GMR’s stock touched a new low of Rs 17.6 on last day of August post the CAG report on the company related to the airport business. Fundamentally though, things are coming in place for the company. First of all is the 352% tariff hike order for GMR operated Delhi Airport, which will improve the overall financial performance sequentially. Besides, the management is also trying to get existing things right.
It has announced initiatives like divesting stakes in group companies for reducing debt and refraining from investing in any new projects till March 2013 (read investment holiday). Both these efforts are expected to pay off well in future believe analysts. Hence, long term investors (investment horizon of at least two years) can see poor sentiments engulfing the stock as a buying opportunity.
Cleaning the mess
The initiatives like the investment holiday and divesting stakes are good moves and will help reduce GMR's huge gross debt of Rs 39,209 crore (net Rs 33,600 crore) as on June 2012 quarter. Says Deepal Delivala, analyst, Citi Research, in 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 group expects to garner about Rs 4,000 crore through divestments in group companies like GMR Infrastructure (holding company) and GMR Highways. It is confident to achieve decent progress in next six months. GMR group Chairman G M Rao told Business Standard last week that the group’s focus is 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 next two years,” he added.
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 about 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%. 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.
Financial performance to improve
The highlight of June 2012 quarter was turnaround in operations sequentially with all businesses making profits at operational level thanks to increased tariff rates at Delhi airport after AERA order. Financial performance in the coming quarters is expected to improve further with full benefits of the hike to be reflected in December 2012 quarter since many tickets for September 2012 quarter were booked before May 15 (announcement of tariff hike). Says Amit Srivastava, analyst, Nirmal Bang, “We expect improvement in profitability of airport segment to turnaround the company into profit.”
But few concerns remain
Strong revenue growth of airports business (22.4%) was largely helped by the new increased tariffs. But traffic growth year-on-year in major airports namely Delhi (1%) and Hyderabad (flat) was poor thanks to the slowdown.
Further, plant load factor (PLF) of gas-based power plants (over 70% of total operational capacity) came in significantly lower due to lower fuel supply. Also, the company has completed gas-based Rajahmudhry project (768mw) 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.”
