Going strong

POINT WISE

Value unlocking through the listing of its subsidiary, Gammon Infrastructure Projects, will help Gammon India.

Gammon India is expected to benefit from the listing of its 89 per cent subsidiary, Gammon Infrastructure Projects (GIPL), which focuses on the increasingly popular BOT projects.

After a private placement of GIPL shares some time back at Rs 75.66, analysts believe that the valuation of GIPL is likely to be approximately Rs 1400 crore after going public.

The value of GIPL in Gammon India's stock is not yet fully captured and significant value unlocking could be expected post listing. Analysts feel that in the stock of Gammon India, the value of GIPL is about 33-40 per cent.

The residual P/E of Gammon India (excluding GIPL) on trailing 12-month earnings is 43x, which is comparable to that of peers like L&T, HCC and Nagarjuna Construction with P/Es of 42.13x, 34.74x and 43.41x, respectively.

Gammon India has recently filed the draft red herring prospectus with Sebi for the upcoming IPO of GIPL.

This company, which will continue to remain a subsidiary of Gammon India, already has signed agreements for seven projects and financial bids have been submitted for 13 more. The gains accruing through its value unlocking, will be reflected in Gammon India's performance and valuation, as well.

On the back of the construction boom and the projects coming its way, the stock price had recently rallied to a 52-week high of Rs 588.95 in early March this year.

An analyst with Brics PCG says, "The current valuation of Gammon India includes that of GIPL, which already has several major BOT projects. The valuations that GIPL stock will get post-issue, will also have a bearing on Gammon India's valuations."

GIPL managing director, Umrigar expects Sebi clearance to come in a week's time. It plans to issue 270 lakh equity shares, plus a green shoe option if exercised.

The projects under implementation include a river project in Kochi, a project at Visakhapatnam port and some NHAI projects. GIPL was formed to garner BOT business arising out of privatisation.

The growth story
To give an idea of the construction boom, investments in the sector are expected to grow at a CAGR of eight per cent over the next three years. All the three areas of infrastructure, housing and industrial construction are experiencing speedy growth.

Although the construction sector is getting cluttered with a plethora of players, old and new, the sheer pace of development has room for all. Moreover, established players like Gammon India are in a position to gain, given their size and experience.

Apart from the Rs 4,00,000 crore allocation by the government to infrastructure projects, Gammon India deputy managing director (retired), SA Reddi points out that foreign funds are also showing interest in funding projects in India.

CRISINFAC believes that construction investments will grow to the tune of Rs 8,30,000 crore, at a CAGR of eight per cent, over the next three years (upto FY08). There are several factors that will propel the overall growth in the construction industry.

In real estate construction, a growth of five per cent CAGR is anticipated, predominantly driven by favourable demographics, rising affordability levels and fiscal benefits on availing of a home loan.

In infrastructure, the anticipated growth is nine per cent CAGR, driven by investments in roads, water supply & sanitation and irrigation, which are supported by regulation/government policies, increasing private sector participation and availability of funds (budgetary supports and multilateral funds), according to CRISINFAC.

Moreover, industrial construction is expected to grow by a CAGR of 33 per cent, driven by investments in key manufacturing sectors such as oil & gas and metals. Investments are mainly driven by buoyant domestic and external demand and high operating rates.

According to the analyst with Brics PCG, concretisation of roads and renewed growth in irrigation projects will propel the construction sector. Several port projects over the next 3-4 years to handle about 4-5 million TEUs would also create demand.

The current outstanding order book positions of various construction companies compare well, with Gammon (Rs 6500 crore), IVRCL (Rs 6500 crore), Madhucon (Rs 4500 crore) and Nagarjuna Construction (Rs 6000 crore).

Analysts believe that going forward, construction companies will see more consistency in revenues due to more annuity projects where the government pays every year.

Foreign forays
Foreign markets are another grazing ground for Indian construction companies. While players from abroad are unlikely to enter Indian construction industry in a big way, primarily due to the kind of rules and regulations that exist, Indian companies like Gammon have a noticeable presence overseas in regions like Singapore, Malaysia, Australia, Middle East and Africa.

Reddi says that six projects are currently underway in Dubai and one in Oman. The company would continue to focus on the Middle East region. About 10-15 per cent of the revenues are expected from foreign operations, this year.

Gammon's grounding
Gammon, which operates in most segments of the construction sector, has its revenues evenly spread out across its major businesses, viz. bridges and flyovers, hydel power/tunnels/irrigation, water/gas pipelines, industrial construction, residential buildings and power.

To benefit from the increasing demand for housing, Gammon has forayed into housing with projects in Mumbai (Ghatkopar) and Bangalore. Other growth areas for housing include Chandigadh (Rs 10,000 crore investment expected in 2-3 years) and Hyderabad (where a Malaysian company is constructing residential towers).

"Even as competition is intensifying, since there is an explosion of projects, there is room for all players. Moreover, we continuously innovate as in case of the JJ flyover in Mumbai," says Reddi. While L&T is the leader, Gammon and Hindustan Construction Company (HCC) come up second.

For the December FY06 quarter, Gammon India posted a marginal three per cent y-o-y growth in net sales to Rs 335 crore, while its operating profits grew by 70.5 per cent to Rs 48.58 crore and net profit grew by 5.3 per cent to Rs 20.94 crore.

Analysts expect the real growth to happen in FY07-08, with more annuity projects likely to come in.

The valuations of the various construction companies differ somewhat. But analysts attribute this to presence of more BOT projects with some companies and the size of the order book.

Possible pitfalls?
The hindering factors for the sector include delayed cement deliveries and cost escalations. While, there are clauses to take care of cost over-runs, lack of timely cement supply is a cause of concern, at least for the moment. Analysts believe that once the state elections get over, cement supply is expected to resume.