The deal gives Gammon a new opportunity.
The acquisition of a 50 per cent stake in Sofinter SPA by the Rs 2,344 crore Gammon India for €50 million,(Rs 325 crore) will stretch the company’s balance sheet in the short term. With the company borrowing overseas, the higher interest burden could hurt the earnings per share (eps). In FY08, Gammon posted a net profit of Rs 86 crore on revenues of Rs 2,344 crore, while the earnings per share was Rs 9.85. Analysts point out that the company’s debt-equity ratio would be much higher than the 0.3 as at the end of March 2008.
Sofinter, through its wholly owned subsidiary, Ansaldo Caldaie, makes utility boilers and has the expertise to supply super critical boilers. The acquisition will help Gammon expand its portfolio of boilers and turbines and gives it a global footprint.
Besides, it will also be in a position to offer EPC services; Sofinter is understood to have an order backlog of around €one billion. Moreover, Gammon can now enter into the industrial boilers space.
Gammon has funded the buyout through borrowings at an interest rate of Libor +275 basis points. The remaining 50 per cent stake in Sofinter will remain with the promoters. In CY07, the Sofinter Group posted revenues of €527 million (Rs 3,425 crore) with a loss of €11 million at the profit before tax level, as Ansaldo incurred losses. The balance sheet is weak and has a total debt of ¤240 million.
In the near term, Ansaldo could continue to report losses, mainly on account of heavy penalties payable to a client for delays in the delivery of boilers. Sofinter’s margins would only improve once new orders pick up. Gammon is also looking to outsource boiler pressure parts from Ansalso’s existing plant in Trichy, with a plan to increase capacity there to 4,000MW. Apart from the boiler space, Gammon can access some niche segments.
If there are no further delays and the order book is well executed, the acquisition could create long term value for the firm. The Gammon India stock has fallen 65 per cent since January 2008 compared with a 31 per cent fall in the Sensex. At the current price of Rs 205, the stock trades at 18.5 times its estimated FY09 earnings.