Stock Review: Gayatri Projects (GPL)

HYDERABAD-BASED infrastructure firm Gayatri Projects (GPL) has performed poorly on bourses in the past six months. Investors are cautious about the infrastructure sector since project execution delays have affected earnings growth of most companies over the past few quarters despite higher order intake.

    Although small in size, GPL appears to be in a sweet spot compared to its peers. The company has moved up in the value chain from being a sub-contractor to owner of projects. It has also forayed into energy generation.

    The firm derives nearly two-thirds of its revenue from road construction and a fairly large chunk of the balance revenue from irrigation projects. The company has an order book of . 8,000 crore, which is six times its trailing 12-month revenue. A chunk of this is concentrated in irrigation and road projects with half of the orders related to Andhra Pradesh. This poses a segment concentration and geographic risk.

    GPL is into civil construction and operates its road and power sector businesses through subsidiaries. It recently bagged a . 113-crore contract in the core construction business and a . 1,135-crore order for road projects through its joint venture with Maytas Infra. Its energy subsidiary is developing a thermal power plant in Andhra Pradesh and analysts expect the project to start generating revenues from 2015.

    The company grew revenues at a compounded annual growth rate of 36% over the past four years and maintained its operating margins in the range of 11-13%. But for the quarter ended September 2010, GPL's revenue grew 12% and net profit increased by a modest 6.7% over the year-ago period, largely due to high interest cost.

    What still holds good for the company, though, is that its stock valuations are modest. At the last traded market price of . 320 on Wednesday, the stock has a price-earning ratio of 7.8, which is at a discount to the average P/E of 19 for small- and medium-infrastructure firms. Given the strong order book and reasonable execution history, the company is expected to post sustainable revenue growth in the long term.