Gammon Infrastructure: Debt down, looking at next leg to drive growth

Sale of assets will help it pare debt; company plans to acquire new assets thereafter to drive growth

Gammon Infrastructure's move to sell its stake in nine projects (six road and three power projects) will fetch it Rs 563 crore besides lowering its debt. It will also help it streamline the stretched balance sheet. 

The slowdown in the infrastructure sector has taken its toll on players in the space. Many BOT developers (like Sadbhav, ITNL) and asset owners (like GMR, GVK, Gammon Infra) were not generating enough cash from their operational projects to fund the equity requirement for their new projects or were having highly stretched balance sheets. Thus, the street and analysts expected many of these companies to put their road BOT projects up for sale.

Gammon has moved ahead on this front. The strategy of the company will be to pare its debt, and post de-leveraging its balance sheet raise equity for new assets.

The company’s MD KK Mohanty has said they want to become a buyer from being a seller currently. 
 

The company had about Rs 4,000 crore of debt on books. About Rs 2,000 crore was from operating assets and Rs 2,000 crore from under construction assets. Thus with sale of its assets, the company not only gets Rs 563 crore as upfront payment for reducing debt but says Mohanty “there will be more to follow”. 

The company will get Rs 100 crore as milestone payments associated with these projects as well as a subsidiary waving off Rs 285 crore advances and another Rs 85 crore other benefits accruing. The company also has some interest left in the past contingent receivable dues, which upon settlement can add more. In all, Mohanty expects about Rs 1,718 crore reduction in debt overall. Once this happens there will be substantial reduction in debt and also the interest costs. 

The projects being sold are operational too and were accruing about Rs 500-600 crore per annum to revenues and had Ebidta margins of around 55%. The company during the June 2015 quarter had clocked Rs 119.45 crore Ebidta while for nine months ending June 2015 the same was at Rs 687.21 crore. However, the main stress was related to finance costs that stood at Rs 53.6 crore in quarter and Rs 168.8 crore for first nine months taking away the benefits at operating level too. The net profit stood at just Rs 3.8 crore and Rs 18.2 crore for the quarter and the nine months respectively.

The debt reduction leading to reduced interest outgo can lead to improved profitability and also company’s rating being upgraded from lenders. A key monitorible will be the quantum of operational profits the existing projects generate as well as how soon the company can put on stream the existing under construction projects, which will provide confidence to the street.

The investors will also have to watch out for other developments as indicated by management on debt reduction and then fresh assets they acquire to drive growth. Already after the buzz of stake sale the stock has moved up 14.5% in last four trading sessions to close at Rs 11.32 on Friday.