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Monday, October 12, 2015

Gammon India: worth it!

Gammon India
CMP: 13.28
Market Cap: 180.30Cr

Gammon India is one of the largest civil engineering construction companies in India. Gammon India can also lay claim to having built the maximum number of bridges in the whole of the commonwealth (commonwealth is a term used for countries ruled by the British)  First project started in 1919 was the piling and civil foundation work for "The Gateway to India"  Gammon India was founded on 1922.
Other important landmark civil engineering projects are:
- India's first cable-stayed bridge at Akkar, Sikkim
- The longest railway tunnel in Asia for Konkan Railway at Ratnagiri.
- Mahatma Gandhi Setu Bridge spanning the river Ganges, between Patna and Hajipur in Bihar (Commerative stamp issued by Indian Postal department in 2007 "LandMark bridges of India)
- Terminal Building of Sharjah International Airport UAE.
- Elevated viaducts for Delhi Metro Rail Corporation
- India's First Second Generation Prototype Fast Breeder Nuclear Reactor

The list is endless .. the latest addition is going to be the Signature Bridge Across Yamuna river in Delhi 
So all said and done Gammon India is a well established name in civil engineering in India. 

Lets now look at why Gammon India is quoting at such a dismal price (Market Capital of 180Cr ) 

If we look at the balance sheet we see that.
1. Gammon India has a -ve networth of -432Cr
2. Total Debt is 10,306Cr
3. Has been reporting Annual report for 9 months for past 2 yrs 
4. 2014-2015 year end has been extended to 18 months ie Oct 1,2014 to March 2016


Income statement also has only a sad story to tell.. 
1. past 5 yrs Sales has dropped by 50%  8162Cr(2011) to 3885Cr (2014 [9 months])
2. Net profit is negative for past 4 yrs 


Lets look at Cash flows.. and its gets a little bit interesting
1. +ve Cash flows from Operations for past 3 yrs 
2. Company has been able to generate +ve cash flow from "Finance Activities" 
3. Gammon has not stopped deploying cash in new projects (-ve Net Cash From Investing Activities)

Clearly though Gammon India has been reporting losses for past 4 yrs, it has been able to scrape through as far as Cash Flows is concerned with finance still trickling in..



Price Chart: 
Price chart is something we already know about (180Cr Market Cap) 

1. Gammon India stock price was at its peak in 2008 of about 790/- per share..
2. During the financial crisis 2008-2009 it fell to its teens and then recovered to 200+ levels 2009-2010
3. 2011 -ve earnings started and company has been downhill since then.
4. 999 Day EMA(5 yrs) Exponential moving avg is 47.47 
5. 50 Day EMA is 14.02
6. 100Day EMA is 16.05
7. CMP: 13.28


Well there is no doubt that stock price is in the dumps. topline for year ending Sept 2014 was 3885Cr 
Market cap of 180Cr is like 4.6% of its Last reported Annual Sales..

Ofcourse 180Cr Market cap has no meaning cause there is 10306Cr of debt and 8770Cr of Contingent liabilities.. 

So 2 things is clear .. 
1. Market cap is peanuts for Gammon India considering that its a pre-independence Era company and is well established as a Civil construction Engineering company.
2. Gammon India is in dumps with 10306Cr debt and 50% drop in Sales in past 5 yrs... picture is Bleak!!

I think as investors one question in my mind is "Will it recover" Can I buy this worthless piece of paper and turn it into a crown jewel??

My answer is Resounding YES!!

1. Gammon has done a Corporate Debt Restructuring (CDR)
2. Cut-off date of CDR was 1st Jan 2013
3. Total debt aggregating 14,814Cr has been restructured. (both Fund & non-fund based)
4. CDR package provides a 10yrs repayment plan (including 2 yrs moratorium)
5. Interest rate has been lowered by 1% for 15 months ( that would be till April 2014)
6. Waiver of penal charges till date of implementation
7. Additional funding by way of priority loan. 
8. All securities envisaged under the CDR scheme have been created.
9. Promoters have been issued Zero Coupon (zero interest) Compulsory Convertible Debentures worth 100cr. So the promoters have bought in 100cr additional investment in equity of Gammon India on 26th May 2015 these CCD will be converted into shares @ a price of 25.30 per share.

10. On 14th August 2015 Gammon India has decided to restructure and segregate its businesses and created 2 wholy owned subsidiaries 
   a) Gammon Retail Infrastructure Limited (GRIL)
   b) Transrail Lighting Limited (TLL)
The rationale was..
   a) To create sector focussed companies
   b) To enable investments by strategic investors
   c) De-risk business from each other
   d) Deleverage balance sheet of the company.

Gammon Retail Infrastructure Limited (GRIL): Transfer & vesting of the company's civil EPC undertaking ie. Civil Engineering, Procurement and construction business carried on by the company in roads, hydro-power, nuclear power, tunnels, bridges, buildings, cooling towers, chimney and other sectors as a going concern, which shall include all the properties, rights & powers and all debt, liabilities, duties and obligations comprised in and pertaining to the EPC business into GRIL against issue and allotment of equity shares by GRIL to GIL (Gammon India Limited)

Transrail Lighting Limited (TLL):  Transfer & vesting of the company's T&D Undertaking (as defined in the scheme) comprising of the Engineering, Procurement and construction business of the company in the Transmission & distribution sector, including the tower testing facility located at Deoli and the tower manufacturing facility located at Baroda and Nagpur, but excluding the tower manufacturing facility located at Deoli and the conductor manufacturing facility located at Silvassa, as a going concern,  which shall include all properties, rights and powers and all debts, liabilities, duties and obligations comprised... to the T&D business into TLL against issue and allotment of equity shares by TLL to GIL 

basically the company has created 2 100% owned subsidiaries which are Healthy (a going concern) and debt liabilities of these 2 Healthy companies have been separated (for sale in the future or to attract investments..)

11. On 27 Aug 2015 Step down subsidiary Gammon Infrastructure Projects Limited (GIPL) has divested its stake in 9 projects .. this will result in cash inflows of 563 cr plus advance waivers of 285cr another divestment of 50% stake in Vizag Seaport Pvt. Ltd. will result in 62.5cr, plus future cash flows of  100cr based on achieved milestone. So that should see 1000cr inflow into Gammon India Limited.

12. Gammon India on 21 Aug 2015 announced receipt of 397cr road project from Public Works department.

13. On 24th Sept 2015 Gammon India announced getting a 1799.99cr NHAI road project.

Conclusion: 
All these activities donot confirm that Gammon India is solvent. It does however indicate that the company is taking steps to reduce its debt burden. creating separate subsidiaries GRIL & TTL which are considered "A going concern" all point to positive development.

Though complete recovery will take years.. I think this is a good time to buy into Gammon India. If Gammon India was not in Financial difficulty we would have never seen such low price.. the brand is intact and we are still seeing new order flows.. Long term 5+yrs could be a multibagger.

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