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AMBIT CAPITAL

I N I T IA T I N G C O V E R A G E

Tuesday 30, March 2010

Gammon India
At Inflexion Point Point
Initiating coverage with BUY: Target price Rs290
We initiate coverage on Gammon India (GIL) with a BUY and an SOTP target of Rs290 (valuing the company at Rs179/sh based on 12x FY11E earnings, GIL's stake in Gammon Infrastructure Projects (GIPL) at Rs88/sh (DCF-based, 40% holding company discount), international acquisitions at (Rs9/sh), treasury stock at Rs10/sh, Sadbhav Engineering stake at Rs4/sh.

BUY
Price Target Price Rs290 Market Capitalisation Rs274,39mn 52 week range H/L (Rs) Shares o/s (mn) 119.69 Reuters GAMM.BO Perfm(%) 1M 3M (US$611mn) 276/56 Daily vol (mn) 0.16 Bloomberg GMON IN 12M YTD Rs229 %Upside 27

Current valuation reflects acquisition write-offs
Our total valuation for Gammon's Power business ranges from Rs1- 22/sh over CY10E and CY11E. We model a stress case valuation of Rs221/sh for the stock assuming entire write-off acquisition debt of Euro97.5mn. Excluding GIPL, Power subsidiaries and others, the stock is trading at 8x (Rs118) our FY11E earnings.

India boiler business order inflow to be key re-rating trigger
We expect Ansaldo-GB Engineering to bag boiler orders worth Rs20bn (mix of sub & supercritical package) by 3QFY11E. This will likely be the key trigger for stock re-rating as capex has already been spent.

Absolute 4.8 0.9 303.5 0.9 Rel.to Sensex (3.1) (1.6) 117.3 (0.8) BSE Sensex 17,711 Source: Bloomberg Nifty 5,303

Gammon Infrastructure's valuation leaves scope for further upside
Based on our Initiating coverage report on GIPL dated 8th Feb 2010, we believe GIPL's current valuation does not reflect the inherent business value. With road projects’s nearing COD date and expected financial closure of other key infraprojects, we believe valuations would improve, leading to further upside.

Shareholding pattern (%)
Public 12% FII 28%

Prom. 23%

ATSL's capacity expansion in place - order book diverse
GIL's current order book of Rs144bn is biased in favour of high-growth sectors with 46% in transportation, 22% in power, 15% in transmission lines and the remainder in buildings, cooling towers and chimneys. This will result in continued traction as infrastructure spending picks up. ATSL is nearly through with capacity expansion and this would also result in ramping up the blended order book.

Corp 18%

Inst. 19%

Source: Bloomberg

Price performance
22,000 17,000 12,000 7,000 GMON (RHS) 300 200 100 0 Apr-09 Aug-09 Dec-09 Mar-10 Sensex

Risks
(i) Order flow slowdown; (ii) extended working capital cycle; (iii) raw material price increases; (iv) varying market value of subsidiaries; (v) ramp-up delays in BOTs; (vi) increase in interest rate; and (vii) funding issues. Exhibit 1: Key financials
YE March (Rs mn) Operating income EBITDA Net profit EPS (Rs) RoE (%) RoCE (%) P/E (x) FY07 18,038 1,791 445 3.3 15.1 13.7 69.8 FY08 22,788 2,306 861 6.3 14.5 12.3 36.1 FY09 36,579 3,345 1,405 10.4 22.1 15.6 22.1 FY10E 42,595 4,312 1,413 10.4 17.7 11.7 22.0 FY11E 55,227 5,513 2,029 15.0 17.2 12.4 15.3

Source: Bloomberg
Analyst Parikshit Kandpal Tel.: +91-22-3043 3201 parikshitkandpal@ambitcapital.com Dhirendra Tiwari Tel.: +91-22-3043 3241 dhirendratiwari@ambitcapital.com

Source: Company, Ambit Capital Research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to disclaimer section on the last page for further important disclaimer.

Ambit Capital Pvt Ltd.

Construction Sector

Company Financial Snapshot
Profit and loss (Rsmn) Net Sales Operating expenditure EBITDA Depreciation Interest expenditure PBT Tax PAT / Net profit Profit and loss ratios EBITDA margin (%) PAT Margin (%) P/E (x) EV/EBITDA (x) Dividend Yield (%) FY09 36,579 33,234 3,345 640 1,053 2,087 682 1,405 FY10E 42,595 38,283 4,312 757 1,351 2,151 737 1,413 FY11E 55,227 49,714 5,513 805 1,704 3,084 1,055 2,029

Order book mix FY10
Hydro Power Structures 8% Environment & Pipelines 11% Energy 14% Power transmission and distribution 15%
Source:: Company, Ambit Capital research

Hydraulic & Irrigation 3%

Industrial Structure & Buildings 3%

9.1 3.8 22.1 10.2 0.4

10.1 3.3 22.0 9.1 0.2

10.0 3.7 15.3 8.0 0.2

Transportati on engineering 46%

Balance sheet (Rsmn)
Total Assets Fixed assets Current assets Investments Current Liabilities/Prov. Total Liabilities Total Networth Total debt Others Balance sheet ratios (%) RoE RoCE Net Debt/Equity Total Debt/Equity P/BV (x) FY09 26,073 9,834 33,038 2,206 19,005 26,073 14,738 9,723 1,612 FY10E 33,312 12,557 33,297 2,241 14,783 33,312 18,983 12,678 1,651 FY11E 37,505 13,254 41,365 2,241 19,354 37,505 22,414 13,422 1,669

Cash flow (Rsmn)

22.1 15.6 62.5 66.0 2.1

17.7 11.7 59.2 66.8 1.6

17.2 12.4 55.3 59.9 1.4

FY09 PBT 2,087 Depreciation 640 Interest 1,053 Tax (682) Net working capital (7,104) Cash flow from operating activities (4,007) Capital expenditure (2,654) Investments (488) Others 95 Cash flow from investing activities (3,047) Incr (decr) in borrowings 6,124 Issuance of equity 1,065 Preference share capital 1,050 Interest paid (1,053) Cash flow from financing activities 7,187 Net change in cash 133 Closing cash balance 514

FY10E 2,151 757 1,351 (737) (3,557) (36) (3,541) (35) 116 (3,460) 2,939 2,832 0 (1,351) 4,420 924 1,438

FY11E 3,084 805 1,704 (1,055) (3,913) 624 (1,501) 0 (29) (1,530) 792 1,402 0 (1,704) 490 (417) 1,021

Company snapshot Low 1 Quality of earnings Domestic sales Net debt/Equity Working Cap. Req. Quality of mngmnt Depth of mngmnt Promoters Corporate Governance 2 3

Ratings High 4 5

GAMMON INDIA

30 MARCH 2010

2

GIL has traded at a one-year forward median multiple of 2.896 1. 40% holding company discount 5.4x. Construction Sector Investment Highlights Valuation bands Forward P/E and P/BV bands: During the period FY05-09. We believe a 40% discount on the P/BV multiple reflects the write-off of acquisition cost for the international subsidiaries.343 11.294 561 136 1.0x 0.5x Source: Bloomberg Source: Bloomberg Exhibit 4: SOTP valuation Particulars Gammon Standalone Gammon Infrastructure Projects Limited Gammon treasury shares post ATSL merger Investments in Sadbhav Engineering International Acquisitions International Acquisitions Total Source: Ambit Capital Research Segments Construction and ATSL Infrastructure subsidiary Treasury stock Investments Sofinter & Franco Tosi SAE powerlines Value 24.Ambit Capital Pvt Ltd. On P/BV.0x 3. Gammon India has traded at a one-year forward median multiple of 25x.8mn shares valued at CMP 30% holding company discount on market cap Valued at EV/EBIDTA of 6x CY10e at 20% discount to Alstom SAE Power lines at 10x P/E FY11e GAMMON INDIA 30 MARCH 2010 3 .138 40. Exhibit 2: 1 year forward P/E (Rs) 900 800 700 600 500 400 300 200 100 0 Apr-06 Apr-07 Apr-08 Apr-09 Exhibit 3: 1 year forward P/BV (Rs) 50x 35x 25x 15x 5x 900 800 700 600 500 400 300 200 100 0 Apr-06 Apr-07 Apr-08 Apr-09 5.116 Value/share 179 88 10 4 1 8 290 Methodology At 12x FY11E Earnings DCF. Currently the stock trades at 15x.5x 2.3x. and currently trades at 1. which would narrow as its subsidiaries turn profitable.

In the case of international subsidiaries. Ambit Capital Research IVRCL Infrastructure 143 17 21 10 190 47 163 116 116 11. losses have been reduced by 90% YoY and we expect the international power business to turn around in CY10E. GIL trades at 20% discount — at 8x FY11E EPS versus the sector multiple of 12x. the Andhra Pradesh government had waived the penalty for bridge collapse (in an order dated 18 January 2010) and given them clean chit. Ahead.0 11 25% Nagarjuna Construction 140 24 20 184 45 161 116 116 9. real estate and other investment. and (ii) the market factoring in writeoffs of the international power business. GAMMON INDIA 30 MARCH 2010 4 .A Current standalone value FY11e -EPS P/E . the NHAI had given a clean chit to Gammon although the matter is still under investigation and a report of the final investigation is still awaited.Ambit Capital Pvt Ltd. We believe that the risk is being overpriced as: (i) the Delhi Metro Rail Corporation (DMRC) has already given a clean chit to Gammon India while in the case of the Punjagutta flyover in Hyderabad. also. even with respect to pure play smaller cash contractors.5 12 36% Gammon India 179 88 0 23 290 111 229 118 118 15 8 - GIL trades at 25% discount to IVRCL and 36% discount to Nagarjuna Construction at the current market price after adjusting for BOTs . We believe the key reason for this underperformance is: (i) accidents at Delhi’s metro project. the Hyderabad site and Chambal bridge in Rajasthan. This makes Gammon India an attractive play. Construction Sector Peer Group Comparison Exhibit 5: Peer group Rs/Share Standalone BOT Subsidiary Real estate Other Investment SOTP/Share SOTP ex Standalone (A) Current Market Price (CMP) CMP .FY11e Gammon India discount Source: Company. the triggers stated above would be the key drivers for stock re-rating. with regard to the Chambal river bridge collapse. The Delhi government had recently awarded the prestigious Signature Bridge award to Gammon India after seeking approval from the DMRC. This ensures a level playing field for Gammon India for future government tenders.

legacy orders would command 7% margin. post GIL's acquisition. Exhibit 6: Order book (mn Euro) 1000 800 600 400 200 0 Franco Tosi SAE Power line Sofinter Total Order book 364 31% 71 10% 498 60% 933 100% (mn Euro) 1550 1350 1150 950 750 550 350 150 -50 CY08 CY09E Order book CY10E 460 933 1.500MW with a majority of orders in the 150-250MW sub-critical segment. while blended margins would be ~10%. Construction Sector Investment Rationale Robust global order book ramp-up. Italy contributes about 20% to GIL's order book. Ambit Capital Research Order book to grow 25% CAGR over CY09-11E GIL's international order book is expected to grow at 25% CAGR over CY09-11E with SAE Power Line recording the highest growth. FT's order book prior to acquisition was about Euro90mn. of which 40% would be new orders.Ambit Capital Pvt Ltd. GAMMON INDIA 30 MARCH 2010 5 . 1. new orders 15%.158 1. Exhibit 7: International order book mn Euros Order book Franco Tosi SAE Power line Sofinter Total Order book CY08 90 20 350 460 CY09E 364 71 498 933 CY10E 437 123 598 1158 CY11E 533 173 747 1453 CAGR % 09-11E 21 56 22 25 Source: Company. Sofinter has a power order book of about ~1. SAE Power Line's order book has grown from Euro20mn to Euro71mn. The order book would have a margin mix of three distinct categories . We model the power business to turn around in CY10E. Ambit Capital Research Sofinter and FT have a current order book of about US$1bn.453 120% 100% 80% 60% 40% 20% CY11E 0% growth YoY % Source: Company. We have not included any orders from Ansaldo-GB group's India operations in the Sofinter order book. which is expected to grow at 22% CAGR while FT will likely grow at 21% CAGR.7x CY09 sales Sofinter and FT have seen order book ramp-ups post stake acquisitions by GIL. As the order mix changes we expect Sofinter’s profitability to improve. This has ramped up to Euro364mn while Sofinter's pre-acquisition order book of Euro350mn has grown to Euro498mn.

6 -4.6 13.0 Franco Tosi -17.1 Total Ebidta -43.0) (124.9 17.1 Total share of Gammon (36.0 EBIDTA Sofinter -30.2 438.8) 100% in SAE Power Lines (2.5 24.3) (0. Ambit Capital Research International acquisitions to turn around in CY10E We believe that CY10E would be a turnaround year for international acquisitions.5 -8.0) (0.9 11.3 631.7 -17. GIL has adopted measures to streamline operations.2) 7.2 Revenues Sofinter 527.75% for 47.4 Gammon's share 50% in Sofinter (20.1 (7. Net loss is expected to get reduced by 90% from Euro61mn in CY08 to Euro2mn in CY09E.0 140.3 -40. Ambit Capital Research Source: Company.0 75.Ambit Capital Pvt Ltd. Construction Sector Exhibit 9: Order book .8 499.4) (4.1 3.8 1.0 0. while real accretion at the net level is expected to occur in CY11E.5 714.7 (2.5 9.5 -2.7 3.0 28.3) (9.9) (599. Ambit Capital Research GAMMON INDIA 30 MARCH 2010 6 . All these efforts have resulted in better cost efficiencies and pick-up in order book resulting in higher capacity utilisation and thereby higher revenue growth.0 5.0 Total Revenues 654.8 4.9) PAT (Euro assumed at Rs 61) 60.4 1.5 10.6 Total PAT -58. the focus being to: (i) increase capacity utilisation. and (iii) rationalise supply chain to lower the cost of materials.1) (2.5 SAE Power Lines -2.2) Assumed at ~ 7.5 and 7% for 50mn Euros PAT accretion for Gammon (43.1% in Franco Tosi (13.9 28.0 Franco Tosi -10.8 7.1 0.4 6.1 -4.2 395.2) EPS accretion (Rs) (19.9 1.8 0.4) Source: Company.0 SAE Power Lines -2.628.4 14.1 -17.4 (7.7 2.2 5.0) 75.7 55.2) (2.2) (7.margin profile EBITDA margins Exhibit 8: Breakdown in order book Order Book Old 40% Old 68% New order 32% New order 60% Source: Company.2 29.3 102.0 -28.8 53.0 Franco Tosi 102.0 605.7 -1. Exhibit 10: Key financials of international subsidiaries mn Euros CY07 CY08 CY09E CY10E 390.0 97. We believe the turnaround is not fully discounted in the prices.1) (2.8) 0.0 SAE Power Lines 24.6 PAT Sofinter -38.6 9. (ii) obtain credit lines to fund working capital.3 542.2 12.9) CY11E 448.7) Interest Cost (7.5 168.3 92.4 -2.5 42.9 6.6 3.0 33.5 -60.

GIL had acquired 50% stake in Sofinter for a consideration of Euro50mn. caters specifically to India. With an upgradation capex of about Rs3.9 Source: Company. about 2500MW. The targeted capacity. though GIL would be eligible to bid for next round of NTPC bulk tendering for 9 units. Sofinter Sofinter.Siemens L&T . Exhibit 12: Super-critical players Boilers BHEL-Alstom L&T . Construction Sector Positive Profitability Trend .500mn.Mitsubishi Bharat forge. This is reflected in 1HCY09 performance being better than 1HCY08. GIL has requested Power Ministry to reconsider it bid. we believe private players will be the key driver of the order book.2 -40.1 -38.3 CY08 499.0 -4. GIL expects marginal loss of Euro 2mn at the net level.5 7. which has a presence in the Sub & Supercritical technology boilers. For the full year CY09.1 CY09E 395.5 33. Ansaldo Italy holds 85% in Ansaldo India. Ambit Capital Research Ansaldo-GB Engineering JV .0 CY10E 390. Ambit Capital Research GAMMON INDIA 30 MARCH 2010 7 Steam Turbine Generator BHEL. Exhibit 11: Sofinter financials SOFINTER Revenues EBIDTA PAT CY07 527.000MW with about 18.0 28. Franco Tosi (FT) and Saldemi with the objective of creating a one-stop shop that offers the entire gamut of power equipment and services. We are positive on Ansaldo-GB Engineering India With about three players setting local manufacturing in the super-critical boiler segment.8 -30. established in 1979 has offerings in power and industrial boilers.Ambit Capital Pvt Ltd.Babcock Wilcox Source: Infraline. the facility would manufacture super-critical boilers with technology from Ansaldo. Ansaldo has an installed base of 80.2 -17. These companies had been operating at lower-than-breakeven capacity utilisation.8 CY11E 448. Since acquisition. In this scenario.focus on super-critical segment Ansaldo-GB Engineering (AGB) currently operates in the sub-critical segment with its 150-250MW HRSG (heat recovery steam generators) boilers.500mn for delivery of HRSGs. wherein GB Engineering is the supplier of pressure points.6 17. Sofinter owns Ansaldo.0 12.Mitsubishi Ansaldo-GB Engineering Thermax .000MW (about 23%) dedicated to super-critical boilers (about 30 units). In September 2008. we remain positive on Ansaldo-GB India’s (AGB India’s) prospects. and with renewed focus from GIL they are expected to break even in CY09. AGB has an order book of Rs3.Alstom Toshiba-JSW .Builds A Strong Turnaround Case GIL acquired stakes in Sofinter. management's focus has been to turn these around. AGB did not bid for NTPC’s bulk tendering as requisite eligibility norm on one year running history of a variable super-critical boiler got over on 5th March 2010.

(Planned) Oct-2009 June-2010 Jan-2011 Mid-2011 Jan-2011 Mid-2012 4000 MW 4000 MW 500-1000 MW/ unit x 4 unit 5000 MW 16th Apr 2007 5th Nov 2007 2nd Sep 2008 10th Nov 2008 10th Mar 2010 2500 MW 3000 MW Estimate Rs30bn order book by FY12-13E We believe turnaround of GIL's power business would be closely linked to the ramp-up of AGB's order book. would be order execution. utility and hydraulic turbines. This was done to lower the bill of materials and improve FT's profitability.Ambit Capital Pvt Ltd. Italy. FT has a presence in Italy. GIL acquired 75. AGB is qualified to bid for NTPC's bulk tender. Saudi Arabia. an installed base of 75. the key however. Ambit Capital Research Date of Prodn. Morocco etc. FT is expected to turn around during CY10E.1% stake in Franco Tosi for a consideration of Euro40mn in 2QFY09. we believe AGB is a strong contender in the super-critical boiler segment. besides it would look to tap private players as well. a complete Westing House license for sub-critical turbines with ability to upgrade to the super-critical segment. With three players in the SC boiler segment compared with four in SC turbines. Belgium. Germany. FT has proprietary technology for industrial steam. And GIL has set up a separate supply chain in Delhi to focus on raw materials procurement for FT. translating into revenue of Rs10bn. as this would involve very high capital outlay to set up rotor and rotor balancing machinery. Exhibit 14: Key assumptions . AGB has a proven technology with Siemens. FT already has a stronghold in the 150-250MW sub-critical turbine segment. GAMMON INDIA 30 MARCH 2010 8 .Ansaldo-GB Rs mn Order book FY11-12E Revenue EBITDA EBITDA margin PAT Net margin Source: Ambit Capital Research FY12-13E 30000 10000 1200 12 600 6 Franco Tosi Franco Tosi (FT) was established in 1881 with product offerings in steam and hydro-turbines. Iran. Construction Sector Exhibit 13: Capacity of new players SC Boilers SC Turbine Date of signing JV agreement L&T-MHI Toshiba-JSW Bharat Forge-Alstom Ansaldo-GB Engineering Thermax-Babcock Wilcox Source: Infraline. Super-critical turbine capacity build-up in India to take time FT has technology to build steam turbines up to 500MW. Egypt. GIL is evaluating options to expand this product portfolio to 600MW in the super-critical turbine segment. We model for Rs30bn in terms of order book (2x 660MW order from public/ private players) by FY12-13E.000MW worldwide.

0 10. We value Sofinter.0 28.4 2. FT.3 -10. Currently.8 38 20. consensus is writing off the Euro97.0 9.0 8 9600.8 6 58.5 6 170.7 12% 800.8 15.3 50.5 -1.3 35.0 12% 1200. Exhibit 16: Valuation of the power business Sofinter (mn Euro) Sofinter Revenue Sofinter EBITDA EV/EBITDA (x) EV (mn Euros) Net Debt Equity Value Value of stake 50% (i) Ansaldo-GB Engineering (Rs mn) Order book FY11-12E Revenue Ebidta margins EBITDA EV/EBITDA (x) EV Debt Equity value Gammon Stake @ 42.825 88.0 13.7 CY09E 92.3 -8.0 40.0 9.7 CY08 102. at one-year forward EV/EBITDA of 6x (20% to Alstom’s EV/EBITDA) and Ansaldo-GB Engineering at 8x EV/EBITDA.1% (i) FT Debt on Netherlands SPV (ii) Total value of Franco Tosi (v)= (i) .2 136 1.5 -17.0 -24. Construction Sector Exhibit 15: Key assumptions .53 113.9 50 57.64 38 42.5mn debt acquisition while valuing power assets.7 Power to add value from CY11E. can add Rs21/sh to SOTP The power business may be value accretive from CY10E and we model for Rs21/ sh value by rolling forward multiples to CY11E.0 49.4 6 80.5 33.4 CY11E 168.8 1. resulting in a valuation impact of Rs1-22/sh to our SOTP for CY10E & CY11E respectively.53 82.0 8 6400.4 6.0 2333 7267 3088.1 FY11-12E 20000 6666.0 1333 5067 2153.5 3008 22.82 88.0 13.5 CY11E 168.295 56.6 6 201.0 CY11E 448.29 41.5 -17.5% Gammon Value in Euro mn (ii) Gammon Netherlands SPV debt-Sofinter (iii) Total value of Sofinter (iv) = (i) +(ii) .(ii) Total Power business value = (iv) + (v) INR Value (Rs mn) Value attributable (Rs/Share) Source: Ambit Capital Research CY10E 390.Ambit Capital Pvt Ltd.6 CY10E 140.Franco Tosi mn Euro Revenues EBITDA PAT Source : Ambit Capital Research CY07 102.0 -8.6 40.64 32.0 CY10E 140.6 FY12-13E 30000 10000.(iii) Franco Tosi (mn Euro) Franco Tosi Revenue Franco Tosi Ebidta EV/EBITDA (x) EV (mn Euros) Debt Equity Value Value of stake 75.5 50 26.2 GAMMON INDIA 30 MARCH 2010 9 .

0 73.0 100.7 100. Construction Sector BOTs offer mix of annuity and vol.Ambit Capital Pvt Ltd.9 93.0 Operational Financial closure achieved Yes Yes 10157 3252 5050 18459 74. has selectively built exposure to a BOT portfolio that includes roads. ports and power projects.5 93. bridges.9 100. Exhibit 17: GIPL .0 100 Environmental clearance Financial closure achieved DPR prepared H1CY10 Financial closure expected DPR being prepared Yes Yes No No No GAMMON INDIA 30 MARCH 2010 10 . Ambit Capital Research GIPL stake % Status Valued 7530 2560 2480 4396 6492 8500 31958 74.0 94.0 COD by Mar-10 Operational Operational Under implementation Under implementation Aug-10 financial closure expected Yes Yes Yes Yes Yes No 257 6541 6798 97.0 50. three nearing commercial operation date (COD).8 31. These projects are in different stages with four being operational.projects Total project cost (Rs mn) Roads/Highways Mumbai Nasik Road Project (MNEL) Rajahmundry Annuity Road Project Dharmavaram Annuity Road Project Kosi expressway Gorakhpur expressway Patna Muzzafarpur Highway Total Bridges Cochin Bridge Rajahmundry Bridge Project Total Ports Mumbai Container Port terminal Visakhapatnam Port Blue water iron ore terminal Total Power Rangit-II Hydro project Biomass Punjab Biomass Haryana Pravara Co-generation plant Youthang Power Ventures Limited Total Grand Total Source: Company. through GIPL.0 Financial closure achieved Operational Mar-10 financial closure expected Yes Yes No 4300 4140 3064 1650 25000 38154 95369 100. three having achieved financial closure in FY09-10 and three expected to achieve financial closure by 1HCY11.0 50.5 100./traffic driven earnings visibility GIL.

132 1. Exhibit 18: GIPL .257mn. The average equity IRR has been about 20-22% with a 15-20 year concession period.259 405 411 181 1.0 13.5 15.860 257 8.177 405 390 176 1.252 58. we value GIPL at Rs26.202 23.350 480 2.337 1.0 50. ATSL's tower testing station near Wardha is expected to be operational by March 2010.504 18.134 6.0 16.611 660 342 342 483 1.0 13.0 17.3x of equity to projects which are in the basket Grand Total (Rs mn) Source: Ambit Capital Research estimates GIPL's BOT strategy has been to participate in favourable select IRR projects with long-term return potential. Currently ATSL has a tower manufacturing capacity of 60ktpa. We have only valued the projects where work has begun.0 73. Currently GIPL is evaluating different options viz. value unlocking in key assets such as roads and ports. Moreover the Company has already bagged a new order worth Euro48mn from Algeria. We believe that there are enough levers in place for the company to tap the tremendous opportunity in infrastructure space.Ambit Capital Pvt Ltd. a subsidiary of GIL.480 4.257 We assign a P/BV of 0.560 2.928 16. which translates to Rs88/share (at 40% holding company discount) to GIL's value for a 76% stake.9 97.5 74.5 100.920 1.088 3.396 6.765 8. Kenya and Afghanistan.8 5.132 2.400 1.035 5.306 6.0 7. GIPL would consider leveraging these assets for future reinvestments in business and already has approval to raise Rs5bn.SOTP valuation Sector Roads Mumbai Nashik Express Ltd REL AEL Kosi Bridge Gorakhpur Cochin Bridge Rajahmundry Bridge Project Power Sikkim Hydro Venture Biomass Punjab PREL Ports Mumbai Container Port terminal Visakhapatnam Port Total 10. capacity is expected to increase to 105ktpa by 4QFY10.0 15.0 94. GAMMON INDIA 30 MARCH 2010 11 .0 77.000 26.0 Project Name Project cost Total equity DCF value Cost of equity GIPL's stake GIPL's share 11.399 4. as these BOTs turn profitable.695 1.509 1.0 13.159 3.984 2.399 14.0 18.0 13.596 2.106 64 1.670 2.250 1.985 28. raising debt at the holding company level as well as diluting equity to raise growth capital.797 4. operates in the power transmission and distribution space. We believe the current valuation for GIL does not reflect the fair value of GIPL and there could be upsides as the projects near their respective completion dates.7 100. and with commissioning of the Wardha unit.252 11.4 93. Going forward.504 6. or projects that are in advanced stages of implementation.031 1.5 93.259 1.210 2.348 1.409 1. Construction Sector GIPL valuation Refering out Initiating coverage report on Gammon Infraprojects dated 8th February 2010. ATSL growth trajectory to continue ATSL.0 100.0 100. ATSL has increased its overseas presence with clientele in Algeria.601 2.

673 16.097 25. ATSL also has a conductor manufacturing plant with 38ktpa capacity. This puts it on a par with other major players (see exhibit 19).000 105. ATSL is also setting up a steel pole and hi mast manufacturing facility at Silvassa with investment of Rs500mn. Nuts . and (ii) competition from domestic players.88mn for 100% stock purchase and Euro7mn for debt retirement.737 2. Ghana. Insulator. and Algeria. Over next two years we estimate margins to expand. South Africa. operational since March 2008. Ambit Capital Research Materials 30% 25% 30-35% 15-20% Acquisition of SAE Power Lines to augment global footprint ATSL has acquired SAE Power Lines (SPL) for a consideration of Euro12mn.8000 No No No Yes Net Sales (Rs mn) 47. ATSL would use SPL's credentials to expand its global footprint and would be the sole supplier of towers and conductors to them.114 1. GAMMON INDIA 30 MARCH 2010 12 .250 31. SPL was one of the world’s largest power transmission company with presence in Botswana.000 109.363 2.114 EBIDTA PAT (Rs mn) (Rs mn) 5. hardware fitting Source: Company. SPL's order book is expected to become fourfold.930 42. ATSL has invested Rs400mn in the conductor facility. This gives ATSL a competitive edge.000 108.211 828 Via capacity expansion ATSL has increased tower production capability from 60ktpa to 105ktpa. SPL has: (i) high overheads. with net margins at ~2% for CY10E. Exhibit 20: Tranmission tower material breakup Tower Conductor Construction materials Conductor Bolts.828 1. Once sourcing from ATSL begins.breakdown of materials ATSL has captive production capacity which can cater to 80-85% of the material requirement in a transmission project versus other players that have 55% captive production. Besides. SPL is also looking at possibilities of exploring the US and Canadian markets.021 Tower (MT) 110. Kalpataru and Jyoti Structures do not have in-house conductor manufacturing. KEC.482 2.000 Conductor Poles & Masts (MT) (MT No No No 3. Transmission tower . Construction Sector Capacity expansion puts ATSL on a par with industry leaders Exhibit 19: ATSL Peer group FY11E Company KEC International Kalpataru Power Jyoti Structures ATSL Source: Ambit Capital Research Capacity (MT) Market cap (Rsmn) 30. No further capex is planned apart from the Rs200-250mn meant for normal maintenance. margins can potentially improve.494 14.Ambit Capital Pvt Ltd. about Rs750mn in tower capacity augmentation and Rs250mn in the tower testing facility. During 2003-04. Previously. which included Euro4. Post acquisition in April 2008.000 4. as currently.

6 CY10E 75. Ambit Capital Research CY10E 75.5 1.5 CY08 29.4 -2.9% 2.3% Valuation of SAE Power Lines Valuation of SAE Power Lines may range from Rs8.9 Source: Company.4/share over CY10-11E once the company returns to profitibality. a Mumbai suburb.SAE Power Lines mn Euro Revenues EBITDA PAT CY07 24.9 10 39 39.0 2367 17.4 CY11E 97.1% stake in Gammon Realty (GR).7 -2.5 6. Exhibit 23: Valuation SAE Power lines (mn Euro) SAE Power Lines Revenue SAE Power Lines EBITDA SAE Power Lines PAT P/E (x) Equity Value Total INR Value (Rs mn) Value attributable (Rs/Share) Source: Company.4-17. GAMMON INDIA 30 MARCH 2010 13 .0 2. Ambit Capital Research Exhibit 22: Order book & margins mn Euro Order book growth % EBITDA margins PAT margins Source: Company.Ambit Capital Pvt Ltd.5 6. Construction Sector Exhibit 21: Key assumptions .5% CY11E 173 41 3.8 3.2 -2.0 4.5 1.8 1138 8.0 4.8 18.1 0. GR has a landbank of 38 acres in Bhopal and five acres in Andheri.9 10 18.no clear visibility GIL has interests in real estate and holds 75.4 Real estate . Ambit Capital Research CY08 20 CY09E 71 255 3% 1% CY10E 123 73 3.7 -2.8 CY09E 55.8 3. On a DCF basis we value GR at Rs748mn though we have not included this in our SOTP due to lack of visibility of the projects as well as the overall slowdown in the real estate market.9 CY11E 97.7% 1. As of March 2009 GIL has invested Rs150mn as equity contribution in GR.

Ambit Capital Pvt Ltd.000 100.000 120. Construction Sector Domestic business to see recovery 17% order book CAGR over FY09-11E GIL operates in multiple business segments .000 Mar-08 Mar-09 Mar-10 Mar-11 21 14 7 - Exhibit 25: ATSL order book (%) 45 36 (mn Rs) 35. cooling towers and chimneys. 15% and the remainder in buildings.2bn. Exhibit 24: Standalone order book (mn Rs) 140.000 24 16 50. environment. power.000 8 Hydro Power Structures 8% Environment & Pipelines 11% Hydraulic & Irrigation 3% Industrial Structure & Buildings 3% Energy 14% Power transmission and distribution 15% Source: Company. Ambit Capital Research growth % Order book growth % We expect GIL standalone order book to grow at 15% CAGR over FY09-11E to Rs141bn and ATSL's order book to grow at 29% CAGR to Rs33. We expect the order book to grow at 17% CAGR over FY09-11E to Rs174. GAMMON INDIA 30 MARCH 2010 14 .2bn) of GIL's order book is constituted by transportation (includes 20% order from GIPL).4bn.000 20. with capacity expansion nearing completion.000 40.000 7. 22%.000 80. pipelines etc. transmission lines. Also. Ambit Capital Research Transportati on engineering 46% Jun-07 Mar-08 Mar-09 Mar-10 Mar-11 - Order book growth % Going forward we expect the contribution of transmission lines to increase owing to higher growth in ATSL's order book.000 (%) 35 28 Order book Source: Company.000 14. Currently 46% (Rs66. GIL has enough headroom to increase capacity utilisation.000 28.000 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 9 27 18 21.key verticals are in transportation.000 32 100. Exhibit 26: Order book mix Exhibit 27: Total order book growth (mn Rs) (%) 40 150.000 60. transmission lines. energy.

cost overruns in some fixed price contracts from GIPL have resulted in zero margins in these captive projects. 27% CAGR in transportation.033mn and model for ATSL's revenue CAGR at 29% to Rs14.000 30. We peg OPM at around 10.000 - Source: Company. Ambit Capital Research estimates We expect standalone revenue to grow at 21% CAGR over FY09-11E to Rs41.5% band during FY09-11E. Such robust growth is led by 29% CAGR in the power and transmission segment (ATSL). Also. 20% CAGR in energy projects. Going forward we expect GIL's operating margins to expand. Construction Sector 23% revenue CAGR over FY09-11E We expect GIL's revenue to grow at 23% CAGR over FY09-11E to Rs55.000 3.1% in FY08.000 30.000 Environment & Pipelines 11% Energy 19% Power transmission and distribution 25% 10.000 9.000 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Net Sales growth % (%) 40 32 24 16 8 - Exhibit 29: ATSL revenue (mn Rs) 15. Exhibit 30: Revenue mix FY10 Hydraulic & Irrigation 2% Industrial Structure & Buildings 7% Exhibit 31: Total revenue trend (mn Rs) 60.227mn.000 20. Operating profit to grow at 28% CAGR to FY11E GIL endeavors to maintain operating margins in the 10-10. resulting in lower topline.Ambit Capital Pvt Ltd. while the other segments are expected to grow at 15% CAGR. ATSL should contribute 25% and energy projects including hydro structures are expected to contribute about 28% to revenue.000 12. which was at 10. Exhibit 28: Standalone revenue (mn Rs) 50.2% in FY09 owing to two big projects in Assam and J&K being suspended.000 Jun-07 Mar-08 Mar-09 Mar-10E Mar-11E Net Sales growth % (%) 240 190 140 90 40 (10) Source: Company. witnessed 95bps contraction to 9. OPM.000 20.000 40. Ambit Capital Research The transportation segment will likely be the key contributor to our FY10E sales at 27%.000 6.2% for GAMMON INDIA 30 MARCH 2010 15 .114mn.000 40.000 10.000 Transportati on engineering 27% (%) 60 50 40 30 20 10 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Revenue growth % Hydro Power Structures 9% 50.

which was not present in FY08.031mn while ATSL's margins are expected to contract from 13% in FY09E to 12% in FY10E and 10. Profit to grow at 20% CAGR to FY11E GIL's net profit grew 63% YoY to Rs1.5% YoY i. as two projects were suspended.5% YoY growth. net profit of the company is estimated to grow to Rs1. profit growth was nearly flat due to drop in margins on lower revenue booking. Exhibit 39: EBITDA mix FY10E ATSL 30% Exhibit 40: Total EBITDA margin and growth (%) 12 (%) 50 40 8 30 20 10 FY07 FY08 FY09 FY10 FY11 growth % EBITDA Margins - Gammon standalone 70% 4 Source: Company.5% in FY11E. Ambit Capital Research GIL's operating profit mix for FY10E has 70% contribution from Gammon standalone and 30% contribution from ATSL. resulting in 28% CAGR over FY09-FY11E. Construction Sector FY10E and 10% for FY11E (lower on account of ATSL). at 20% CAGR over FY09-FY11E.Ambit Capital Pvt Ltd.513mn in FY11E (28% YoY). Likewise operating profit is expected to grow at 34% CAGR over FY09-11E to Rs4. GAMMON INDIA 30 MARCH 2010 16 . Ahead. Ambit Capital Research Exhibit 38: ATSL EBITDA margin and growth (%) 20 15 10 5 FY07 FY08 FY09 FY10 FY11 growth % EBITDA Margins (%) 280 230 180 130 80 30 (20) (%) 55 45 35 25 15 5 (5) Standalone operating margins are expected to improve from 8% in FY09 to 9. and ATSL's operating profit is expected to grow at 16% CAGR over FY09-11E to Rs1.5% in FY10E and 9.413mn in FY10E.029mn in FY11E with growth of 43.e.482mn.8% in FY11E. Exhibit 37: Standalone EBITDA margin & growth (%) 12 10 8 6 4 2 FY07 FY08 FY09 FY10 FY11 growth % EBITDA Margins Source: Company.312mn in FY10E (YoY growth of 29%) and thereafter to Rs5. Excluding ATSL. registering 0. then to Rs2.405mn in FY09 due to consolidation of the high-margin ATSL business. Operating profit is estimated to increase to Rs4.

3% in FY10E to 3. Expect net margins to expand from 3.200mn while ATSL's net profit is expected to grow at 22% CAGR over FY09-11E to Rs828mn. Construction Sector Exhibit 42: ATSL PAT margins and growth (%) 12 (%) 40 30 20 4 10 FY07 FY08 FY09 FY10 FY11 growth % PAT margins Exhibit 41: Standalone PAT margins and growth (%) 4 3 2 1 FY07 FY08 FY09 FY10 FY11 growth % PAT margins Source: Company.Ambit Capital Pvt Ltd. GAMMON INDIA 30 MARCH 2010 17 . Ambit Capital Research (%) 90 60 30 (30) (60) 8 - Standalone net profit is expected to grow at 19% CAGR ( FY09-11E) to Rs1. Exhibit 43: PAT mix FY10E Exhibit 44: Total PAT margins and growth (%) 4 Gammon standalone 48% (%) 90 60 30 - ATSL 52% 3 2 1 FY07 FY08 FY09 FY10 FY11 growth % PAT margins (30) (60) Source: Company. Ambit Capital Research estimates GIL's net profit mix for FY10E has 48% contribution from Gammon standalone and 52% contribution from ATSL. reflecting higher net margins for ATSL.7% in FY11E.

6 2.7 3. the D/E ratio of 0.3 10.3 FY09 0.6 8.7 9. Coverage Ratios To Improve Return ratios compressed owing to high BOT investments Overall.8 3. return ratios are expected to improve.0 11.4 FY08 0. Ambit Capital Research Credit ratios .4 FY07 FY08 FY09 FY10E FY11E Source: Company.7x in FY11E while EBIT/I is expected to improve to 2.expected to improve Coverage ratios are expected to improve with debt/EBITDA improving from 3.1 1. we note the recalculated return ratios trend upward.6 Source: Company.7 FY11E 0.5 10.7 FY10E 0.9 3. Exhibit 47: Coverage ratios Coverage ratio DEBT/EBITDA Year FY07 FY08 FY09 FY10E FY11E FY07 FY08 FY09 FY10E FY11E 30 MARCH 2010 GIPL 2.1 7. With these projects achieving commercial operations.Ambit Capital Pvt Ltd.8x would lie within the manageable limit. On a standalone basis. This is largely owing to a change in business strategy from 'only' cash contracts to one that is a mix of cash and a longgestation BOT infra model via investment in subsidiaries. Ambit Capital Research * excluding investments.3 2.8x in FY11E.3 3.1 8.9 12.0 15. Ambit Capital Research GAMMON INDIA .0 2. D/E less than 1 We believe at 23% revenue CAGR over FY09-11E. loans and advances to subsidiaries.7 7. Construction Sector B/S Manageable.5 13.4x in FY09 to 2.8 18 EBIT/I Source: Company. Historically. post stripping of the investment.1x in FY04. Exhibit 45: ROCE & ROE % ROCE GIL-overall GIL* ROE GIL-overall GIL* 9.4 22.7 9.4 3.2 15.2 9. GIPL's RoCE and ROEs have been in the 16-25% range and have deteriorated with time.8 17. Exhibit 46: D/E trend D/E GIL FY07 0. D/E has been as high as 1.4 14.4 17.2 12. Loans to subs. during FY04-06.

150 11.712 10.915 10.033) 3.503 (520) 2. Exhibit 48: Balance sheet Year to March (Rs mn) Cash & equivalents Debtors Inventory Loans & advances Investments Fixed assets Current liabilities & provisions Total assets Debt Preference share capital Deffered tax liability Others Total liabilities Shareholders' equity Reserves & surpluses Total networth Net working capital Net debt (cash) Total liabilities & equities Construction Sector FY07 960 3.206 9.139 22.413 0.227 29.248 1.7% 49.287 (1.390 16.111 8.579 60.021 14.254 19.015 7.557 14.Ambit Capital Pvt Ltd.240 33.705 1.771 0 372 4.241 13.768 16.073 FY10E 1.351 (53) 2.913) 12.9% 757 3.345 45.038 16.718 7.741 18.172 7.355 2.521 14.368 2.6% FY11E 55.209 26.087 682 1.053 434 2.483 2.714 5.513 27.715 0 379 4.788 26.834 19.414 (3.234 3.3% 20.5% 33.597 FY08 381 5.873 11.438 486 (61) 892 447 445 FY08 22.8% 462 1.401 37.029 43.073 9.6% FY09 36.116 14.4% 38.290 4.050 575 44 15.306 28.708 1.438 11.354 37.091 275 22.334 217 14.9% 805 4.422 1.050 528 73 14.094 177 11.151 737 1.104) 9.372 510 861 93.755 15.1% FY10E 42.557) 11.597 3.110 12.341 9.312 FY11E 1.034 5.678 1.283 4.701 2.727 15.783 33.791 352 1.786 2.0% 640 2.055 2.962 1.084 1.723 1.241 12.326 11.5% GAMMON INDIA 30 MARCH 2010 19 .329 243 18.142 177 12.050 4.429 3.405 63.555 1.738 (7.429 FY09 514 13.505 13.983 (3.312 12.704 79 3.240 7.050 544 18 11.005 26.595 16.844 596 124 1.312 28.505 Exhibit 49: Income statement ear to March (Rs mn) Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non-operational income/exp PBT Tax PAT / Net profit % growth FY07 18.

1 1.021 Exhibit 51: Ratio analysis Year to March (%) EBITDA margin (%) EBIT margin PAT Margin (%) Return on capital employed Return on equity Current ratio (x) FY07 9.8 GAMMON INDIA 30 MARCH 2010 20 .704 (1.503) 2. Exhibit 50: Cash flow statement Year to March (Rs mn) PBT Depreciation Interest Tax Net working capital Cash flow from operating activities Capital expenditure Others Investments Cash flow from investing activities Incr (decr) in borrowings Issuance of equity Preference share capital Interest paid Cash flow from financing activities Net change in cash Closing cash balance Construction Sector FY07 892 352 486 (447) (520) 763 (3.372 462 596 (510) (1.7 17.4 10.530) 792 1.Ambit Capital Pvt Ltd.0 8.800 0 (486) 3.704) 490 (417) 1.050 (1.1 22.7 12.187 133 514 FY10E 2.573) (24) (906) (4.9 8.6 FY09 9.084 805 1.6 22.913) 624 (1.832 0 (1.047) 6.1 10.6 9.402 0 (1.8 12.7 12.1 0.104) (4.420 924 1.3 6.4 8.438 FY11E 3.2 0.5 3.654) 95 (488) (3.8 69.1 7.351 (737) (3.0 Exhibit 52: Valuation parameters Year to March EPS (Rs) Diluted EPS (Rs) Book value per share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) FY07 3.4 108.124 1.1 3.8 2.6 36.541) 116 (35) (3.7 2.357 (383) 960 FY08 1.043 1.1 1.053) 7.0 165.0 1.3 1.4 140.2 1.9 FY10E 10.3 14.5 1.351) 4.1 8.3 11.6 FY10E 10.8 22.065 1.9 FY11E 15.939 2.501) (29) 0 (1.1 2.0 15.007) (2.3 84.3 FY08 6.460) 2.053 (682) (7.4 3.384) 22 521 (840) 48 (77) 0 (596) (625) (579) 381 FY09 2.0 FY09 10.1 FY11E 10.5 10.3 FY08 10.033) 887 (1.8 15.1 2.151 757 1.2 2.3 3.7 15.3 3.1 8.055) (3.557) (36) (3.4 10.087 640 1.0 2.5 13.4 17.3 90.3 15.8 1.0 0.

the stock could target Rs251 and support is at Rs224 and at Rs210.Ambit Capital Pvt Ltd. On the daily chart.     GAMMON INDIA 30 MARCH 2010 21 .BUY with an upside target of 251 Exhibit 53: Daily Chart Source: MetaStock  For the past two weeks Gammon India has been trading in a band of Rs210 to Rs240. the stock is witnessing a Diamond pattern. The stock had a breakout (Rs224) but going forward. sustaining above this breakout level. is very important. as the MACD is also curved in the Buy mode. Construction Sector Gammon India . On the upside. which is a consolidation pattern. We expect the stock would sustain and march upward.

Ambit Capital Pvt Ltd. Construction Sector NOTES GAMMON INDIA 30 MARCH 2010 22 .

Construction Sector Explanation of Investment Rating Investment Rating Buy Hold Sell Expected return (over 12-Month period from date of initial rating ) >15% 5% to 15% <5% GAMMON INDIA 30 MARCH 2010 23 .Ambit Capital Pvt Ltd.

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