Gammon Infra sitting on projects worth 12,000 crores: MD

Kishore Kumar Mohanty, MD, Gammon Infra, in an interview with ET Now talks about talks about company's financial health and prospect. Excerpts:

ET Now: First if you could talk about the quarterly numbers, walk us through what went right for you because the bottom line saw a very good 73% jump despite tepid sales numbers, so if you could talk about the growth drivers and the laggards this quarter?
Kishore Kumar Mohanty: These are basically capital assets, so it is expected that the top line and operating expenses will be low going ahead because the management expenses, operating expenses will be very low. Going ahead it will be around 10% of the management operating expenses, rest will be all capital earnings. So that is in the expected line and secondly we have about three commissioned projects, the earnings from that is basically the top line. On the execution side, we have around 8-9 projects, which is getting commissioned this year. Naturally by the third quarter, fourth quarter, our top line will be going up in the current financial year.

ET Now: The cost of capital is going up for infrastructure companies and historically we have seen that every time when the cost of capital goes up and interest rates are moving up, profitability always remains under pressure?

Kishore Kumar Mohanty: There are two aspects to it. Yes, interest rate going ahead or going up is really a concern for the new projects but for the old projects, we have somehow locked up our interest. So that’s why the effect of interest is slightly minimised but going ahead, we expect the interest rates to sober now, so that this problem will be addressed.

ET Now: For this quarter, you have seen an operating margin jump of 70%. Are these levels sustainable?

Kishore Kumar Mohanty: If you understand the capital assets, infrastructure assets, most of the expenses come from the capital investments, so it is like an investment income. So there is not much operating expenses in these things, so initially the projects were in the commissioned stage. Now it has got to a mature stage, naturally there will be a jump and especially this year, there will be a further jump, might be 200-300% because there are five projects likely to be getting commissioned and going to a CoD stage.

ET Now: What’s the current order book status?

Kishore Kumar Mohanty: Presently we have around 12,000 crores projects, and this year we have a higher focus on new procurements. We expect to get another 10000 crores projects in current year, new projects in the road or in the urban development, water resources or in the port segment, so this year is looking to be very bright. We are absolutely focussed on the subject.

ET Now: Executable over what time period, the order book?

Kishore Kumar Mohanty: The present order book is executable between 1.5 years to 2 years time except might be one hydro project, which is in Himachal Pradesh, which will take might be between 3-5 years time.

ET Now: 10000 crores is a big number, from where will you get so many orders, government of India is not spending, state governments are not spending, private sector capex is also slowing down?

Kishore Kumar Mohanty: These are all PPP projects, public private partnership projects. Especially in the road sector, government has already declared nearly 70000 crores projects. We have presently qualified in different infrastructure segments around 174000 crores of projects. So out of 174000 crores of projects, if we bid even if at a 5%, 10000 crores does not look to be a big number. More so because the government spending are coming down, so more projects are getting diverted to the PPP structure, so the opportunity in the PPP structure is slightly higher. If you understand the Gammon Infra, Gammon Infra is an asset owning company in the infrastructure segment. It is just not the construction, Gammon Infra does not have any interest in the construction. So asset owning means more PPP projects, more PPP projects coming from different infrastructure segment, it will create more opportunity for this segment.

ET Now: Let’s talk about your rights issue. There are worries in the market that the company is facing funding gap at the parent level and the proceeds would go towards that. What’s the status right now?

Kishore Kumar Mohanty: If you understand again the capital asset business, especially the infrastructure business, in the infrastructure business, the capital is the key both debt and the equity. In the present committed projects, we have a further requirement of between 450-500 crores in next two years time equity commitments. If you get another 5000-10000 crores for this year, the minimum equity required would be again 500-700 crores. Equity raising and capital raising will be a continuous process in this type of business. For the present committed projects, we are going for a rights issue for the part funding of the equity requirement of the current projects.

ET Now: What’s the pricing that you are looking at?

Kishore Kumar Mohanty: Pricing is not yet decided. We are in discussion with the merchant bankers, most likely it will be around the market price.

ET Now: If I look at your holding pattern, the promoters currently own 75.5% stake, so if the rights issue sales through, the promoters will only end up increasing their stake?

Kishore Kumar Mohanty: No, in the rights issue, it is a proportionate offering to the retail investors as well as the promoters. Promoter is the Gammon India, so naturally the Gammon India is the parent, presently they will be giving a 74% of the rights issue. And the balance will be coming from the public, so it will not upset the shareholding to a large extent.

ET Now: You just said that the pricing of the rights issue would be at the current CMP, that’s Rs 18 or so?

Kishore Kumar Mohanty: The price is not exactly decided yet, we are in discussion with the merchant bankers and might be the SEBI also depending on whatever the strategy we take but yes, it will be in that range only.

ET Now: In the range of 18-19?

Kishore Kumar Mohanty: Yeah, 18-20 or 21 might be.

ET Now: Share three numbers with us, your top line guidance for the current year, which is FY12, your margin outlook and then your EPS estimate?

Kishore Kumar Mohanty: Our top line will grow a lot because we will have four or five projects commissioned this current year, so we are expected to get at least a 150% jump in the top line, which was this year it was 335. We should cross around 500 to 600 crores in the current year in the top line. Margins in this business, operating margin will be quite high. If you see two years down the line, the operating margin will be in the order of 80-85% because hardly 10-15% will be operational expenses. These are all capital investments. EPS to be very honest, these are in the initial stages, so there will be a cash flow mismatch and earnings in the initial stages will not be very perfect. PL account bottom line may not be very high because in an infrastructure project in the initial stages, there is a cash flow mismatch and the incomes will come once it has matured for a couple of years.