Gamindia 20100330

AMBIT CAPITAL Tuesday 30, March 2010
Gammon India
I N I T IA T I N G C O V E R A G E
BUY At Inflexion PPoint

oint
Price Rs229
Initiating coverage with BUY: Target price Rs290
Target Price %Upside We initiate coverage on Gammon India (GIL) with a BUY and an SOTP target of
Rs290 27 Rs290 (valuing the company at Rs179/sh based on 12x FY11E earnings, GIL's
Market Capitalisation stake in Gammon Infrastructure Projects (GIPL) at Rs88/sh (DCF-based, 40%
Rs274,39mn (US$611mn) holding company discount), international acquisitions at (Rs9/sh), treasury stock
at Rs10/sh, Sadbhav Engineering stake at Rs4/sh.
52 week range H/L (Rs) 276/56
Current valuation reflects acquisition write-offs
Shares o/s Daily vol
(mn) (mn) Our total valuation for Gammon's Power business ranges from Rs1- 22/sh over
119.69 0.16 CY10E and CY11E. We model a stress case valuation of Rs221/sh for the stock
assuming entire write-off acquisition debt of Euro97.5mn. Excluding GIPL, Power
Reuters Bloomberg
GAMM.BO GMON IN subsidiaries and others, the stock is trading at 8x (Rs118) our FY11E earnings.
Perfm(%) 1M 3M 12M YTD

India boiler business order inflow to be key re-rating trigger
Absolute 4.8 0.9 303.5 0.9
We expect Ansaldo-GB Engineering to bag boiler orders worth Rs20bn (mix of
Rel.to Sensex (3.1) (1.6) 117.3 (0.8)
sub & supercritical package) by 3QFY11E. This will likely be the key trigger for
BSE Sensex Nifty
stock re-rating as capex has already been spent.
17,711 5,303
Gammon Infrastructure's valuation leaves scope for further upside
Source: Bloomberg
Based on our Initiating coverage report on GIPL dated 8th Feb 2010, we believe
GIPL's current valuation does not reflect the inherent business value. With road
Shareholding pattern (%) projects’s nearing COD date and expected financial closure of other key infra-
Public FII projects, we believe valuations would improve, leading to further upside.
12% 28%
Prom. ATSL's capacity expansion in place - order book diverse
23%
GIL's current order book of Rs144bn is biased in favour of high-growth sectors
Corp Inst. with 46% in transportation, 22% in power, 15% in transmission lines and the
19%
18% remainder in buildings, cooling towers and chimneys. This will result in continued
Source: Bloomberg traction as infrastructure spending picks up. ATSL is nearly through with capacity
expansion and this would also result in ramping up the blended order book.
Price performance
Risks
22,000 300
(i) Order flow slowdown; (ii) extended working capital cycle; (iii) raw material
17,000 200
12,000 100
price increases; (iv) varying market value of subsidiaries; (v) ramp-up delays in
7,000 0
BOTs; (vi) increase in interest rate; and (vii) funding issues.
Apr-09 Aug-09 Dec-09 Mar-10
Exhibit 1: Key financials
GMON (RHS) Sensex
YE March (Rs mn) FY07 FY08 FY09 FY10E FY11E
Source: Bloomberg
Operating income 18,038 22,788 36,579 42,595 55,227
EBITDA 1,791 2,306 3,345 4,312 5,513
Analyst
Parikshit Kandpal
Net profit 445 861 1,405 1,413 2,029
Tel.: +91-22-3043 3201 EPS (Rs) 3.3 6.3 10.4 10.4 15.0
parikshitkandpal@ambitcapital.com
RoE (%) 15.1 14.5 22.1 17.7 17.2
Dhirendra Tiwari RoCE (%) 13.7 12.3 15.6 11.7 12.4
Tel.: +91-22-3043 3241
dhirendratiwari@ambitcapital.com
P/E (x) 69.8 36.1 22.1 22.0 15.3
Source: Company, Ambit Capital Research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research
reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to disclaimer section on the last page for further important disclaimer.
Ambit Capital Pvt Ltd. Construction Sector
Company Financial Snapshot
Profit and loss (Rsmn)

Order book mix FY10
FY09 FY10E FY11E
Net Sales 36,579 42,595 55,227 Hydraulic & Industrial
Operating expenditure 33,234 38,283 49,714 Hydro Irrigation Structure &
EBITDA 3,345 4,312 5,513 Power 3% Buildings
Depreciation 640 757 805 Structures 3%
8%
Interest expenditure 1,053 1,351 1,704
PBT 2,087 2,151 3,084 Environment
Tax 682 737 1,055 & Pipelines
PAT / Net profit 1,405 1,413 2,029 11%
Energy 14%
Power
Profit and loss ratios
transmission Transportati
EBITDA margin (%) 9.1 10.1 10.0 on
and
PAT Margin (%) 3.8 3.3 3.7 distribution engineering
P/E (x) 22.1 22.0 15.3 15% 46%
EV/EBITDA (x) 10.2 9.1 8.0
Dividend Yield (%) 0.4 0.2 0.2 Source:: Company, Ambit Capital research
Balance sheet (Rsmn) Cash flow (Rsmn)

FY09 FY10E FY11E FY09 FY10E FY11E
Total Assets 26,073 33,312 37,505 PBT 2,087 2,151 3,084
Fixed assets 9,834 12,557 13,254 Depreciation 640 757 805
Current assets 33,038 33,297 41,365 Interest 1,053 1,351 1,704
Investments 2,206 2,241 2,241 Tax (682) (737) (1,055)
Current Liabilities/Prov. 19,005 14,783 19,354 Net working capital (7,104) (3,557) (3,913)
Total Liabilities 26,073 33,312 37,505 Cash flow from operating activities (4,007) (36) 624
Total Networth 14,738 18,983 22,414 Capital expenditure (2,654) (3,541) (1,501)
Total debt 9,723 12,678 13,422 Investments (488) (35) 0
Others 1,612 1,651 1,669 Others 95 116 (29)
Cash flow from investing activities (3,047) (3,460) (1,530)
Balance sheet ratios (%) Incr (decr) in borrowings 6,124 2,939 792
RoE 22.1 17.7 17.2 Issuance of equity 1,065 2,832 1,402
RoCE 15.6 11.7 12.4 Preference share capital 1,050 0 0
Net Debt/Equity 62.5 59.2 55.3 Interest paid (1,053) (1,351) (1,704)
Total Debt/Equity 66.0 66.8 59.9 Cash flow from financing activities 7,187 4,420 490
P/BV (x) 2.1 1.6 1.4 Net change in cash 133 924 (417)
Closing cash balance 514 1,438 1,021
Company snapshot Ratings

Low High
1 2 3 4 5
Quality of earnings
Domestic sales
Net debt/Equity
Working Cap. Req.
Quality of mngmnt
Depth of mngmnt
Promoters
Corporate Governance
GAMMON INDIA 30 MARCH 2010 2

Investment Highlights
Valuation bands
Forward P/E and P/BV bands: During the period FY05-09, Gammon India has
traded at a one-year forward median multiple of 25x. Currently the stock trades
at 15x. On P/BV, GIL has traded at a one-year forward median multiple of 2.3x,
and currently trades at 1.4x. We believe a 40% discount on the P/BV multiple
reflects the write-off of acquisition cost for the international subsidiaries, which
would narrow as its subsidiaries turn profitable.
Exhibit 2: 1 year forward P/E Exhibit 3: 1 year forward P/BV
(Rs)
(Rs)
900
900
800 5.0x
50x 800
700
700
600
600 3.5x
500 35x
500
400 25x 400
300 300 2.0x
200 15x
200
100 5x 100 0.5x
0 0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-06
Apr-07
Apr-08
Apr-09
Source: Bloomberg Source: Bloomberg
Exhibit 4: SOTP valuation

Particulars Segments Value Value/share Methodology
Gammon Standalone Construction and ATSL 24,343 179 At 12x FY11E Earnings
Gammon Infrastructure Infrastructure subsidiary 11,896 88 DCF; 40% holding company
Projects Limited discount
Gammon treasury shares Treasury stock 1,294 10 5.8mn shares valued at CMP
post ATSL merger
Investments in Sadbhav Investments 561 4 30% holding company discount on
Engineering market cap
International Acquisitions Sofinter & Franco Tosi 136 1 Valued at EV/EBIDTA of 6x CY10e
at 20% discount to Alstom
International Acquisitions SAE powerlines 1,138 8 SAE Power lines at 10x P/E FY11e
Total 40,116 290
Source: Ambit Capital Research

Peer Group Comparison

Exhibit 5: Peer group
Rs/Share IVRCL Nagarjuna Gammon
Infrastructure Construction India
Standalone 143 140 179
BOT Subsidiary 17 24 88
Real estate 21 20 0
Other Investment 10 - 23
SOTP/Share 190 184 290
SOTP ex Standalone (A) 47 45 111
Current Market Price (CMP) 163 161 229
CMP - A 116 116 118
Current standalone value 116 116 118
FY11e -EPS 11.0 9.5 15
P/E - FY11e 11 12 8
Gammon India discount 25% 36% -
GIL trades at 25% discount to IVRCL and 36% discount to Nagarjuna Construction
at the current market price after adjusting for BOTs , real estate and other
investment. This makes Gammon India an attractive play, even with respect to
pure play smaller cash contractors. GIL trades at 20% discount — at 8x FY11E
EPS versus the sector multiple of 12x. We believe the key reason for this
underperformance is: (i) accidents at Delhi’s metro project, the Hyderabad site
and Chambal bridge in Rajasthan; and (ii) the market factoring in writeoffs of
the international power business.
We believe that the risk is being overpriced as: (i) the Delhi Metro Rail Corporation
(DMRC) has already given a clean chit to Gammon India while in the case of the
Punjagutta flyover in Hyderabad, the Andhra Pradesh government had waived
the penalty for bridge collapse (in an order dated 18 January 2010) and given
them clean chit; also, with regard to the Chambal river bridge collapse, the
NHAI had given a clean chit to Gammon although the matter is still under
investigation and a report of the final investigation is still awaited.
The Delhi government had recently awarded the prestigious Signature Bridge
award to Gammon India after seeking approval from the DMRC. This ensures a
level playing field for Gammon India for future government tenders.
In the case of international subsidiaries, losses have been reduced by 90% YoY
and we expect the international power business to turn around in CY10E.
Ahead, the triggers stated above would be the key drivers for stock re-rating.

Investment Rationale
Robust global order book ramp-up; 1.7x CY09 sales
Sofinter and FT have seen order book ramp-ups post stake acquisitions by GIL.
FT's order book prior to acquisition was about Euro90mn. This has ramped up
to Euro364mn while Sofinter's pre-acquisition order book of Euro350mn has
grown to Euro498mn. SAE Power Line's order book has grown from Euro20mn
to Euro71mn. Sofinter has a power order book of about ~1,500MW with a
majority of orders in the 150-250MW sub-critical segment. Italy contributes about
20% to GIL's order book.
Exhibit 6: Order book
(mn Euro) 498 933 (mn Euro)

1000 60% 1550 1,453 120%
100%
1350 1,158 100%
800
1150
933 80%
950
600 71
364 10% 750 60%
400 31% 550 460
40%
350
200 20%
150
-50 0%
0
CY08 CY09E CY10E CY11E
Franco Tosi SAE Power Sofinter Total Order
line book Order book growth YoY %
Order book to grow 25% CAGR over CY09-11E

GIL's international order book is expected to grow at 25% CAGR over CY09-11E
with SAE Power Line recording the highest growth. We have not included any
orders from Ansaldo-GB group's India operations in the Sofinter order book,
which is expected to grow at 22% CAGR while FT will likely grow at 21% CAGR.
Exhibit 7: International order book

mn Euros CY08 CY09E CY10E CY11E CAGR % 09-11E
Order book
Franco Tosi 90 364 437 533 21
SAE Power line 20 71 123 173 56
Sofinter 350 498 598 747 22
Total Order book 460 933 1158 1453 25
Sofinter and FT have a current order book of about US$1bn, of which 40%
would be new orders, post GIL's acquisition. The order book would have a margin
mix of three distinct categories - legacy orders would command 7% margin; new
orders 15%, while blended margins would be ~10%. As the order mix changes
we expect Sofinter’s profitability to improve. We model the power business to
turn around in CY10E.

Exhibit 8: Breakdown in order book Exhibit 9: Order book - margin profile
Order Book EBITDA margins
Old New order

40% 32%
Old
68%
New order
60%
Source: Company, Ambit Capital Research Source: Company, Ambit Capital Research
International acquisitions to turn around in CY10E

We believe that CY10E would be a turnaround year for international acquisitions,
while real accretion at the net level is expected to occur in CY11E. GIL has adopted
measures to streamline operations, the focus being to: (i) increase capacity
utilisation; (ii) obtain credit lines to fund working capital; and (iii) rationalise
supply chain to lower the cost of materials. All these efforts have resulted in
better cost efficiencies and pick-up in order book resulting in higher capacity
utilisation and thereby higher revenue growth. Net loss is expected to get reduced
by 90% from Euro61mn in CY08 to Euro2mn in CY09E. We believe the turnaround
is not fully discounted in the prices.
Exhibit 10: Key financials of international subsidiaries

mn Euros CY07 CY08 CY09E CY10E CY11E
Revenues
Sofinter 527.8 499.2 395.0 390.0 448.5
Franco Tosi 102.3 102.3 92.0 140.0 168.0
SAE Power Lines 24.2 29.7 55.0 75.0 97.5
Total Revenues 654.3 631.3 542.0 605.0 714.0
EBIDTA
Sofinter -30.1 -17.2 12.0 28.5 33.6
Franco Tosi -10.5 -8.5 10.5 9.8 13.4
SAE Power Lines -2.4 -2.7 2.1 4.5 6.8
Total Ebidta -43.0 -28.5 24.6 42.8 53.9
PAT
Sofinter -38.3 -40.1 -4.0 7.8 17.9
Franco Tosi -17.7 -17.7 -1.0 1.4 6.7
SAE Power Lines -2.5 -2.8 0.6 1.9 3.9
Total PAT -58.5 -60.6 -4.4 11.1 28.6
Gammon's share
50% in Sofinter (20.1) (2.0) 3.9 9.0
75.1% in Franco Tosi (13.3) (0.8) 1.1 5.0
100% in SAE Power Lines (2.8) 0.1 0.2 0.4
Total share of Gammon (36.1) (2.7) 5.1 14.4
Interest Cost (7.2) (7.2) (7.2) (7.2)
Assumed at ~ 7.75% for 47.5 and 7% for 50mn Euros
PAT accretion for Gammon (43.3) (9.9) (2.0) 7.2
PAT (Euro assumed at Rs 61) 60.7 (2,628.9) (599.2) (124.0) 438.6
EPS accretion (Rs) (19.4) (4.4) (0.9) 3.2

Positive Profitability Trend - Builds A

Strong Turnaround Case
GIL acquired stakes in Sofinter, Franco Tosi (FT) and Saldemi with the objective
of creating a one-stop shop that offers the entire gamut of power equipment
and services. Since acquisition, management's focus has been to turn these
around. These companies had been operating at lower-than-breakeven capacity
utilisation, and with renewed focus from GIL they are expected to break even in
CY09. This is reflected in 1HCY09 performance being better than 1HCY08. For
the full year CY09, GIL expects marginal loss of Euro 2mn at the net level.
Sofinter
Sofinter, established in 1979 has offerings in power and industrial boilers. In
September 2008, GIL had acquired 50% stake in Sofinter for a consideration of
Euro50mn. Sofinter owns Ansaldo, which has a presence in the Sub & Super-
critical technology boilers. Ansaldo has an installed base of 80,000MW with
about 18,000MW (about 23%) dedicated to super-critical boilers (about 30 units).
Exhibit 11: Sofinter financials

SOFINTER CY07 CY08 CY09E CY10E CY11E
Revenues 527.8 499.2 395.0 390.0 448.5
EBIDTA -30.1 -17.2 12.0 28.5 33.6
PAT -38.3 -40.1 -4.0 7.8 17.9
Ansaldo-GB Engineering JV - focus on super-critical segment

Ansaldo-GB Engineering (AGB) currently operates in the sub-critical segment
with its 150-250MW HRSG (heat recovery steam generators) boilers, wherein GB
Engineering is the supplier of pressure points. Ansaldo Italy holds 85% in Ansaldo
India. With an upgradation capex of about Rs3,500mn, the facility would
manufacture super-critical boilers with technology from Ansaldo. The targeted
capacity, about 2500MW, caters specifically to India. AGB has an order book of
Rs3,500mn for delivery of HRSGs.
We are positive on Ansaldo-GB Engineering India

With about three players setting local manufacturing in the super-critical boiler
segment, we remain positive on Ansaldo-GB India’s (AGB India’s) prospects.
AGB did not bid for NTPC’s bulk tendering as requisite eligibility norm on one
year running history of a variable super-critical boiler got over on 5th March
2010, GIL has requested Power Ministry to reconsider it bid, though GIL would
be eligible to bid for next round of NTPC bulk tendering for 9 units. In this
scenario, we believe private players will be the key driver of the order book.
Exhibit 12: Super-critical players

Boilers Steam Turbine Generator
BHEL-Alstom BHEL- Siemens
L&T - Mitsubishi L&T - Mitsubishi
Ansaldo-GB Engineering Bharat forge- Alstom
Thermax - Babcock Wilcox Toshiba-JSW
Source: Infraline, Ambit Capital Research

Exhibit 13: Capacity of new players

SC Boilers SC Turbine Date of signing Date of Prodn.
JV agreement (Planned)
L&T-MHI 4000 MW 4000 MW 16th Apr 2007 Oct-2009
5th Nov 2007 June-2010
Toshiba-JSW 500-1000 MW/ 2nd Sep 2008 Jan-2011

unit x 4 unit
Bharat Forge-Alstom 5000 MW 10th Nov 2008 Mid-2011
Ansaldo-GB Engineering 2500 MW Jan-2011
Thermax-Babcock Wilcox 3000 MW 10th Mar 2010 Mid-2012
Source: Infraline, Ambit Capital Research
Estimate Rs30bn order book by FY12-13E

We believe turnaround of GIL's power business would be closely linked to the
ramp-up of AGB's order book. AGB is qualified to bid for NTPC's bulk tender,
besides it would look to tap private players as well. AGB has a proven technology
with Siemens; the key however, would be order execution. With three players in
the SC boiler segment compared with four in SC turbines, we believe AGB is a
strong contender in the super-critical boiler segment.
We model for Rs30bn in terms of order book (2x 660MW order from public/
private players) by FY12-13E, translating into revenue of Rs10bn.
Exhibit 14: Key assumptions - Ansaldo-GB

Rs mn FY12-13E
Order book FY11-12E 30000
Revenue 10000
EBITDA 1200
EBITDA margin 12
PAT 600
Net margin 6
Franco Tosi
Franco Tosi (FT) was established in 1881 with product offerings in steam and
hydro-turbines. GIL acquired 75.1% stake in Franco Tosi for a consideration of
Euro40mn in 2QFY09. FT has proprietary technology for industrial steam, utility
and hydraulic turbines, an installed base of 75,000MW worldwide, a complete
Westing House license for sub-critical turbines with ability to upgrade to the
super-critical segment. FT has a presence in Italy, Germany, Belgium, Egypt, Iran,
Saudi Arabia, Morocco etc.
Super-critical turbine capacity build-up in India to take time

FT has technology to build steam turbines up to 500MW. GIL is evaluating options
to expand this product portfolio to 600MW in the super-critical turbine segment,
as this would involve very high capital outlay to set up rotor and rotor balancing
machinery. FT already has a stronghold in the 150-250MW sub-critical turbine
segment. And GIL has set up a separate supply chain in Delhi to focus on raw
materials procurement for FT, Italy. This was done to lower the bill of materials
and improve FT's profitability. FT is expected to turn around during CY10E.

Exhibit 15: Key assumptions - Franco Tosi

mn Euro CY07 CY08 CY09E CY10E CY11E
Revenues 102.3 102.3 92.0 140.0 168.0
EBITDA -10.5 -8.5 10.5 9.8 13.4
PAT -17.7 -17.7 -1.0 1.4 6.7
Source : Ambit Capital Research
Power to add value from CY11E; can add Rs21/sh to SOTP

The power business may be value accretive from CY10E and we model for Rs21/
sh value by rolling forward multiples to CY11E. Currently, consensus is writing
off the Euro97.5mn debt acquisition while valuing power assets. We value Sofinter,
FT, at one-year forward EV/EBITDA of 6x (20% to Alstom’s EV/EBITDA) and
Ansaldo-GB Engineering at 8x EV/EBITDA, resulting in a valuation impact of
Rs1-22/sh to our SOTP for CY10E & CY11E respectively.
Exhibit 16: Valuation of the power business

Sofinter (mn Euro) CY10E CY11E
Sofinter Revenue 390.0 448.5
Sofinter EBITDA 28.5 33.6
EV/EBITDA (x) 6 6
EV (mn Euros) 170.82 201.825
Net Debt 88.53 88.53
Equity Value 82.29 113.295
Value of stake 50% (i) 41.1 56.6
Ansaldo-GB Engineering (Rs mn) FY11-12E FY12-13E
Order book FY11-12E 20000 30000
Revenue 6666.7 10000.0
Ebidta margins 12% 12%
EBITDA 800.0 1200.0
EV/EBITDA (x) 8 8
EV 6400.0 9600.0
Debt 1333 2333
Equity value 5067 7267
Gammon Stake @ 42.5% 2153.3 3088.3
Gammon Value in Euro mn (ii) 35.5 50.9
Gammon Netherlands SPV debt-Sofinter (iii) 50 50
Total value of Sofinter (iv) = (i) +(ii) - (iii) 26.6 57.5
Franco Tosi (mn Euro) CY10E CY11E
Franco Tosi Revenue 140.0 168.0
Franco Tosi Ebidta 9.8 13.4
EV/EBITDA (x) 6 6
EV (mn Euros) 58.8 80.64
Debt 38 38
Equity Value 20.8 42.64
Value of stake 75.1% (i) 15.6 32.0
FT Debt on Netherlands SPV (ii) 40.0 40.0
Total value of Franco Tosi (v)= (i) - (ii) -24.4 -8.0
Total Power business value = (iv) + (v) 2.2 49.5
INR Value (Rs mn) 136 3008
Value attributable (Rs/Share) 1.0 22.2

BOTs offer mix of annuity and vol./traffic driven earnings visibility

GIL, through GIPL, has selectively built exposure to a BOT portfolio that includes
roads, bridges, ports and power projects. These projects are in different stages
with four being operational, three nearing commercial operation date (COD),
three having achieved financial closure in FY09-10 and three expected to achieve
financial closure by 1HCY11.
Exhibit 17: GIPL - projects

Total project cost (Rs mn) GIPL stake % Status Valued
Roads/Highways
Mumbai Nasik Road Project (MNEL) 7530 74.9 COD by Mar-10 Yes
Rajahmundry Annuity Road Project 2560 93.5 Operational Yes
Dharmavaram Annuity Road Project 2480 93.5 Operational Yes
Kosi expressway 4396 100.0 Under implementation Yes
Gorakhpur expressway 6492 94.9 Under implementation Yes
Patna Muzzafarpur Highway 8500 100.0 Aug-10 financial closure expected No
Total 31958
Bridges
Cochin Bridge 257 97.7 Operational Yes
Rajahmundry Bridge Project 6541 100.0 Financial closure achieved Yes
Total 6798
Ports
Mumbai Container Port terminal 10157 74.0 Financial closure achieved Yes
Visakhapatnam Port 3252 73.8 Operational Yes
Blue water iron ore terminal 5050 31.0 Mar-10 financial closure expected No
Total 18459
Power
Rangit-II Hydro project 4300 100.0 Environmental clearance Yes
Biomass Punjab 4140 50.0 Financial closure achieved Yes
Biomass Haryana 3064 50.0 DPR prepared No
Pravara Co-generation plant 1650 100.0 H1CY10 Financial closure expected No
Youthang Power Ventures Limited 25000 100 DPR being prepared No
Total 38154
Grand Total 95369

GIPL valuation
Refering out Initiating coverage report on Gammon Infraprojects dated 8th
February 2010, we value GIPL at Rs26,257mn, which translates to Rs88/share
(at 40% holding company discount) to GIL's value for a 76% stake. We have only
valued the projects where work has begun, or projects that are in advanced
stages of implementation. We believe the current valuation for GIL does not
reflect the fair value of GIPL and there could be upsides as the projects near their
respective completion dates.
Exhibit 18: GIPL - SOTP valuation
Sector Project Name Project Total DCF Cost of GIPL's GIPL's
cost equity value equity stake share
Roads 11,306
Mumbai Nashik Express Ltd 7,670 660 8,409 14.0 77.4 6,509
REL 2,560 342 1,337 13.0 93.5 1,250
AEL 2,480 342 1,259 13.0 93.5 1,177
Kosi Bridge 4,396 483 405 13.0 100.0 405
Gorakhpur 6,860 1,106 411 13.0 94.9 390
Cochin Bridge 257 64 181 15.0 97.7 176
Rajahmundry Bridge Project 8,611 1,765 1,399 16.0 100.0 1,399
Power 4,984
Sikkim Hydro Venture 5,035 1,259 2,132 18.0 100.0 2,132
Biomass Punjab 5,400 1,350 2,695 17.0 50.0 1,348
PREL 1,920 480 1,504 18.0 100.0 1,504
Ports 6,797
Mumbai Container Port terminal 10,159 2,031 6,210 16.5 74.0 4,596
Visakhapatnam Port 3,252 1,252 2,985 15.5 73.8 2,202
Total 58,601 11,134 28,928 23,088
We assign a P/BV of 0.3x of equity to projects which are in the basket 3,000
Grand Total (Rs mn) 26,257
Source: Ambit Capital Research estimates
GIPL's BOT strategy has been to participate in favourable select IRR projects with
long-term return potential. The average equity IRR has been about 20-22% with
a 15-20 year concession period. Going forward, as these BOTs turn profitable,
GIPL would consider leveraging these assets for future reinvestments in business
and already has approval to raise Rs5bn. Currently GIPL is evaluating different
options viz. value unlocking in key assets such as roads and ports, raising debt
at the holding company level as well as diluting equity to raise growth capital.
We believe that there are enough levers in place for the company to tap the
tremendous opportunity in infrastructure space.
ATSL growth trajectory to continue

ATSL, a subsidiary of GIL, operates in the power transmission and distribution
space. Currently ATSL has a tower manufacturing capacity of 60ktpa, and with
commissioning of the Wardha unit, capacity is expected to increase to 105ktpa
by 4QFY10. ATSL's tower testing station near Wardha is expected to be operational
by March 2010.
ATSL has increased its overseas presence with clientele in Algeria, Kenya and
Afghanistan. Moreover the Company has already bagged a new order worth
Euro48mn from Algeria.

Capacity expansion puts ATSL on a par with industry leaders
Exhibit 19: ATSL Peer group

FY11E Capacity (MT)
Company Net Sales EBIDTA PAT Market cap Tower Conductor Poles & Masts
(Rs mn) (Rs mn) (Rs mn) (Rsmn) (MT) (MT) (MT
KEC International 47,930 5,000 2,363 30,250 110,000 No No
Kalpataru Power 42,097 4,737 2,114 31,673 108,000 No No
Jyoti Structures 25,494 2,828 1,211 16,021 109,000 No No
ATSL 14,114 1,482 828 105,000 3,8000 Yes
Via capacity expansion ATSL has increased tower production capability from
60ktpa to 105ktpa. This puts it on a par with other major players (see exhibit
19). Besides, ATSL also has a conductor manufacturing plant with 38ktpa capacity,
operational since March 2008. ATSL is also setting up a steel pole and hi mast
manufacturing facility at Silvassa with investment of Rs500mn. Previously, ATSL
has invested Rs400mn in the conductor facility, about Rs750mn in tower capacity
augmentation and Rs250mn in the tower testing facility. No further capex is
planned apart from the Rs200-250mn meant for normal maintenance.
Transmission tower - breakdown of materials

ATSL has captive production capacity which can cater to 80-85% of the material
requirement in a transmission project versus other players that have 55% captive
production. KEC, Kalpataru and Jyoti Structures do not have in-house conductor
manufacturing. This gives ATSL a competitive edge.
Exhibit 20: Tranmission tower material breakup

Tower Materials
Conductor 30%
Construction materials 25%
Conductor 30-35%
Bolts, Nuts , Insulator, hardware fitting 15-20%
Acquisition of SAE Power Lines to augment global footprint

ATSL has acquired SAE Power Lines (SPL) for a consideration of Euro12mn, which
included Euro4.88mn for 100% stock purchase and Euro7mn for debt retirement.
During 2003-04, SPL was one of the world’s largest power transmission company
with presence in Botswana, South Africa, Ghana, and Algeria. ATSL would use
SPL's credentials to expand its global footprint and would be the sole supplier of
towers and conductors to them.
SPL is also looking at possibilities of exploring the US and Canadian markets.

Post acquisition in April 2008, SPL's order book is expected to become fourfold;
with net margins at ~2% for CY10E. Over next two years we estimate margins to
expand, as currently, SPL has: (i) high overheads; and (ii) competition from
domestic players. Once sourcing from ATSL begins, margins can potentially
improve.

Exhibit 21: Key assumptions - SAE Power Lines

mn Euro CY07 CY08 CY09E CY10E CY11E
Revenues 24.2 29.7 55.0 75.0 97.5
EBITDA -2.4 -2.7 2.1 4.5 6.8
PAT -2.5 -2.8 0.6 1.9 3.9
Exhibit 22: Order book & margins

mn Euro CY08 CY09E CY10E CY11E
Order book 20 71 123 173
growth % 255 73 41
EBITDA margins 3% 3.7% 3.9%
PAT margins 1% 1.5% 2.3%
Valuation of SAE Power Lines

Valuation of SAE Power Lines may range from Rs8.4-17.4/share over CY10-11E
once the company returns to profitibality.
Exhibit 23: Valuation

SAE Power lines (mn Euro) CY10E CY11E
SAE Power Lines Revenue 75.0 97.5
SAE Power Lines EBITDA 4.5 6.8
SAE Power Lines PAT 1.9 3.9
P/E (x) 10 10
Equity Value 18.8 39
Total 18.8 39.0
INR Value (Rs mn) 1138 2367
Value attributable (Rs/Share) 8.4 17.4
Real estate - no clear visibility

GIL has interests in real estate and holds 75.1% stake in Gammon Realty (GR).
GR has a landbank of 38 acres in Bhopal and five acres in Andheri, a Mumbai
suburb. As of March 2009 GIL has invested Rs150mn as equity contribution in
GR. On a DCF basis we value GR at Rs748mn though we have not included this
in our SOTP due to lack of visibility of the projects as well as the overall slowdown
in the real estate market.

Domestic business to see recovery

17% order book CAGR over FY09-11E
GIL operates in multiple business segments - key verticals are in transportation,

transmission lines, energy, environment, pipelines etc. Currently 46% (Rs66.2bn)
of GIL's order book is constituted by transportation (includes 20% order from
GIPL), power, 22%; transmission lines, 15% and the remainder in buildings, cooling
towers and chimneys. We expect the order book to grow at 17% CAGR over
FY09-11E to Rs174.4bn.
Exhibit 24: Standalone order book Exhibit 25: ATSL order book
(mn Rs) (%) (mn Rs) (%)

140,000 45 35,000 35
120,000
36 28,000 28
100,000
80,000 27 21,000 21
60,000 18 14,000 14
40,000
9 7,000 7
20,000
- - - -
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-08 Mar-09 Mar-10 Mar-11
Order book growth % Order book growth %
We expect GIL standalone order book to grow at 15% CAGR over FY09-11E to
Rs141bn and ATSL's order book to grow at 29% CAGR to Rs33.2bn.
Exhibit 26: Order book mix Exhibit 27: Total order book growth
(mn Rs) (%)

Hydraulic & Industrial 40
Hydro Irrigation Structure & 150,000
Power 3% Buildings 32
Structures 3%
8%
100,000 24
Environment
& Pipelines 16
11% 50,000
Energy 14% 8
Power
transmission Transportati
on - -
and
distribution engineering Jun-07 Mar-08 Mar-09 Mar-10 Mar-11
15% 46% Order book growth %
Going forward we expect the contribution of transmission lines to increase owing

to higher growth in ATSL's order book. Also, with capacity expansion nearing
completion, GIL has enough headroom to increase capacity utilisation.

23% revenue CAGR over FY09-11E

We expect GIL's revenue to grow at 23% CAGR over FY09-11E to Rs55,227mn.
Such robust growth is led by 29% CAGR in the power and transmission segment
(ATSL), 27% CAGR in transportation, 20% CAGR in energy projects; while the
other segments are expected to grow at 15% CAGR.
Exhibit 28: Standalone revenue Exhibit 29: ATSL revenue
(mn Rs) (%) (mn Rs) (%)

50,000 40 15,000 240
40,000 32 12,000 190
30,000 24 9,000 140
20,000 16 6,000 90
10,000 8 3,000 40
- - - (10)
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Jun-07 Mar-08 Mar-09 Mar-10E Mar-11E
Net Sales growth % Net Sales growth %
Source: Company, Ambit Capital Research estimates
We expect standalone revenue to grow at 21% CAGR over FY09-11E to

Rs41,033mn and model for ATSL's revenue CAGR at 29% to Rs14,114mn.
Exhibit 30: Revenue mix FY10 Exhibit 31: Total revenue trend
(mn Rs) (%)

Hydraulic & Industrial
Structure & 60,000
Irrigation 60
2% Buildings
50,000
Hydro 7% Transportati 50
Power on 40,000
Structures engineering 40
9% 27% 30,000
30
Environment 20,000 20
& Pipelines Power
11% transmission
10,000 10
and
Energy 19% - -
distribution
25% Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
Revenue growth %
The transportation segment will likely be the key contributor to our FY10E sales
at 27%, ATSL should contribute 25% and energy projects including hydro
structures are expected to contribute about 28% to revenue.
Operating profit to grow at 28% CAGR to FY11E

GIL endeavors to maintain operating margins in the 10-10.5% band during
FY09-11E. OPM, which was at 10.1% in FY08, witnessed 95bps contraction to
9.2% in FY09 owing to two big projects in Assam and J&K being suspended,
resulting in lower topline. Also, cost overruns in some fixed price contracts from
GIPL have resulted in zero margins in these captive projects. Going forward we
expect GIL's operating margins to expand. We peg OPM at around 10.2% for
FY10E and 10% for FY11E (lower on account of ATSL). Operating profit is estimated
to increase to Rs4,312mn in FY10E (YoY growth of 29%) and thereafter to
Rs5,513mn in FY11E (28% YoY), resulting in 28% CAGR over FY09-FY11E.
Exhibit 37: Standalone EBITDA margin & growth Exhibit 38: ATSL EBITDA margin and growth
(%) (%) (%) (%)

12 20 280
55
10 230
45 15
8 180
35
6 25 10 130
4 15 80
5
2 5 30
- (5)
- (20)
FY07 FY08 FY09 FY10 FY11
EBITDA Margins growth % EBITDA Margins growth %
Standalone operating margins are expected to improve from 8% in FY09 to 9.5%

in FY10E and 9.8% in FY11E. Likewise operating profit is expected to grow at
34% CAGR over FY09-11E to Rs4,031mn while ATSL's margins are expected to
contract from 13% in FY09E to 12% in FY10E and 10.5% in FY11E; and ATSL's
operating profit is expected to grow at 16% CAGR over FY09-11E to Rs1,482mn.
Exhibit 39: EBITDA mix FY10E Exhibit 40: Total EBITDA margin and growth
ATSL 30% (%) (%)

12 50
40
8
30
Gammon 20
standalone 4
70% 10
- -
EBITDA Margins growth %
GIL's operating profit mix for FY10E has 70% contribution from Gammon
standalone and 30% contribution from ATSL.
Profit to grow at 20% CAGR to FY11E

GIL's net profit grew 63% YoY to Rs1,405mn in FY09 due to consolidation of the
high-margin ATSL business, which was not present in FY08. Excluding ATSL,
profit growth was nearly flat due to drop in margins on lower revenue booking,
as two projects were suspended. Ahead, net profit of the company is estimated
to grow to Rs1,413mn in FY10E, registering 0.5% YoY growth, then to Rs2,029mn
in FY11E with growth of 43.5% YoY i.e. at 20% CAGR over FY09-FY11E.

Exhibit 41: Standalone PAT margins and growth Exhibit 42: ATSL PAT margins and growth
(%) (%) (%) (%)

4 12 40
90
3 60 30
8
30
2 20
-
4
1 10
(30)
- (60) - -
FY07 FY08 FY09 FY10 FY11 FY07 FY08 FY09 FY10 FY11
PAT margins growth % PAT margins growth %
Standalone net profit is expected to grow at 19% CAGR ( FY09-11E) to Rs1,200mn

while ATSL's net profit is expected to grow at 22% CAGR over FY09-11E to
Rs828mn. Expect net margins to expand from 3.3% in FY10E to 3.7% in FY11E.
Exhibit 43: PAT mix FY10E Exhibit 44: Total PAT margins and growth
(%) (%)
4
90
Gammon 3 60
ATSL 52% standalone
48% 30
2
-
1
(30)
- (60)
PAT margins growth %
Source: Company, Ambit Capital Research estimates
GIL's net profit mix for FY10E has 48% contribution from Gammon standalone
and 52% contribution from ATSL, reflecting higher net margins for ATSL.

B/S Manageable; Coverage Ratios

To Improve
Return ratios compressed owing to high BOT investments
Overall, during FY04-06, GIPL's RoCE and ROEs have been in the 16-25% range
and have deteriorated with time. This is largely owing to a change in business
strategy from 'only' cash contracts to one that is a mix of cash and a long-
gestation BOT infra model via investment in subsidiaries. With these projects
achieving commercial operations, return ratios are expected to improve. On a
standalone basis, post stripping of the investment, loans and advances to
subsidiaries, we note the recalculated return ratios trend upward.
Exhibit 45: ROCE & ROE

% FY07 FY08 FY09 FY10E FY11E
ROCE
GIL-overall 9.5 7.9 10.2 8.0 9.2
GIL* 13.7 12.3 15.6 11.7 12.4
ROE
GIL-overall 9.0 7.4 10.4 8.4 9.8
GIL* 15.1 14.5 22.1 17.7 17.2
Source: Company, Ambit Capital Research * excluding investments, Loans to subs.
D/E less than 1

We believe at 23% revenue CAGR over FY09-11E, the D/E ratio of 0.8x would lie
within the manageable limit. Historically, D/E has been as high as 1.1x in FY04.
Exhibit 46: D/E trend

D/E FY07 FY08 FY09 FY10E FY11E
GIL 0.4 0.3 0.7 0.7 0.6
Credit ratios - expected to improve

Coverage ratios are expected to improve with debt/EBITDA improving from 3.4x
in FY09 to 2.7x in FY11E while EBIT/I is expected to improve to 2.8x in FY11E.
Exhibit 47: Coverage ratios

Coverage ratio Year GIPL
DEBT/EBITDA FY07 2.1
FY08 1.8
FY09 3.4
FY10E 3.3
FY11E 2.7
EBIT/I FY07 3.9

FY08 3.3
FY09 3.0
FY10E 2.6
FY11E 2.8
Exhibit 48: Balance sheet

Year to March (Rs mn) FY07 FY08 FY09 FY10E FY11E
Cash & equivalents 960 381 514 1,438 1,021
Debtors 3,034 5,172 13,712 11,150 14,116
Inventory 5,290 7,050 10,111 11,341 14,873
Loans & advances 4,786 4,962 8,701 9,368 11,355
Investments 2,240 1,718 2,206 2,241 2,241
Fixed assets 7,015 7,915 9,834 12,557 13,254
Current liabilities & provisions 7,727 10,768 19,005 14,783 19,354
Total assets 15,597 16,429 26,073 33,312 37,505
Debt 3,715 3,771 9,723 12,678 13,422

Preference share capital 0 0 1,050 1,050 1,050
Deffered tax liability 379 372 544 528 575
Others 18 73 44
Total liabilities 4,094 4,142 11,334 14,329 15,091
Shareholders' equity 177 177 217 243 275
Reserves & surpluses 11,326 12,110 14,521 18,741 22,139
Total networth 11,503 12,287 14,738 18,983 22,414
Net working capital (520) (1,033) (7,104) (3,557) (3,913)
Net debt (cash) 2,755 3,390 9,209 11,240 12,401
Total liabilities & equities 15,597 16,429 26,073 33,312 37,505
Exhibit 49: Income statement

ear to March (Rs mn) FY07 FY08 FY09 FY10E FY11E
Operating income 18,038 22,788 36,579 42,595 55,227
% growth 26.3% 60.5% 16.4% 29.7%
Operating expenditure 16,248 20,483 33,234 38,283 49,714
EBITDA 1,791 2,306 3,345 4,312 5,513
% growth 28.8% 45.0% 28.9% 27.9%
Depreciation 352 462 640 757 805
EBIT 1,438 1,844 2,705 3,555 4,708
Interest expenditure 486 596 1,053 1,351 1,704
Non-operational income/exp (61) 124 434 (53) 79
PBT 892 1,372 2,087 2,151 3,084
Tax 447 510 682 737 1,055
PAT / Net profit 445 861 1,405 1,413 2,029
% growth 93.6% 63.1% 0.6% 43.5%

Exhibit 50: Cash flow statement

Year to March (Rs mn) FY07 FY08 FY09 FY10E FY11E
PBT 892 1,372 2,087 2,151 3,084
Depreciation 352 462 640 757 805
Interest 486 596 1,053 1,351 1,704
Tax (447) (510) (682) (737) (1,055)
Net working capital (520) (1,033) (7,104) (3,557) (3,913)
Cash flow from operating activities 763 887 (4,007) (36) 624
Capital expenditure (3,573) (1,384) (2,654) (3,541) (1,501)
Others (24) 22 95 116 (29)
Investments (906) 521 (488) (35) 0
Cash flow from investing activities (4,503) (840) (3,047) (3,460) (1,530)
Incr (decr) in borrowings 2,043 48 6,124 2,939 792
Issuance of equity 1,800 (77) 1,065 2,832 1,402
Preference share capital 0 0 1,050 0 0
Interest paid (486) (596) (1,053) (1,351) (1,704)
Cash flow from financing activities 3,357 (625) 7,187 4,420 490
Net change in cash (383) (579) 133 924 (417)
Closing cash balance 960 381 514 1,438 1,021
Exhibit 51: Ratio analysis

Year to March (%) FY07 FY08 FY09 FY10E FY11E
EBITDA margin (%) 9.9 10.1 9.1 10.1 10.0
EBIT margin 8.0 8.1 7.4 8.3 8.5
PAT Margin (%) 2.5 3.8 3.8 3.3 3.7
Return on capital employed 13.7 12.3 15.6 11.7 12.4
Return on equity 15.1 14.5 22.1 17.7 17.2
Current ratio (x) 1.3 1.6 1.6 2.1 2.0
Exhibit 52: Valuation parameters

Year to March FY07 FY08 FY09 FY10E FY11E
EPS (Rs) 3.3 6.3 10.4 10.4 15.0
Diluted EPS (Rs) 3.3 6.3 10.4 10.4 15.0
Book value per share (Rs) 84.8 90.6 108.8 140.1 165.3
P/E (x) 69.8 36.1 22.1 22.0 15.3
P/BV (x) 2.7 2.5 2.1 1.6 1.4
EV/EBITDA (x) 12.8 10.2 10.2 9.1 8.0
EV/Sales (x) 1.3 1.0 0.9 0.9 0.8

Gammon India - BUY with an

upside target of 251
Exhibit 53: Daily Chart
Source: MetaStock
 For the past two weeks Gammon India has been trading in a band of Rs210
to Rs240.
 On the daily chart, the stock is witnessing a Diamond pattern, which is a

consolidation pattern.
 The stock had a breakout (Rs224) but going forward, sustaining above this
breakout level, is very important.
 We expect the stock would sustain and march upward, as the MACD is also
curved in the Buy mode.
 On the upside, the stock could target Rs251 and support is at Rs224 and at
Rs210.

NOTES

Explanation of Investment Rating
Investment Rating Expected return

(over 12-Month period from date of initial rating )
Buy >15%
Hold 5% to 15%
Sell <5%

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AMBIT CAPITAL Tuesday 30, March 2010

BUY At Inflexion PPoint

Perfm(%) 1M 3M 12M YTD

Company Financial Snapshot

Profit and loss (Rsmn)

Balance sheet (Rsmn) Cash flow (Rsmn)

Company snapshot Ratings

GAMMON INDIA 30 MARCH 2010 2

Exhibit 2: 1 year forward P/E Exhibit 3: 1 year forward P/BV

Exhibit 4: SOTP valuation

GAMMON INDIA 30 MARCH 2010 3

Peer Group Comparison

GAMMON INDIA 30 MARCH 2010 4

Exhibit 6: Order book

(mn Euro) 498 933 (mn Euro)

Source: Company, Ambit Capital Research

Order book to grow 25% CAGR over CY09-11E

Exhibit 7: International order book

GAMMON INDIA 30 MARCH 2010 5

Exhibit 8: Breakdown in order book Exhibit 9: Order book - margin profile

Order Book EBITDA margins

Old New order

International acquisitions to turn around in CY10E

Exhibit 10: Key financials of international subsidiaries

GAMMON INDIA 30 MARCH 2010 6

Positive Profitability Trend - Builds A

Exhibit 11: Sofinter financials

Ansaldo-GB Engineering JV - focus on super-critical segment

We are positive on Ansaldo-GB Engineering India

Exhibit 12: Super-critical players

GAMMON INDIA 30 MARCH 2010 7

Exhibit 13: Capacity of new players

Toshiba-JSW 500-1000 MW/ 2nd Sep 2008 Jan-2011

Estimate Rs30bn order book by FY12-13E

Exhibit 14: Key assumptions - Ansaldo-GB

Super-critical turbine capacity build-up in India to take time

GAMMON INDIA 30 MARCH 2010 8

Exhibit 15: Key assumptions - Franco Tosi

Power to add value from CY11E; can add Rs21/sh to SOTP

Exhibit 16: Valuation of the power business

GAMMON INDIA 30 MARCH 2010 9

BOTs offer mix of annuity and vol./traffic driven earnings visibility

Exhibit 17: GIPL - projects

GAMMON INDIA 30 MARCH 2010 10

ATSL growth trajectory to continue

GAMMON INDIA 30 MARCH 2010 11

Capacity expansion puts ATSL on a par with industry leaders

Exhibit 19: ATSL Peer group

Transmission tower - breakdown of materials

Exhibit 20: Tranmission tower material breakup

Acquisition of SAE Power Lines to augment global footprint

SPL is also looking at possibilities of exploring the US and Canadian markets.

GAMMON INDIA 30 MARCH 2010 12

Exhibit 21: Key assumptions - SAE Power Lines

Exhibit 22: Order book & margins

Valuation of SAE Power Lines

Exhibit 23: Valuation

Real estate - no clear visibility

GAMMON INDIA 30 MARCH 2010 13

Domestic business to see recovery

GIL operates in multiple business segments - key verticals are in transportation,

(mn Rs) (%) (mn Rs) (%)