GMR Infrastructure Ltd’s stock touched a new low of Rs 17.60 on August 31 after the Comptroller and Auditor General of India (CAG), the national auditor, released a report on the company’s Delhi Airport deal. However, since then, it has rebounded 12 per cent to Rs 19.50 today, which can be partly attributed to expectations of improvement in the company’s fundamentals. GMR’s management recently announced it was working towards divesting stakes in group companies for reducing debt and would also refrain from investing in any new asset heavy projects till March 2013 (read investment holiday). Both these efforts are expected to pay off well in the future, believe analysts. Earlier, the airports’ regulator had permitted a 352 per cent rate hike for the Delhi Airport, which is also expected to help improve the overall financial performance of GMR. In this backdrop, long-term investors (investment horizon of at least two years) can see poor sentiments engulfing the stock as a buying opportunity.
Lowering debt, increasing cash flows
The initiatives like the investment holiday and divesting stakes are good moves and will help reduce GMR’s huge gross consolidated debt of Rs 39,209 crore (net Rs 33,600 crore) as on the June quarter. Says Deepal Delivala, an analyst at Citi Research, in a report dated August 14: “Investment holiday is a much needed breather given the company’s fast pace of growth (of assets under portfolio), current macro-environment that is fraught with challenges for almost all its businesses and increased size of balance sheet.”
The management expects to garner about Rs 4,000 crore through divestments in subsidiaries like GMR Highways as well as GMR Infrastructure (the listed holding company). It is confident of achieving decent progress in the next six months. GMR group Chairman G M Rao told Business Standard last week the group’s focus was to develop more cash flows in the business. “Our target is to increase cash reserves from Rs 3,000 crore currently to Rs 10,000 crore in two years,” he said.
| IMPROVING PROSPECTS | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 7,642 | 8,929 | 11,852 |
| % change y-o-y | 32.4 | 16.8 | 32.7 |
| Operating profit | 1,759 | 3,304 | 4,940 |
| % change y-o-y | 13 | 87.8 | 49.5 |
| Adjusted net profit | -441 | 158 | 571 |
| % change y-o-y | NA | LTP | 261.6 |
| E : Estimates NA : Not Applicable LTP : Loss to Profit Consolidated financials Source: Company, Analyst reports | |||
Analysts see this as the biggest positive move. Says Shankar K of Edelweiss: “The company’s ability to improve cash flows will be the key driver of the stock price.”
The company has also chalked out a new strategy of ‘asset light’ and ‘asset right’ for all future projects. The first is more related to airports business. It means picking up projects where the job is to maintain and run the airport infrastructure for a fee and having only a minority equity stake of 10-26 per cent. Asset right strategy means getting into new infra projects with majority stake, running these for one or two years, and then divesting majority stake for a premium.
Performance to improve
The highlight of the June quarter was the turnaround in operations sequentially, with all businesses making profits at the operational level, thanks to increased tariff rates at Delhi airport. Financial performance in the coming quarters is expected to improve further with full benefits of the tariff hike to be reflected in the December quarter since many tickets for the September quarter were booked before May 15 (announcement of rate hike). Says Amit Srivastava, an analyst at Nirmal Bang: “We expect improvement in profitability of airport segment to turn around the company into profit.”
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Strong revenue growth of airports business (up 22.4 per cent) was largely helped by the increase in rates. But year-on-year traffic growth in major airports, namely Delhi (one per cent) and Hyderabad (flat), was poor thanks to the slowdown. If the trend persists for long, it could shave off some of the expected gains in the company’s performance.
Further, plant load factor (PLF) of gas-based power plants (over 70 per cent of the total operational capacity) came in significantly lower due to lack of sufficient fuel supply. Also, the company has completed the gas-based Rajahmudhry project (768 Mw), but is not able to commission the plant for want of gas. These concerns have not abated.
Says Shankar of Edelweiss: “While regulatory overhang in airports has diminished, slowdown in traffic growth, lower PLFs due to fuel issues, and mounting debt burden concern us.” Adds Deepal Delivala of Citi: “We expect the stock to be under pressure unless there is clarity on gas availability, signing of fuel supply agreements for coal-based power plants and real estate monetisation at Delhi airport.”