Gayatri Projects Limited - Hands Down

IPO is back and it is a nice sight to see the number of companies rushing in to cash this opportunity before the stock market crashes. FIEM is currently running and Minar, GPL (this one), JHS and Hanung on the pipeline. So what is nice of this IPO. I saw the others and thought something on projects to be an interesting one as there could be something on infrastructure.

There are times when you wonder how some companies, that have done all the negative things can still raise money. This is one company that falls in that category.


Issue Details

No of Equity Shares : 29 Lakhs
Objective of the Issue : Videocon Aplliances and Videocon Industries are diluting their stake and there is a fresh issue of 10 Lakh shares
Employee Quota : Just 1 Lakh compared to the others that I have seen in percentage terms
Post Issue Dilution : 29% will be for public
Price : Rs. 275 -Rs. 295
Issue Size : Rs 79.75 crores to Rs. 85 crores
Dates : September 26-29, 2006
P/E : As of last years earnings it stands at 13-15 times


Overview of the Company

The company has been around for 16 years and has an experience in constucting over 600 kms of highways and 1113 kms of irrigation canals. It has a minor interest in building ports, airports, industrial works etc. It has experience in building dams (7 in total). It has a current book order of more than 1000 crores of which 40% constitute building of roads and irrigation completes the rest. Its joint ventures have a book size of Rs. 1350 crores with approximately 50% in road segment.


Objectives of the offer

The first objective of the company is to get a listing in BSE and it wants to giva an exit-option to its existing shareholders. The first part of the objective is something that is unique. This company is not in IT sector where the requirement for publicity is high. It is into key infrastructure projects and the financials, experience plays a higher degree of role than a brand name.The company is borrowing in excess of 28 crores of which 20 crores would go to fund an SPV and the rest is to retire its debt. It currently has debt in excess of 250 crores and I do not know how this small change of 8 crores will make any impact.


Understanding the Financials

• The company has close to 60% of its balance sheet in working capital. Of its current assets, 85% is locked in inventories, loans and advances and sundry debtors.
• The current D/E is close to 2.75
• Work Expenditure which contributes close to 80% of the cost has been reducing over the years, indicating some pricing power
• The company has had a strong cash flow from its operations last year. This is highly fluctuating for the company with negative CFO in 2003-04. The company has too much debt in its portfolio that is carrying with a higher cost.

Positives

• The company has recently got a working capital loan from a bank for Rs. 165 crores. As a bank has allowed this, the company's financial might be getting better with good projects on hand.
• Work Expenditure which contributes close to 80% of the cost has been reducing over the years, indicating some pricing power

Capital Structure

• Well, this issue will make the promoter richer by 62 times on the lower side. Apart from it, the company has been issuing shares to its promoters at face value. There has been no infusion of capital since 1994. However, the company has capitalized its reserves by giving bonuses to its existing shareholders. The plan for the IPO has been in place for the past year as the company gave a bonus last year.
• With this issue, Videocon will completely come out of the venture. 16% of the equity capital is held by IL&FS and 2i. This part of the equity capital is not sticky and they can sell their issue at any time of their choice.
• D/E is close to 2.75, an average running with its peers
  

Negatives

• Management is extremely poor and the details have been given on the risk section.
• Dividend policy of the company for one of its group companies is at a big doubt. The company was incurring losses from the start but the company declared dividend. I do not know from where did the money came from to declare the dividend.
• The company's debt book is simply stunning with average age of 10 years. The company does not look to be in a position to recover this money and it exceeds 100 crores.
• The company does not believe in maintaining its assets. No AMC has been taken on its assets and it has written that its assets in construction equipment etc as one of its key strengths!
• The company has given guarantees amounting to Rs.233 crores to its group companies.
• Interest Coverage Ratio is only 1.75 times, this is extremely low for a company that is heavily leveraged. Small changes in revenue can wipe out its profits.
• As its loans are secured, this can create a bottleneck in its operations. This ratio has been improving over the years, but still in a dangerous territory.
• The company is using the exit as a route to raise money too. The SPV has a cost of Rs. 20 crores and this issue is expected to give Rs. 27.5 crores for the company and the remaining money is used to retire its debt.

Risks

Management

• One of its groups companies has a criminal complaint for non-payment of a lease rental. Though it is for a small sum, it still raises some concern on the quality of management.
• Two of its companies have been suspended from trading for non-payment. The company paid the fees for re-listing last year. It looks like the company wanted to have a clean sheet before this IPO. Unfortunately, BSE is yet to give a clearance as these companies is yet to start commercial production.
• The litigation against the company is quite high at 80. Civil, Debt recovery tribunal and sales tax being the key ones. The total exposure in these cases is close to 90 crores. Group companies and the promoters have not been spared either.
• 11 of the 17 companies have negative networth.
• The company has been doing a lot of inter-firm transfers. A total of 250 crores have been reported in this section but then most of them are acceptable transactions

Interesting Facts

I do not know if this true. This security is for listing only in BSE and not in NSE. However, I got the prospectus from NSE. Videocon must not have been too happy with this venture. The investment has generated close to 16% p.a. since its investment in 1994 excluding dividends. With 16% of the capital held by FIs with no lock-in, this stock can open with some profit booking. However, the management has been so poor that I would not regret having missed this issue.The company has priced on relative earnings and the company has priced it on the lower side. However, consider the D/E of the company with its peers, it is still on the higher side and its RoNW is at best - average.


This stock is a pure exit strategy for Videocon and borrowing for the SPV. The company's financials are by no means strong. There are too many litigations indicating poor management. FIs can pull the price down at the open of this issue and as investor apart from the sector it is playing in, nothing else is close to being attractive.


Gayatri Projects - Hands down for this IPO