Gammon Infrastructure Projects Ltd’s (GIPL’s) stock jumped 19.57% on Monday to Rs17.84 following reports that it has secured a Rs871.2 crore road project.
This compares favourably not only with peers, but also GIPL’s own record of hardly any fresh orders in the last many quarters.
Analysts expect the company’s revenue to grow at a 30-35% compounded rate over the next 18-24 months, given that about four of the seven road projects will be operational this year.
Over the last couple of years, delays had seen the commissioning of barely three projects, restricting revenue growth.
That’s why end-fiscal 2012 (FY12) would have seen the company’s cash flows from operations down to half of that in the previous year.
Going forward, toll and annuity revenue is expected to triple, which will not only offer relief, but also improve GIPL’s credentials in project execution.
What about funding?
The optimism about the company stems from its ability to securitize project receivables to generate cash flows, which, in turn, can be used to fund the equity requirement in some new projects. Further, media reports and analysts suggest that GIPL intends to sell stakes in existing projects and tap the equity markets going forward, to meet the mismatch in funding. But it’s a tightrope walk, with the company’s debt-to-equity ratio expected to have touched an unhealthy five at the end of FY12. Interest costs as a percentage of sales jumped by around 51% from a year earlier in the December quarter alone.
The key risk is that roads account for over two-thirds of GIPL’s total order book, with other infrastructure sectors being in limbo because of a lack of policy reforms.
Will the company’s aggressive bidding in road projects risk its profitability?
A report by Karvy Stock Broking Ltd, establishing the company’s strengths and weaknesses, says: “Whilst on execution capability, GIPL ranks at par with the larger infrastructure players, middling scope on eligibility and value unlocking drag its overall rating (among peers).”
While bagging several orders is one hurdle crossed, GIPL’s ability to deliver shareholder returns hinges on its ability to bridge the funding gap for its projects.
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