Gammon brings home the bacon

Indian construction company raises funds for development.

Construction company Gammon India raised $87 million last Friday (January 20) from the sale of Global Depositary Receipts backed by new shares through Macquarie Securities.

The company sold a total of 9.18 million units - each equivalent to one share - at $9.47, which translated into Rp420 per share and a 6.85% discount to Friday's close on the Mumbai Stock Exchange. The deal had been marketed on a discount range of 0-9%.

The reg.-S offering accounts for about 10% of the post-issue share capital and has a $13 million greenshoe, which may be exercised after the GDRs start trading on Friday.

The order book was said to have been between five and 10 times covered after a pickup in interest in the final two days with about 45 investors buying in. The road show started on January 12 and visited Hong Kong, Singapore and London.

Asian investors walked off with 65% of the deal, while 25% went the UK and 10% to offshore US accounts. The foreign ownership of the company will amount to about 40% after the deal.

Gammon India is one of the largest players in its industry and is seen as a key beneficiary of a predicted boom in construction given its capability to handle large ticket and cross-segment complex projects. It has an order book coverage of slightly less than five years.

Analysts say the company should also be able to tap into an expected increase in infrastructure spending, which still only accounts for about 4% of GDP in India, up from 3.3% in 2003, but well below the more than 10% of GDP in China.

According to a recent research report by India's B&K Securities, the country's construction industry is expected to see total investment of Rp4,685 billion ($106 million) and Rp7,098 billion of infrastructure spending in the next five to seven years, led by the planned investment for the national highway development programme.

The share price rose 2.09% yesterday to an all-time closing high of Rp460.3 and has jumped 215% in the past 12 months.

However, B&K Securities analyst Nirbhay Singh noted in hist report that the market is already pricing in the future estimated earnings growth of 33.3% CAGR in 2004-2008.

At a P/E of 31.8 times for 2007 and 24.7 times for 2008, valuations are looking rich at current levels, especially given the EPS dilution resulting from the GDR issue, he said, but retained a market performer rating with a positive bias on the stock.

The proceeds will be used to fund the growth of the company within engineering, procurement and construction as well as BOT (Build, Operate, Transfer) projects. Part of the money will also be used for general working capital and to reduce debt.

Following the deal, the company's free-float will increase to 66.9% from 63.3%, or to 67.4% post-shoe.

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