Gammon India: In the middle of liquidity crunch

The company announced its debt restructure plan, stake fell 6% on the news

Facing liquidity issues, India's leading engineering and construction company, Gammon India recently announced its plan to restructure its debt with the lenders through the corporate debt restructuring. Though this should have had a positive rub-off on its share price instead its stock fell almost 6% post the announcement.

Currently, the stock is trading at Rs 25.30 per share. Apart from the debt issue the bigger concerns is its operating environment and operational issues in business. The company is facing a lot of challenges including unfavourable industry environment, lack of fresh orders, slow execution, falling order book, higher working capital needs and finally increase in debt and thus pressure on financial liquidity.

Debt restructuring could be positive, but analysts say that this could take time and stock may not react positively considering the business environment is yet to improve to make the restructuring effective.

The company had good pipeline of construction projects and the order book was almost Rs 15,000 crore in March 2012. Higher order book enabled the company to grow in terms of sales, but that was accompanied by the pressure on the balance sheet. During 2012 the company made a sales turnover of about Rs 8080 crore.

However this also led to higher inventory and debtors in the books. In FY12 its working capital stood at Rs 3,256 crore which was almost 40% of the turnover of the company. Higher working capital needs and cash needed to manage day-to-day business led to higher borrowings.

Its debt as on March 2012 stood at Rs 9,103 crore, which was significantly high in view of its net worth of just Rs 2,173 crore in FY12. Though debt helped in terms of business growth and meeting its liquidity issues, but this also meant higher interest outgo.

In FY12, the company incurred an interest cost of Rs 704 crore, which was over 38% higher compared to FY11. This again drained the cash flows of the company leading to liquidity issue. The cash flow of FY12 indicates that the company is able to garner enough cash from business and in fact has borrowed to deploy more money in the business.

CARE Ratings earlier in September 2012 revised its debt ratings on account of the liquidity strain reflected in the consistently high working capital utilization levels, significant increase in the short-term borrowings in FY12 which it said that exposes the company to refinancing risks, continued weakening of debt coverage indicators and capital structure. It also raised concerns over substantial off-balance-sheet exposure in the form of corporate guarantees and other financial support extended to its group companies and company's exposure to risky real estate projects through its subsidiaries.

The problems have compounded as industry is facing slowdown and client side issues relating to delay in payments. The financial performance of the company is severely impacted as seen in recent quarterly results. In December quarter, the company paid 30% higher interest, compared to a year ago period, and reported net loss of Rs 261.6 crore.