Initiating Coverage
Gremach Infrastructure
CMP: Rs 360 Target : Rs 529 BUY
Full steam ahead
Foray into oil exploration rigs and coal mining to drive growth and profitability
Investment rationale
v Engaged in the business of leasing out construction and mining equipment. Strong government thrust on infrastructure development coupled with Gremach's timely equipment acquisition (capex of Rs 1.3bn) will drive a revenue CAGR of 62% CAGR over FY07-FY09.
v Aggressive forays into onshore oil rig rentals, SEZ development and coal mining would fuel the next phase of growth for the company.
v Orders placed for 40 onshore oil rigs for an amount of US$ 1bn to be delivered in the next three to four years by Bomco, China's biggest oil and gas rig manufacturer. This would make Gremach the biggest onshore rig rental player in India.
v Investing Rs 2bn to establish an SEZ in Kolhapur, Maharashtra and a further Rs 2.3bn to construct a saw pipe manufacturing facility within the zone. About 250 acres of land already acquired for the proposed SEZ.
v Coal mining rights acquired in Mozambique with estimated coal reserves of 200mn tonnes, which if proven, will place Gremach in the select club of Indian companies operating mines outside India. We expect this business to be extremely profitable for the company, but have not valued the same due to the absence of information.
Key concerns
v Any delay in the execution of proposed projects or decline in oil rig machinery leasing rates will have a negative bearing on our estimates.
Valuation
v SOTP approach yields a target of Rs 529 for Gremach as follows: a) Rs 242/share for the core business based on a P/E of 12x on FY09E (20% discount to larger peer Sanghvi Movers); b) Rs 195/share for the rig business based on FCFE approach and assuming 10 rig acquisitions in FY08 and FY09; and c) Rs 92/share for the SEZ foray (250 acres of Kolhapur land valued at Rs 7.5mn/acre).
v Our target price of Rs 529 represents a 47% upside from current levels. We initiate coverage on the stock with a Buy.
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