Stock Review: GMR Infrastructure

The decision to sell 50 per cent stake in the USbased InterGen for $1.23 billion to China's largest power generation company, Huaneng Group, is in line with GMR Infrastructure's strategy to focus on domestic operations, especially the highyielding power projects.

The acquisition of InterGen for about $1.13 billion in October 2008 was not yielding the desired results due to global recession and InterGen's diversified presence in developed markets like the United Kingdom, Australia, the Netherlands, Mexico and the Philippines. Consequently, returns from global power assets and dividend payout by the US-based company were not sufficient to cover the interest cost of the acquisition debt. GMR had to re-finance the $737-million short-term debt at a lower rate recently.

GMR did not consolidate InterGen's financials with itself. Hence, the deal does not directly impact its fundamentals. However, according to analysts, there will be an inflow of over $200 million, which will improve GMR's high net debt-to-equity ratio of over two times. Moreover, the acquisition debt was guaranteed by GMR, and after March 2011, the company would have had to consolidate InterGen, according to the International Financial Reporting Standards norms. Hence, this transaction assumes significance for the outlook of the company.

The deal, subject to customary regulatory approvals in each jurisdiction where InterGen operates as well as the Chinese government, is expected to be completed by the first quarter of 2011-12.

The key overhang of the underperforming InterGen is now gone and investors can expect better profitability and improved returns, say analysts. The deal also gives more headroom to the company to finance its power expansion programme (to 4,261 Mw) in the next few years.

Stake sale in InterGen will help the company improve its net debt to equity ratio, boosting profitability