GMR Infra: Debt reduction positive, but street cautious

Analysts are looking forward for signs of steady flow in revenue and profits for the consolidated entity

GMR Infrastructure (GMR) continues utilising its fast-growing airports business to improve its future prospects. After a recent move to monetise 10 million square feet of area at its Delhi airport, on Wednesday GMR announced a deal to raise Rs 8,000 crore from marquee long-term strategic and financial investors through equity investment in the airports business, GMR Airports (GAL). As the proceeds will be utilised for debt reduction, GMR also intends to demerge its energy, highways and, urban infrastructure & transportation businesses, a move long awaited. 

The proposed investment by Tata Group, GIC Singapore’s sovereign wealth fund and SSG Capital in GAL will help GMR significantly reduce its current net debt of Rs 20,000 crore. However, existing PE (private equity) investors holding 5.8 per cent stake will also exit from GAL. Thus, post their exit, GMR’s net debt will be Rs 13,000-14,000 crore, given that of the Rs 8,000 crore equity infusion, Rs 1,000 crore will go directly into GAL and assuming another Rs 1,000 crore would go towards compensating PE investors. Nevertheless, the debt reduction will be substantial and positive for GMR. Moreover, GMR’s stake in GAL, even at reduced levels, will be about 54 per cent. Post earn-outs of up to Rs 4,475 crore linked to achievement of certain milestones and performance over next 5 years, GMR’s stake is pegged at 61 per cent.

However, since the airports business remains the key cash cow, the reduction in stake to bring down GMR’s combined debt is looked at with slight concern by analysts. That’s because, GMR’s other businesses such as energy & power and road portfolio, after facing heat for a long time due to low coal availability/tariffs and traffic growth respectively, though improving, their future revenue and profitability remains lumpy, says a fund manager. Even airports is a long gestation business and the progress on land development, footfalls, regulatory issues, etc will have a bearing on financials. Hence, GMR’s consolidated revenue trend may remain lumpy. Thus, analysts suggest that investors should wait for a few quarters till revenue and profits start showing a steady trend, recent developments bear fruits and GMR’s energy, power and road assets derive value (crucial for demerger). A K Prabhakar, Head of Research at IDBI Capital, says that while debt reduction is positive, he would wait before recommending investors to enter the counter.

Little surprising that GMR’s stock, after seeing intra-day gains of 9.25 per cent, closed 0.26 down on Wednesday on the BSE.