Gremach Infra Equipment & Projects Ltd - Rs 35.00

Incorporated in 1991, Gremach Infrastructure Equipment & Projects Ltd’s (GIEPL) main activity is to provide rental of construction/earthmoving machineries to medium & large construction companies who are engaged in the business of infrastructure developments like constructing of roads, airports, dams, power projects, mining activities, housing & civil construction and other related activities. GIEPL’s business is flourishing rapidly as it makes business sense for the construction companies to take these high cost construction equipments on a rental basis instead of blocking their capital in procuring equipments which may not be used for executing other projects. The other advantage of taking the equipment on rental basis is the availability of quality equipments without the hassle of their maintenance. Thirdly, with rapid technological developments, the cost of replacement of these equipments is also very huge and hence the developers now prefer to take equipments on rent rather to own them. Over the year, GIEPL has pursued a strategy of diversifying the selection of machinery/equipment according to different business segments in the infrastructure sector. In addition to renting its owned equipments, company also hires equipments owned by other parties and rent it out to its own clients. Infact, GIEPL has been deriving majority of revenue from renting of equipment which are exclusively owned by third parties. This is possible due to the fact that, company has established a very strong network so as to have a geographical reach as well as a diversified industrial and project segment.

Remarkably, GIEPL is among the handful of large player in the organized sector, which is presently being dominated by small unorganized players. But as the project location are diverse and the equipment requirement at various sites may vary, only bigger companies with strong financial muscle like GIEL can fulfill the requirement. Secondly, company has an edge over its peers as it has huge asset bank of heavy equipments ranging from compacters, rollers, concrete mixers, dozers, forklifts, loaders to excavators, PTR, dumpers, electronic sensor pavers, kerb laying machine, tunneling boomer, concrete batching and mixing plant. Moreover it also has a vast pool of skilled labour that include mechanical engineers, civil engineers, mechanical experts, technicians, and operators etc. who operate and maintain the equipment. Because of all these factors, GIEPL boats of having a very strong clientele base that includes all the major infrastructure players in the country such as L&T, Punj Lloyd, Shapoorji Pallonji, Gammon India, HCC, Gannon Dunkerley etc. Incidentally, company adopts direct marketing approach and has set-up a separate Tender department to procure contracts from public sector undertaking as well as from private clients. As of now, company has a centralized maintenance department & workshop in Kalamboli, Navi Mumbai spread over an area of 450 sq. mtrs each.

As a part of its diversification plan, GIEPL has taken 75% controlling stake in 11 Coal mine licenses in Mozambique having an aggregate 13,520 hectares (appx. 13.52 cr sq. mts) of land in prime region of Moatize, Africa. With the global shortage and crisis of hard coking coal, the future prospect of this business looks terrific. Infact in Oct’08 only company stuck coal in the range of 1~3 mtrs depth making it a full open cast mines. Moreover company expects the coal reserve to the tune of 200 million tonne in these mines which is huge. On the other hand witnessing a sharp jump in E&P activities earlier, company even entered into the business of renting of oil & gas drilling rigs. Accordingly it has signed the MOU for 40 on-shore rigs with China's biggest oil & gas rig manufacturer “BOMBO”. Simultaneously, company has also ventured into setting up of SEZ and has received formal approval for 100 hectares Metal SEZ at Kolhapur & another at Dhule in Maharashtra. Although in short term above diversification looks a drain on company’s cash flow, but in long term it may emerge as a sustainable and profitable business.

Meanwhile due to global liquidity crunch and a significant slowdown in domestic construction activity, GIEPL’s performance also took a hit. Its topline as well bottomline declined sharply in the last few quarters. However, of late the infrastructure development & construction activity has started picking up and the industry is expected to be back on growth track soon. To conclude, with govt’s special emphasis on creating physical infrastructure and massive investment being planned in coming years, company’s core business of renting equipment will do well. This concept is growing rapidly and gaining wide acceptance as the penetration level in India is quite low at 2%, compared to UK at 80% and North America at 35%. In order increase its equipment bank & fund other growth plans, GIEPL had raised almost Rs 200 cr in Feb 2008 thru FCCB route to be converted into equity @ Rs 376 per share. Subsequently conversion price has been reset to Rs 282 per share. Surprisingly in June 2009 when the scrip was trading at Rs 30 odd levels, more than 16% of the FCCB holders amounting to US$ 0.82 cr opted for conversion to equity shares @ Rs 282 per share. What made them do so, only they can reply. This is despite the fact that GIEPL has recently taken the approval for FCCB back in March’09. At the same time taking the benefit of crash in the share price, promoters went ahead and made an allotment of whopping 4.90 cr warrants in June’09 to themselves to be converted into equity at merely Rs 31 per share. And infact within the same month they opted to convert 1.8 cr warrants diluting the equity capital to Rs 34.40 cr currently. With this new preferential allotment of 4.90 cr warrants they will smartly let their old allotment of 1 cr warrants lapse which was to be converted @ Rs 123 per share. Despite Rs 55 cr fresh capital infusion, company is looking to raise more money thru other avenues like selling of old machinery, surplus land, ESOP, fresh debts etc to funds its other projects, capital expenditure and working capital requirement. Notably, its outstanding FCCB to the tune of Rs 165 will be due for redemption only in 2013.

Fundamentally, GIEPL reported 15% rise in revenue to Rs 295 cr but 30% fall in PAT to Rs 26 cr for FY09. Even for Q1FY10 it recorded 30% fall in topline to Rs 71 cr and 60% drop in bottomline to Rs 4.50 cr. However it is expected to clock bumper growth in coming years on the back of substantial capital expenditure and starting of commercial operation by its other divisions. Company has also highly leveraged itself with the debt equity ratio of more than 2.5x times. For FY10, it may clock a turnover of Rs ~375 cr and NP of Rs 25 cr leading to an EPS of more than Rs 7 at current equity of Rs 34.40 cr. Although no further FCCB conversion is expected, but the warrant conversion will lead to further 90% equity dilution to Rs 65 cr. So the fully diluted FY10 EPS works out to Rs 4. Considering the company’s growth plan and aggressive attitude, investors are advised to keep a close track on the share price and accumulate it between Rs 30~35 levels for handsome gain in long term.

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