Analysts` corner- Gammon India

Gammon India
Reco price: Rs 202
Current market price: Rs 214.55
Target price: Rs 281
Upside: 31%

Gammon India’s (Gammon) Q1 FY09 revenue grew by only 8.3 per cent year-on-year (y-o-y) to Rs 585.2 crore, much lower than market expectations and way below management guidance of 35-40 per cent.

Suspension of two projects in Kashmir and Assam resulted in tepid revenue growth. EBITDA margins contracted 228 basis points (bps) y-o-y to 8.4 per cent, as the proportion of low margin captive projects in revenues increased. Adjusted PAT declined by a substantial 51.3 per cent y-o-y to Rs 13.9 crore and the net profit margins thereby declined 291 bps y-o-y to 2.4 per cent.

Gammon has merged its transmission and distribution contracting associate and the fourth largest power transmission company, Associated Transrail Structures Ltd (ATSL) with itself by offering 2 shares of Gammon for every share of ATSL held. The merger would result in 29 per cent dilution to Gammon’s equity. However, FY09 profits are likely to receive a 76 per cent boost, thereby making the merger value accretive for Gammon.

Post downward revision in estimates of organic business and inclusion of ATSL financials, Gammon is trading at a P/E of 8.7x FY09E and 7.1x FY10E earnings, making it the cheapest stock among peers. Inconsistent performance and negative surprises have resulted in its relative discount, despite its long execution history and wide-ranging capabilities. Consistent delivery over next 2-3 quarters is required for a re-rating of the stock.

Tags: multibagger, RESEARCH CALLS