The Hindu Business Line : Gayatri Projects: Invest

Investors can consider taking exposure in the initial public offering of Gayatri Projects. In the price band of Rs 275-295, the offer is priced at 15-16 times its 2005-06 post-issue per share earnings. The valuations are comparable to that of its listed peers and, hence, may not help it command a substantial listing premium. However, given the opportunities in the infrastructure space, Gayatri Projects may stand to gain over two years.

Better earnings visibility due to the company's presence in the annuity business, its ability to forge tie-ups with various players for meeting technical and financial pre-qualification criteria, comfortable operating margins, and a satisfactory order-book also lend support to our view. The company has a presence primarily in the roads and irrigation segments.

Ownership-based model

Gayatri Projects is upgrading itself from a civil construction contractor to executing projects based on the ownership-based model.

The risks are higher in the latter as revenues accrue over a longer time-frame, say 20-30 years, and are difficult to predict.

However, higher proportion of annuity contracts (a fixed amount is paid every year) in its unexecuted order-book gives better earnings visibility in the medium-term and reduces risk.

Mr T. V. Sandeep Reddy, MD.

The success in this model will also depend on the company's ability to forge tie-ups with various other established players to satisfy pre-qualification requirements — both technical and financial.

Being a small player with a net worth of Rs 120 crore (post-issue) and revenues of Rs 370 crore, the company may not be in a position to bid for big projects.

This offer may not increase the company's bidding capacity substantially as the net worth expansion will be minimum.

However, the company's ability to forge technical and financial tie-ups may enable it to compete for ownership-based projects.

Gayatri Projects has entered into joint-ventures with various construction companies such as Simplex and Jaiprakash to satisfy pre-qualification criteria. It has also tied-up with IDFC for financial support.

Though these partnerships could give it a slice of the ownership pie and broad-base its abilities, it may drag down the overall operating margins as profitability is usually lower in such ventures.

Order-book

The unexecuted order-book at three times the company's 2006 revenues is satisfactory. Orders worth Rs 1,100 crore are to be executed over three-four years.

However, this excludes the various BOT and annuity projects worth Rs 790 crore that would be executed through joint ventures.

Of the total ownership-based projects, annuity projects account for Rs 630 crore.

The higher proportion of annuity projects is comforting as the revenue visibility is higher. Operating margins at 16 per cent are higher compared to most peers.

Offer details

Gayatri Projects is raising Rs 80-85 crore from the market to provide an exit route to Videocon Industries, a private equity investment in the company and to invest in a BOT project.

The offer is lead managed by Allianz Securities. The offer opens on September 26 and closes on September 29.

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