Gayatri Projects Ltd. CMP: Rs342 BUY with a target price of Rs517
With an order book/FY06 sales of 6.4x on account of a tall order intake of Rs10.9bn during FY06, Gayatri Projects Ltd (GPL) is set to execute higher value of contracts in the next four years, than that completed in last 25 years. The oldest construction group in Hyderabad has an order book of Rs23.9bn, primarily in roads and irrigation verticals with an average gestation period of 2.5 years, expected to drive topline CAGR of 41.7% during FY06-08. Furthermore, most equipment ordered through IPO proceeds will be in possession by January 2007, accelerating growth going forward.
GPL enjoys one of the highest operating margins among construction peers. OPM of 17.5% during FY06 is on account of its policy to own nearly 100% of equipments and refrain from subcontracting. The company also benefited from better pricing power for certain Andhra Pradesh irrigation projects as it was one of the few to prequalify. However, market cap/sales remains one of the lowest at 0.8x when most peers trade at 2x to 3x market cap/sales. We foresee this anomaly correcting over a period of time.
GPL has a good BOT presence for its size of operations. It has one Meerut-Muzzafarnagar toll based project, which has achieved financial closure and two annuity projects in Uttar Pradesh to be constructed by 2009. We assign a value of Rs81.8 per share of GPL to these three BOTs; basis 1x P/BV of GPL’s equity infused for the toll project and 0.8x and 0.9x for the two annuities.
Cost management, availing lower cost debt and lower tax rate, as indicated by the GPL management, is estimated to result in bottomline CAGR of 7 1.8% during FY06-08. GPL plans to claim section 80(A)I taxation benefits and effective tax rates are likely to fall to the region of 12-15% of PBT during FY07 and FY08 from 35% in FY06.
Adjusted for assigned BOT value, the stock trades at 8.2x FY07E and 4.6x FY08E EPS, making it one of the most attractive construction counters. Similarly, adjusted EV/EBIDTA of 4.6x FY08E earnings, suggests that valuations are attractive. We recommend BUY with one-year target price of Rs517. We expect a re-rating to take place and the GPL stock will still trade at discount to most peers at 9.9x FY08E EPS at our target price.