec 2010-end) of Ä565m.
! The company has pumped Rs1.28bn into the recently acquired Metropolitan Infrahousing
Private Ltd and expects to put an additional Rs1.5bn into it by March-end.
! The average interest rate for the quarter was 10.5%, while the current short-term loan is
available to the company at an even higher 11%.
Revised EPS forecasts are down 37% for FY11F and 31% for FY12F
We are reducing our revenue forecasts 10% for FY11 and 9% for FY12 as management guides
for flat yoy growth during 4QFY11 and as we see the low order intake and high working capital
situation restricting growth. We also trip our EBITDA margin forecasts slightly. The impact of an
EBITDA decline further aggravated by our higher interest costs assumption prompts the sharp
downward EPS revision in our forecasts.
We reiterate Sell with a revised target price of Rs106.7/share
We value Gammonís listed subsidiaries at a 15% holding discount to their listed prices (in line with
other companies in our coverage universe). We also continue to value Gammonís Italian
subsidiaries at a 20% discount to the EV/sales multiple of their Swedish peer Alstom due to its
smaller scale of operations along with a further 15% holding company discount. We value the
standalone (parent) entity at 8x our FY12 EPS forecast (multiple at 20% discount to the sector
leader Nagarjuna due to lower margins and RoE expectations) and the valuation for the
standalone entity plunges due to the steep EPS forecast decline. As a result, despite an increase
in our subsidiaries valuation thanks to the increase in our international subsidiaries valuation due
to a higher peer multiple and reduced debt from the previous year (although still at a very high
level), our SOTP-based target price declines to Rs106.7/share from Rs.151/share previously.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gammon India
High sales growth at what cost?
Gammon's high sales growth exceeding that of industry peers is impressive, but
hasn't resulted in any benefit in PAT, due to high working capital costs. We
believe weak order inflow should add pressure on profitability. With no evident
profits at international subsidiaries, we maintain a Sell with revised EPS and TP.
High sales growth, but margins collapse
Despite in-line sales and EBITDA, normalised PAT for the standalone entity for 3QFY11 was
30% lower than our forecast, due to higher interest costs (up 13% qoq). However, the
EBITDA margin declined about 174bp yoy and 66bp qoq to 8.1%. Profitability remains under
pressure despite good execution performance as higher working capital and lower margins
led to a 33% yoy decline in PAT. Net debt at the end of the quarter was Rs24.2bn (Rs12.2bn
at the end of FY10), and net working capital was at Rs31bn.
Management guides for bad margins and slow growth ahead
During the 3Q results conference call, management stated that sales growth would be muted
for at least the next two to three quarters (4QFY11F flat yoy) as management attempts to
control interest costs. We therefore cut our sales forecasts 9-10% for FY11-12 and reduced
our EBITDA margin forecasts marginally. We also increased our interest cost forecasts,
resulting in reductions in our EPS forecasts of 37% for FY11 and 31% for FY12.
Maintain Sell, with a revised target price of Rs106.7
The stock price has corrected sharply, by 35% (vs Sensex down 10%), over the past three
months as the sector faces execution issues. Visibility on order book growth is very low, with
the 3QFY11 order book at the FY10 end level, which we believe will affect revenue growth
and keep margins under pressure. We believe higher debt coupled with higher interest costs
should affect the PAT even further. We feel that the outlook for profits is bleak for
international subsidiaries, with high debt on their books (marginal loss for CY10). We
increase our subsidiariesí valuation to Rs30.1 from Rs11.6 as the peer set valuation multiple
rises for international subsidiaries. We value the parent business at 8x FY12F EPS (20%
discount to sector leader Nagarjuna), and our SOTP-based target price drops to Rs106.7.
With about 13% potential downside, we maintain a Sell.
Tough times ahead for growth and
profitability
The 3QFY11 PAT results were lower than our forecast due to higher interest costs despite
handsome top-line growth. We believe that given low order inflow, the company will
struggle with revenue growth and profitability in the coming quarters.
3QFY11 standalone PAT was 30% below our forecast on higher interest costs
! Net sales were Rs13.7bn, up 35% yoy and up 16% qoq. RBS forecast was Rs13.6bn.
! EBITDA came at Rs1.1bn, up 11% yoy and up 8% qoq. RBS forecast was Rs1.2bn.
! EBITDA margin declined 174bp yoy and 66bp qoq to 8.1%. RBS forecast was 8.5%.
! At Rs244m, depreciation was in line with our forecast.
! Net interest was Rs509m, up 50% yoy and 13% qoq. RBS forecast was Rs380m.
! Tax expenses were Rs86m and the tax rate declined to 26% from 35% in the 2Q. RBS
forecast was 33%.
! Normalised profit was Rs247m, down 33% yoy and up 14% qoq. RBS forecast was Rs351m.
! Taking into account a forex loss of Rs146m, reported profit was Rs102m, down 51% yoy and
58% qoq.
! Normalised EPS for the 3Q was Rs1.8 per share.
Higher depreciation and interest costs also affected the 9MFY11 performance
! Net sales were Rs38.6bn, up 37% yoy.
! EBITDA was Rs3.2bn, up 11% yoy.
! The EBITDA margin was 8.4%, down about 200bp yoy on higher raw material costs.
! Depreciation was Rs669m, up 29% qoq.
! Net interest cost rose 22% yoy to Rs1.33bn.
! Higher depreciation and net interest led to a 25% yoy normalised PAT decline of Rs787m.
! Reported net profit declined 29% yoy to Rs644m.
Management call highlights
! Order book as of the end of the quarter was Rs145bn, flat from the end-FY10 level as order
inflow remained muted throughout 9MFY11.
! Order book breakup: 35% transportation; 40% energy and 25% others.
! Management said growth in the next to three quarters will be muted as management attempts
to maintain debt, which has been affected by high working capital, at the current level.
! Management said EBITDA and PAT margins would continue to remain under pressure for the
next three quarters due to low revenue growth, lower-margin projects and high interest cost
pressure.
! Net debt at the end of the quarter was Rs24.2bn, and net working capital was Rs31bn.
Debtors were at Rs20.6bn.
! The company expects its international (Italian) subsidiaries to post a marginal loss for CY10.
Its CY11 revenue guidance is Ä450m on an order book (at Dec 2010-end) of Ä565m.
! The company has pumped Rs1.28bn into the recently acquired Metropolitan Infrahousing
Private Ltd and expects to put an additional Rs1.5bn into it by March-end.
! The average interest rate for the quarter was 10.5%, while the current short-term loan is
available to the company at an even higher 11%.
Revised EPS forecasts are down 37% for FY11F and 31% for FY12F
We are reducing our revenue forecasts 10% for FY11 and 9% for FY12 as management guides
for flat yoy growth during 4QFY11 and as we see the low order intake and high working capital
situation restricting growth. We also trip our EBITDA margin forecasts slightly. The impact of an
EBITDA decline further aggravated by our higher interest costs assumption prompts the sharp
downward EPS revision in our forecasts.
We reiterate Sell with a revised target price of Rs106.7/share
We value Gammonís listed subsidiaries at a 15% holding discount to their listed prices (in line with
other companies in our coverage universe). We also continue to value Gammonís Italian
subsidiaries at a 20% discount to the EV/sales multiple of their Swedish peer Alstom due to its
smaller scale of operations along with a further 15% holding company discount. We value the
standalone (parent) entity at 8x our FY12 EPS forecast (multiple at 20% discount to the sector
leader Nagarjuna due to lower margins and RoE expectations) and the valuation for the
standalone entity plunges due to the steep EPS forecast decline. As a result, despite an increase
in our subsidiaries valuation thanks to the increase in our international subsidiaries valuation due
to a higher peer multiple and reduced debt from the previous year (although still at a very high
level), our SOTP-based target price declines to Rs106.7/share from Rs.151/share previously.
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