Gammon India Pursues Overseas Acquisitions in Power Sector

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Researched by Industrial Info Resources (Sugar Land, Texas)--Gammon India Limited (BOM:509550) (Mumbai), a leading construction firm focused on the power sector, is reportedly in talks with power firm Sofinter S.p.A. (Gallarate, Italy) to acquire a majority equity stake in a subsidiary of Sofinter, Ansaldo Caldaie, which manufactures boilers. The deal, if clinched, is estimated to be worth well over $70 million.

Last month, Gammon paid $63 million for a 75.1% stake in Franco Tosi Meccanica S.p.A. (Legnano, Italy), a steam turbine manufacturer. It also picked up a 50% equity stake for $12 million in Sadelmi S.p.A. (Milan, Italy), an engineering, procurement and construction services company in the power sector. The Sofinter deal would be Gammon's third acquisition in the Italian market.

Franco manufactures steam turbines for hydroelectric and thermal power plants, while Sadelmi provides balance of plant for the power sector. Gammon is hoping to improve margins and achieve scale for both its acquisitions, which are reportedly operating much below their rated capacities. Franco has the capacity to manufacture turbines for 2,000 megawatts (MW) of power generation, but is currently operating at less than 10% of its capacity. The company has an order book of $630 million with orders from Latin America and Europe. The acquisition by Gammon opens up a new market for Franco. In the last fiscal year, Franco registered an operating loss of $15.8 million against revenue of $142 million. The firm is also reeling under a debt of $63 million. Gammon expects to achieve full capacity production for Franco within the next three years. It also aims to achieve an operating profit of 12% on Franco's order book by outsourcing manufacturing operations of casting and forging to India. Gammon estimates that Franco could break even with revenue of $252 million.

Sadelmi has an order book of $315 million. It reported revenue of $189 million for the last fiscal year and has a revenue target of $236 million for the current year. Sadelmi is likely to set up an office in India and jointly bid for power projects in the country along with Gammon.

Gammon is largely involved in construction works for power projects, which contribute to over 50% of the company's revenue. Completed and ongoing projects of the company in the power sector include construction works for Units 3 and 4 of the Kaiga atomic power plant in Karnataka, the Rajasthan atomic power project, and a 120-MW captive power plant for National Aluminum Company Limited (BOM:532234) (Calcutta, West Bengal), a 500-MW power plant at Trombay, Maharashtra, and the fast breeder reactor at Kalpakkam, Tamil Nadu. In March last year, the company entered into a joint venture with Bermaco Energy Systems Limited (Mumbai) to set up renewable power generation plants at eight locations in the northern state of Haryana. It had also entered into a similar agreement with the state government of Punjab to set up nine such renewable power plants in the state.

Gammon is on an overseas acquisition drive, which will enable it to qualify as a bidder in contracts for large power projects in India. The company is looking to add design and engineering expertise to its portfolio by way of acquisitions. This will enable the firm to pursue opportunities in the country's power sector that are attracting foreign investments and international players in India's effort to add over 70,000 MW of power generation capacity by 2012.

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