Stock Review: GMR Infrastructure

GMR Infrastructure has been an underperformer on the bourses over the past year. Its stock has fallen 28 per cent compared to 17 per cent rise in the Sensex due to a disappointing financial performance. This is because its top line has stayed flat over the past four quarters, while its airports, power and roads businesses are in an expansionary phase.

In the September quarter, the company reported a loss of `69 crore (after adjusting for extraordinary items) at the net level along with higher operational expenditure and capitalisation costs incurred on partial commissioning of Terminal-3 of Delhi airport.

Also, a high debt-equity ratio of about 2.5 times is partly responsible for dragging earnings growth. In the medium term, the outlook for airports and power businesses is cautious, while roads provide better visibility.

In airports, robust passenger traffic growth and an increase in user development fee at the Hyderabad airport (which is already profitable) will be more than compensated by full capitalisation costs due to commissioning of domestic operations at Delhi.

In power, the company has been grappling with gas supply constraints in the 235mw Kakinada plant (which could also affect the upcoming 768-mw Rajahmundry).

Pressure on merchant tariffs — down 40 per cent y-oyto `4.05 per unit in the second quarter impacting 30 per cent of its capacity — could also affect overall returns. With the company expanding its power capacity from 808 Mw to 4,261 Mw, this business will continue to be positive for the next few years.

The roads business is in abetter shape. GMR Infra has witnessed good traffic growth in its three toll-based projects, which led to 18 per cent growth in operating profit. While roads will continue to be a good business, returns are relatively lower compared to other businesses as competition is high. Analysts estimate a sum-of-parts valuation of `65 compared to the market price of `50.

A high debt-equity ratio of about 2.5 times is partly responsible for dragging earnings growth