Some relief for GVK from Bengaluru airport stake sale

With debt of only Rs 2,000 crore likely to be retired after the deal, the loan burden is far from over

Despite a frenzy day of trade on Monday, the stock of GVK Power and Infrastructure (GVK) gained over six per cent following the company’s decision to sell 33 per cent stake in Bangalore International Airport Ltd (BIAL) to Fairfax India. Noted as the first exit by GVK from its marquee airports project, the transaction brings some relief to GVK’s debt burden of Rs 20,460 crore as on March 31, 2015.

According to GVK, an inflow of Rs 2,149 crore fetched by the deal would help the company retire debt up to Rs 2,000 crore, or 10 per cent, of its consolidated loan outstanding as on March 31, 2015. Consequently, interest burden, too, will reduce Rs 300 crore annually, or 15 per cent, of the annualised interest outgo of Rs 1,470 crore for nine-month operations in FY16.

The deal has a flip side, too. In FY15, BIAL contributed Rs 32 crore to GVK’s profit, and in the nine-month operations in FY16, profit from BIAL has zoomed to Rs 114 crore, thanks to an improvement in traffic and an increase in user development fee. With GVK now set to hold only 10 per cent stake in BIAL, contribution of profits from the Bangalore airport operations will also shrink proportionately. Nevertheless, the gains from interest cost savings will be more than the profit contribution from BIAL.

The stock gained as the deal, likely to conclude by the first quarter of FY17, will reduce GVK’s consolidated debt and trim the extent of losses.

All segments of the company have shown remarkable improvement in their operations in FY16 so far. For instance, the power segment (revenue of Rs 748 crore) posted a threefold growth year-on-year (y-o-y), while the airports segment saw 15 per cent growth (Rs 2,076 crore) for the first nine-month in FY16. Thus, the net loss is down 27 per cent y-o-y to Rs 526 crore.

With operations picking up, analysts earlier pegged FY17 losses to reduce to Rs 281 crore, compared to an estimate of Rs 790 crore in FY16. Upon the closure of BIAL deal, anticipated loss in FY17 could further reduce to Rs 100-120 crore. While demand for power remains subdued, analysts say, even if GVK operates at 30 per cent plant load factor, it should be adequate to cover the cost of debt for the power plants. Road projects, too, are in the process of being divested, and this could further ease the debt burden.

However, the loan outstanding of under Rs 20,000 crore remains a cause of worry, thus investment sentiments around the stock remains poor. Analysts rule out a reversal of sentiments in the near term, until the debt is erased substantially and its core operations turn profitable.