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Gammon's domestic business has started to show signs of improvement, prompting us to raise
our FY12F EPS. However, its European business continues to underperform and is the key driver
of group losses. With no relief in sight, we recommend Sell and cut our target price to Rs71.00.
Positive signs in core business, but Italian business remains a drag
In a recent conference call, Gammon management reiterated its 9% standalone EBITDA margin
guidance for FY12, which is better than our expectations. It is also focusing on working capital
management in order to keep interest expenses down. Working capital increased sharply in
1QFY12 after having improved in 2HFY11. However, management said that its Italian subsidiary
would continue to underperform as economic conditions worsen in Europe. We believe the
ongoing stabilisation of the core business and a good performance from its BOT (build-operatetransfer)
subsidiary GIPL will not be sufficient to offset the Italian losses at the consolidated level
(out of the Rs1.57bn net loss in FY11, international entities and other subsidiaries contributed a
loss of Rs1.97bn).
Standalone EBITDA forecasts up 5% for FY12; liquidity position likely to remain tight
We have raised our standalone EBITDA margin forecast for FY12 by 50bp to 8.8%; still slightly
below the guidance of 9%. This has resulted in a 17% increase in our FY12 standalone EPS
forecast. We maintain our forecasts for FY13. Despite the strengthening of the P&L, we remain
concerned about the liquidity position due to the working capital increase and the substantial
investment (Rs3bn) in a long-gestation real estate project.
We trim our SOTP valuation to Rs71 from Rs85.90; reiterate Sell
The downgrade to our target price is solely due to subsidiaries, with Gammon Infrastructure
(GIPL - the listed subsidiary) contributing half of the downgrade and the Italian subsidiaries/ JVs
the other half. While we are becoming more positive on the core business as it reduces lossmaking
legacy orders, the Italian business continues to weigh on overall profitability and liquidity.
We believe the situation is likely to continue given the worsening economic conditions in Europe,
and this may further strain the balance sheet of the consolidated entity (FY11 consolidated net
debt/equity increased to 258% from 200% in FY10).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gammon's domestic business has started to show signs of improvement, prompting us to raise
our FY12F EPS. However, its European business continues to underperform and is the key driver
of group losses. With no relief in sight, we recommend Sell and cut our target price to Rs71.00.
Positive signs in core business, but Italian business remains a drag
In a recent conference call, Gammon management reiterated its 9% standalone EBITDA margin
guidance for FY12, which is better than our expectations. It is also focusing on working capital
management in order to keep interest expenses down. Working capital increased sharply in
1QFY12 after having improved in 2HFY11. However, management said that its Italian subsidiary
would continue to underperform as economic conditions worsen in Europe. We believe the
ongoing stabilisation of the core business and a good performance from its BOT (build-operatetransfer)
subsidiary GIPL will not be sufficient to offset the Italian losses at the consolidated level
(out of the Rs1.57bn net loss in FY11, international entities and other subsidiaries contributed a
loss of Rs1.97bn).
Standalone EBITDA forecasts up 5% for FY12; liquidity position likely to remain tight
We have raised our standalone EBITDA margin forecast for FY12 by 50bp to 8.8%; still slightly
below the guidance of 9%. This has resulted in a 17% increase in our FY12 standalone EPS
forecast. We maintain our forecasts for FY13. Despite the strengthening of the P&L, we remain
concerned about the liquidity position due to the working capital increase and the substantial
investment (Rs3bn) in a long-gestation real estate project.
We trim our SOTP valuation to Rs71 from Rs85.90; reiterate Sell
The downgrade to our target price is solely due to subsidiaries, with Gammon Infrastructure
(GIPL - the listed subsidiary) contributing half of the downgrade and the Italian subsidiaries/ JVs
the other half. While we are becoming more positive on the core business as it reduces lossmaking
legacy orders, the Italian business continues to weigh on overall profitability and liquidity.
We believe the situation is likely to continue given the worsening economic conditions in Europe,
and this may further strain the balance sheet of the consolidated entity (FY11 consolidated net
debt/equity increased to 258% from 200% in FY10).
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