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Gammon India----------------------------------------------------------------- Maintain OUTPERFORM
4Q11 disappoints on loss-making legacy orders
● Gammon’s reported PAT needs to be adjusted for: 1) Rs1.8 bn
received from its real estate subsidiary, Metropolitan Infrahousing,
2) Rs1.7 bn of loss provisioning on revaluation of old fixed-price
orders (Kosi & Gorakhpur) and claims writeoff (DMRC order) and
3) Rs250 mn of gains from sale of its stake in Sadbhav Engg.
● 4Q11 recurring PAT of Rs273 mn fell 56% YoY (4% below CS
estimate), mainly impacted by its old loss-making fixed-price orders.
● Although Gammon claims it has improved its working capital cycle
sequentially, our calculation suggests its working capital cycle (net
of cash) increased from 132 days in FY10 to 147 days in FY11.
● Gammon plans to focus on cash flow improvement during FY12
rather than focussing on growth. It therefore guided for just 7-11%
top-line growth in FY12. However, it expects margins to improve to
9% as loss-making orders are expected to be completed by
December 2011.
● Gammon did not provide any details on its Italian and real estate
businesses. We cut our FY12-13E EPS by 1-5% on rising interest
rates and reduce target price to Rs164 (from Rs182), based on
the value of its construction business, which is at 10x FY12E EPS
(vs 12x previously).
4Q11 disappoints as legacy orders impact margins
Gammon’s legacy fixed-priced orders that constituted 25% of its order
book have fallen to about 10% now. However, led by delays (including
external factors such as floods, insurgency, etc.) and rising commodity
costs, these orders are now loss-making. Loss at these projects
continue to impact Gammon’s performance. 4Q11 operating margins
were just 6.3% vs our expectation of 8% and 119 bp lower YoY.
Gammon expects to complete these loss-making orders by December
2011. Its reported PAT needs to be adjusted for several one-time items
such as: 1) Rs1.8 bn interest income received on debentures of Rs0.8
bn of its real estate subsidiary taken over from ICICI Bank 4-5 years
back, 2) Rs1.7 bn loss provisioning on revaluation of its legacy road
projects, Kosi & Gorakhpur and claims writeoff for its DMRC order and
3) Rs250 mn of gains from the sale of its stake in Sadbhav Engg.
Working capital cycle though has improved on a sequential basis as
guided by the company, we note that it (net of cash) deteriorated
during FY11 to 147 days versus 132 days during FY10. Gammon
plans to focus on improving working capital cycle during FY12.
Figure 1: Gammon India – 4Q FY11 standalone results summary
(Rs mn) 4QFY10 4QFY11 % YoY 4QFY11E % difference
Order book 113,595 150,000 32.0% 155,000 -3.2%
Net Sales 16,678 17,379 4.2% 14,500 19.9%
Total operating expenses (15,426) (16,282) 5.5% (13,340) 22.1%
EBITDA 1,252 1,097 -12.4% 1,160 -5.4%
EBITDA margin (%) 7.5% 6.3% (119) 8.0% (169)
Depreciation (189) (249) 31.7% (261) -4.8%
EBIT 1,063 848 -20.2% 899 -5.6%
Net interest expenses (230) (405) 76.4% (520) -22.1%
Tax (212) (170) -19.9% (95) 79.2%
Tax Rate (%) 25.5% 38.3% 1,286 25.0% N.A.
Recurring PAT 621 273 -56.0% 284 -3.9%
Exceptionals (73) 331 Nmf - N.A.
Reported PAT 548 604 10.3% 284 112.7%
Source: Company data, Credit Suisse estimates
Muted FY12 sales guidance; expects margin improvement
Gammon guided for muted sales growth during FY12 of 7-11%, led by
its almost flat order book over the past four quarters and focus on
improving cash flow generation and margins during FY12 rather than
focussing on growth. Gammon expects the legacy loss-making orders
to be completed by December 2011. Besides, on a conservative basis
it has already provided for potential loss from these orders until
December 2011. This should allow it to improve margins going
forward. Gammon plans to reach 9% operating margin during FY12.
Order inflows could provide positive surprise, led by order
wins at subsidiaries
However, order inflows could surprise on potential large road project
wins on BOT basis by its subsidiary, GIPL, and potential of it winning
the NTPC bulk tender, if it wins its litigation to participate in NTPC’s
bulk tender. Besides, our sales growth estimate for FY12 already
factors in lower growth, as guided by the company.
No clarity provided on its Italian and real estate businesses
During the post-results conference call, Gammon provided no details
on the performance of its Italian business as well as on the media
articles that suggests Gammon is looking to divest its stake in the
Italian business. Besides, we await clarity on details of the land bank
and development plans for Gammon India’s real estate business.
Cut FY12-13E EPS by 1-4%; maintain OUTPERFORM
We cut our FY12-13 earnings estimates by 1-5% to factor in rising
interest costs. We also cut our price target to Rs164 from Rs182 as we
now value its construction business at 10x FY12E EPS versus at 12x
earlier led by expectation of lower growth and fall in peer valuation.
However, adjusted for valuation of its infrastructure business, the stock
now trades at 4-5x core construction earnings, which we believe is
inexpensive and thus maintain our OUTPERFORM rating for the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gammon India----------------------------------------------------------------- Maintain OUTPERFORM
4Q11 disappoints on loss-making legacy orders
● Gammon’s reported PAT needs to be adjusted for: 1) Rs1.8 bn
received from its real estate subsidiary, Metropolitan Infrahousing,
2) Rs1.7 bn of loss provisioning on revaluation of old fixed-price
orders (Kosi & Gorakhpur) and claims writeoff (DMRC order) and
3) Rs250 mn of gains from sale of its stake in Sadbhav Engg.
● 4Q11 recurring PAT of Rs273 mn fell 56% YoY (4% below CS
estimate), mainly impacted by its old loss-making fixed-price orders.
● Although Gammon claims it has improved its working capital cycle
sequentially, our calculation suggests its working capital cycle (net
of cash) increased from 132 days in FY10 to 147 days in FY11.
● Gammon plans to focus on cash flow improvement during FY12
rather than focussing on growth. It therefore guided for just 7-11%
top-line growth in FY12. However, it expects margins to improve to
9% as loss-making orders are expected to be completed by
December 2011.
● Gammon did not provide any details on its Italian and real estate
businesses. We cut our FY12-13E EPS by 1-5% on rising interest
rates and reduce target price to Rs164 (from Rs182), based on
the value of its construction business, which is at 10x FY12E EPS
(vs 12x previously).
4Q11 disappoints as legacy orders impact margins
Gammon’s legacy fixed-priced orders that constituted 25% of its order
book have fallen to about 10% now. However, led by delays (including
external factors such as floods, insurgency, etc.) and rising commodity
costs, these orders are now loss-making. Loss at these projects
continue to impact Gammon’s performance. 4Q11 operating margins
were just 6.3% vs our expectation of 8% and 119 bp lower YoY.
Gammon expects to complete these loss-making orders by December
2011. Its reported PAT needs to be adjusted for several one-time items
such as: 1) Rs1.8 bn interest income received on debentures of Rs0.8
bn of its real estate subsidiary taken over from ICICI Bank 4-5 years
back, 2) Rs1.7 bn loss provisioning on revaluation of its legacy road
projects, Kosi & Gorakhpur and claims writeoff for its DMRC order and
3) Rs250 mn of gains from the sale of its stake in Sadbhav Engg.
Working capital cycle though has improved on a sequential basis as
guided by the company, we note that it (net of cash) deteriorated
during FY11 to 147 days versus 132 days during FY10. Gammon
plans to focus on improving working capital cycle during FY12.
Figure 1: Gammon India – 4Q FY11 standalone results summary
(Rs mn) 4QFY10 4QFY11 % YoY 4QFY11E % difference
Order book 113,595 150,000 32.0% 155,000 -3.2%
Net Sales 16,678 17,379 4.2% 14,500 19.9%
Total operating expenses (15,426) (16,282) 5.5% (13,340) 22.1%
EBITDA 1,252 1,097 -12.4% 1,160 -5.4%
EBITDA margin (%) 7.5% 6.3% (119) 8.0% (169)
Depreciation (189) (249) 31.7% (261) -4.8%
EBIT 1,063 848 -20.2% 899 -5.6%
Net interest expenses (230) (405) 76.4% (520) -22.1%
Tax (212) (170) -19.9% (95) 79.2%
Tax Rate (%) 25.5% 38.3% 1,286 25.0% N.A.
Recurring PAT 621 273 -56.0% 284 -3.9%
Exceptionals (73) 331 Nmf - N.A.
Reported PAT 548 604 10.3% 284 112.7%
Source: Company data, Credit Suisse estimates
Muted FY12 sales guidance; expects margin improvement
Gammon guided for muted sales growth during FY12 of 7-11%, led by
its almost flat order book over the past four quarters and focus on
improving cash flow generation and margins during FY12 rather than
focussing on growth. Gammon expects the legacy loss-making orders
to be completed by December 2011. Besides, on a conservative basis
it has already provided for potential loss from these orders until
December 2011. This should allow it to improve margins going
forward. Gammon plans to reach 9% operating margin during FY12.
Order inflows could provide positive surprise, led by order
wins at subsidiaries
However, order inflows could surprise on potential large road project
wins on BOT basis by its subsidiary, GIPL, and potential of it winning
the NTPC bulk tender, if it wins its litigation to participate in NTPC’s
bulk tender. Besides, our sales growth estimate for FY12 already
factors in lower growth, as guided by the company.
No clarity provided on its Italian and real estate businesses
During the post-results conference call, Gammon provided no details
on the performance of its Italian business as well as on the media
articles that suggests Gammon is looking to divest its stake in the
Italian business. Besides, we await clarity on details of the land bank
and development plans for Gammon India’s real estate business.
Cut FY12-13E EPS by 1-4%; maintain OUTPERFORM
We cut our FY12-13 earnings estimates by 1-5% to factor in rising
interest costs. We also cut our price target to Rs164 from Rs182 as we
now value its construction business at 10x FY12E EPS versus at 12x
earlier led by expectation of lower growth and fall in peer valuation.
However, adjusted for valuation of its infrastructure business, the stock
now trades at 4-5x core construction earnings, which we believe is
inexpensive and thus maintain our OUTPERFORM rating for the stock.
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