Buy Gammon India: Motilal Oswal

Broking house, Motilal Oswal is bullish on Gammon India and has maintained buy rating on the stock.

Motilal Oswal report on Gammon India:

Book to bill ratio at 3.5x FY07E revenues:

As at Dec 2006, Gammon India’s order backlog stood at Rs75b (up from Rs60.7b as of Dec 2005), which corresponds to 3.5x FY07E revenues. Order book composition stands as: Transport engineering (Roads & Bridges) 35%, Hydro & irrigation 35% and others 30%.

Infrastructure development, real estate can unlock value:

GIPL currently has a portfolio of 11 infrastructure development projects, across segments like roads, ports, hydro power, biomass power and SEZs. GIPL has also submitted financial bids for another 4 projects totalling Rs13.5b, and is pre-qualified for submitting financial bids for 11 projects totalling Rs138b. Several of these financial bids are expected to be opened during 1QFY08, indicating that the news flow will continue to be encouraging. Realty development is also emerging as a key focus area, though at nascent stages currently. and the company intends to enhance its role as project developer. As we understand, the company already has certain land banks in metros, which can be monetized. More details on this would be available over the next few months.

Increased contribution from subsidiaries:

Consolidated profits during FY06 stood at Rs1,446m, vs standalone profits of Rs1,043m, resulting in a net contribution of Rs403m from subsidiaries and associate companies. The management stated that 1) Associated Transrail has order backlog of Rs8.5b as at Dec 06 and FY07 expected revenue is Rs4.5b (up 80% YoY) 2) Gammon Billimoria has order book of Rs5b+, and we expect 25-30% YoY growth rate during FY07.

Recommend Buy:

We expect Gammon to report net profit of Rs914m (up 9.6%) in FY07, Rs1.3b in FY08 (up 43.9%) and Rs1.8b (up 38.5% YoY) in FY09. At the CMP of Rs299, the stock trades at reported PER of 28.4x FY07, 19.7x FY08E and 14.2x FY09E. We value Gammon's 82.5% stake in Gammon Infrastructure at Rs9.9b (Rs114/share), 50.9% stake in Gammon and Billimoria at Rs2.1b (Rs24/share), 28.9% stake in Associated Transrail at Rs1.4b (Rs16/share) and stake in Sadbhav engineering at Rs4/sh. Adjusting for the value of BOT and Investments, the stock trades at PER of 13.4x FY07, 9.3x FY08E and 6.7x FY09E. We maintain Buy.

Disclaimer : These are the views of the broking house. We do not take any responsibility for any loss incurred due to any buy decision based on the above reports.