GMR has kicked off this financial year with massive fund raising. It announced today that IDFC and co-investors Argonaut Ventures and Ascent Capital will invest Rs 465 crore in its energy subsidiary, GMR Energy. The energy venture earlier raised $200 million from Temasek. The parent company raised $315 million through a QIP in April. GMR’s Chief Financial Officer A Subba Rao talks to Katya Naidu on the rationale behind the company’s fund raising drive. Edited excerpts:
GMR Energy was supposed to raise money through an IPO (initial public offer) earlier. However, you changed track to go in for a private equity investment instead. Are volatile market conditions the reason behind this?
Market conditions were never a problem. We have seen a lot of power IPOs. IPO creates an immediate dilution and you have to time it properly. An IPO has to happen when there is a reasonable mass of assets. In the next two-three years, there are lots of assets which are coming in to implementation. That is the right time to hit the market. Value creation which will happen in the next few years is huge as compared to the fixed return we are going to pay to the PE (private equity) investors. That is the reason why we went in for private equity, so that it adds value to the public shareholders who are in GMR Infra. We could go in for an IPO in the next one-two years.
GMR Infra has taken a resolution to raise Rs 5,000 crore. Are you planning to exercise that option soon?
We do not intend to raise any capital as of now. The capital we raised through QIP and PE would meet the requirement for the next two years. The enabling resolution is for contingency purposes. If there is a new project which comes and we need to raise money, then going to the shareholders is a two-month process. And, the market conditions which are favourable may disappear. We keep this kind of resolution in place; if there is any requirement, we can immediately go and raise capital, like we did in the case of QIP. When opportunity comes knocking, if you don’t have the capital, you do not have confidence. We can’t raise capital after we bag the opportunity; it will be too late.
What opportunities do you see in the power sector? Are state governments likely to seek bids for power projects this year?
With the present regulations, one can go ahead and set up a power plant and sell across the states in a two-bid process. Of course, one needs to have land and fuel arrangements. There is a huge demand. Once you set up a competitive power project, you have the business case to sell power. This power can be sold to the government or on a merchant basis. If you are in a position to produce anywhere between Rs 2.50 to Rs 2.60 per unit, you have endless demand.
What merchant exposure are you looking at?
We would like to go for 50-60 per cent power sales by the regulated route and the rest in merchant. If cost of generation is at Rs 2.50, one can even sell 100 per cent of the power on a merchant basis. Regulated return for the power sector is 16 per cent and that is tax-free; returns in merchant are better. With merchant sales, returns in our power business should touch 25 per cent and higher.
There have been a lot of road projects which sought bids and more are yet to come. Are you looking at participating in these?
There are a lot of competitive pressures in road projects. It is difficult to forecast how many projects we can bag, as it also depends on the competitive behaviour in the sector. We don’t want to bid irrationally.
What kind of expansion do you see in airports? What has been the traffic increase you have seen?
Traffic growth in airports is improving Last year, traffic in Delhi went up by 15 per cent. In Hyderabad, traffic has grown by only four per cent because of the Telangana disturbance.
This year, the first two months, April and May, have been good. This year should see much better growth than last year.
In Turkey, we have seen phenomenal growth. Traffic grew by 65 per cent last year. It is an exceptional case, because a lot of traffic is moving from the old airport. It can’t grow at 65 per cent every year but it will grow by a significant percentage. Turkey accounts for 18 per cent of your gross airports revenue.
How has been your experience with Intergen, which you have acquired in 2008?
Despite last year’s massacre in global markets, Intergen made positive Ebitda (earnings before interest, taxes, depreciation and amortisation) and cash flows and net cash accrual.
It did well in the toughest of times. Debt on account of Intergen is $1 billion.
We are going for refinancing around $837 million, which would be closed in the next couple of months.
