Gammon Infrastructure Projects (GIP); a part of Gammon Group, is in the business of investing, developing, operating, and maintaining infrastructure projects on a public-private partnership (PPP) basis. GIP currently undertakes and develops projects such as roads, bridges, ports, hydroelectric power projects, and biomass power projects on a PPP basis.

In addition, the company has also identified urban infrastructure, airports, mass rapid transit systems, power transmission lines, and special economic zones as areas of focus for project development. Currently, GIPL has 14 projects in its portfolio, of which four are already in the operational phase, seven are in the development phase, and three are in the pre-development phase.

Plans

The company plans to invest Rs 89.60 crore in its subsidiary Sikkim Hydro Power Ventures Ltd (SHPVL) formed for developing the Rangit-II Hydroelectric Power Project in Sikkim.

The infrastructure company plans to infuse Rs 51 crore in its subsidiary Mumbai Nasik Expressway Ltd (MNEL) formed for construction of the 99.5km-long Vadape-Gonde section (between Mumbai and Nasik, four lanes) of NH-3 on a built-operate-transfer (BOT) basis.

It would invest Rs 36.89 crore in its subsidiary Gorakhpur Infrastructure Company Ltd (GICL) formed for the design, construction, finance, and maintenance of the 32km-long four-lane bypass to Gorakhpur on NH-28 in Uttar Pradesh.

The company intends to use around Rs 24.15 crore for investing in its subsidiary Kosi Bridge Infrastructure Company Ltd (KBICL) formed for the design, construction, finance, and maintenance of the 1.8 km-long four-lane bridge across river Kosi, including the 8.2 km-long approach roads and a guide bund and an afflux bund on NH-57 in Supaul district of Bihar. In order to repay its loan, the company plans to utilise around Rs 10 crore.

Investonomics

The company currently has 14 projects. The projects are geographically dispersed across various states in India erecting roads, bridges, ports, hydropower projects, and biomass power projects. Out of the total 14 projects, six are on an annuity basis, three on an annuity and toll basis, and the balance five on a toll basis.

The company is among the first companies in India exclusively participating in infrastructure development through the PPP model. As an early entrant in the infrastructure development business with already operational projects, the company has the necessary experience in executing important projects. It has a good track record of completing projects much ahead of their schedules.

This would stand in good stead for it and help it to successfully bid for a bigger and greater number of projects, ensuring a continued growth momentum in its business operations. Also GIPL (being a subsidiary of Gammon India) could milk on the Gammon India brand name and experience in executing projects.

b) Revenue recognition

Through its infrastructure development business the major source of revenues is toll fees collection from the users. The company earns an annuity income from some of its build, own, transfer (BOT) projects, which is recognised on a time basis over the period during which the annuity is earned. It also derives revenues of berth hiring, dust suppression, cargo handling, plot rent, wharfage and barge freight, and other charges. It derives revenues from operations & maintenance (O&M) contracts.

c) Future projects

Currently, GPIL has 14 projects. It has placed bids for various other projects. In two of the projects, the company has been declared as the preferred bidder. This includes the hydropower project in Yangthang, Himachal Pradesh. It is also awaiting a letter of intent for a multi-purpose port at Bedi, Gujarat. Apart from these, the company has already bid for the development of infrastructure for water supply in Aurangabad. The company is also qualified for ten other projects, including a mass rapid transit system project in Hyderabad.

Valuation

The issue has been assigned IPO grade 4 out of 5 by CARE, which displays above-average fundamentals. The company marked an excellent 92.3% growth in its topline in FY2007, while the operating profit increased twice to Rs 116.1 crore. The completion of new projects would add to the financial performance.

However, one must take into account the long gestation periods of its projects. A delay in completion of projects could adversely impact revenues of all projects undertaken by GIPL. It may also lead to penalties and escalated costs, and more importantly, delay in revenue flow. In case of annuity projects, the company derives a majority or all its revenues from a single client. Any default in payment by the client would adversely impact the cash flow and the performance of the company.

Also, to draw a parallel would be difficult considering the nature and diversity of its business. Investors with a long-term horizon must invest in this offering, considering the long-term realisations of the company?s projects.