GMR infrastructure

GMR infrastructure is well geared for substantial growth over the long term fuelled by its power and airport businesses

THERE are a few construction and infrastructure companies, which have been able to generate positive cash flows from operations. This is because of heavily leveraged balance sheets, higher working capital requirements or developmental stage of their projects. This has exposed them to greater risk in the current economic downturn. However, if the company has a clutch of mature and operational projects, resultant steady cash flows is a comfort factor for future funding requirements. GMR Infrastructure, at present, is placed in such a comfortable zone.

BUSINESS:

GMR Infrastructure is engaged in the business of power, airports and highways, which contributed 49.11%, 41.91% and 3.49% in the nine months ended December 2008 . The company is also into commercial real estate development and special economic zone close to 4050 acres. However, the progress is slow due to downturn in the market.

GROWTH DRIVERS:

In the power business, growth is expected to come from FY12 and beyond due to an additional 5,000 MW capacity at eight different locations in India. Further, its existing business is likely to benefit from lower naphtha prices and higher gas availability from the KG basin. The biggest growth driver is going to be its airport business. Hyderabad airport is already operational. The company’s efforts to add new airlines, increase the user development fee and other aero charges will increase revenue. Full development of the Delhi airport will give a boost to the airports business in the long term. The company is targeting to complete all its remaining road projects by March 2009.

CONCERNS:

The company’s airport business is dependent on the growth of the overall traffic growth at the airports. While domestic traffic is unlikely to pick up dramatically, substantially and immediately, the growth in the international passenger traffic is expected to remain steady. International passenger traffic, which formed only 25% and 33% in the total passenger traffic, grew by 8.3% and 9.7% at Delhi and Hyderabad airports, respectively, in the nine months of FY09.

GMR’s consolidated debt-to-equity ratio of 1.3 in FY08 is expected to increase. With the consolidation of Intergen, this will go up substantially. The company is also exposed to refinancing risk of the bridge loan. In a fiscal deficit scenario, where interest rates are expected to remain higher, the company is expected to continue to witness the burden of interest charges, which means subdued profitability.

POSITIVE DEVELOPMENTS:

The government has allowed company to charge the Airport Development Fee (ADF) from departing passengers at the Delhi Airport. The permission to charge ADF of Rs 200 per domestic passenger and Rs 1,300 per international passenger for three years from March 1, 2009 is likely to ease the company’s funding requirement to complete the Delhi Airport project on time before the Common Wealth Games in September 2010. Secondly, GMR Holdings, which holds 73.28% in the company as on December 2008 quarter, has bought 2.7 million of the company (termed as creeping acquisition) in 2009 till date and has increased its shareholding to 74.2% as on February 20, 2009.

FINANCIALS:

In December 2008 quarter, consolidated net revenues jumped 79.28% to Rs 959.15 crore, thanks to significant jump in revenues from power (47.7% rise in revenues) and airports (189.4%). Operating profit witnessed an even higher growth of 91.99% to Rs 287.8 crore. However, net profit declined 36.3% to Rs 64.07 crore after accounting for minority interest, notional forex losses while interest and depreciation costs more than doubled.

OUTLOOK:

March 2009 quarter is expected to be better due to improving passenger traffic following reduction of airfares, recently commissioned Ambala-Chandigarh BOT project and resumption of operations at Vemagiri power plant, which were affected due to lack of gas. However, net profit would remain under pressure due to higher fixed costs. The stock trades at around 2.3 times its price to book value for FY10. Though this is on higher side, the company’s real growth will start from FY11 and beyond, as its power and airport projects, which are at various stages of completion, start contributing . Hence, longterm investors should accumulate the stock.

BUILDING BLOCKS

• GMR has two domestic airports at Hyderabad, Delhi and one international airport—Istanbul (Turkey) under its fold
• It is also into power sector with 11 projects out of which three in—Chennai, Karnataka and Andhra Pradesh—are operational with a total capacity of around 800 MW
• Highways segment consists of 6 build-operate-transfer (BOT) projects totalling to 422 kilometres, out of which, four projects, including three annuity-based and one toll based, are operational
• While growth in the revenues will be robust over the next few years, higher fixed costs could constrain rise in net profit
• GMR acquired 50% stake in Netherlands-based Intergen with the power generation capacity of 7658 MW in June ’08. This marks GMR’s entry into the UK, the Netherlands, Mexico, Philippines and Australia. However, debt levels are likely to rise substantially on consolidation due to a bridge loan of $954 million