GMR Infra: Capitalising on power assets

The listing of GMR Energy should help unlock value of power assets; improving prospects of airport biz should add to gains

After GMR Energy, a wholly-owned subsidiary of GMR Infrastructure (GMR), filed its prospectus for an Initial Public Offering (IPO), the Street became hopeful that some of GMR’s concerns would ease. These concerns, mainly due to the high debt, as well as regulatory issues, have led to a significant erosion in market capitalisation over the last few years. Importantly, the market was reluctant to give much value to these power assets (which GMR owns through GMR Energy) because of lack of fuel, unfavourable rate environment and need for further funding. With GMR Energy estimated to be raising funds of Rs 1,450 crore (Rs 700 crore to be used for equity contribution towards power projects and repayment of debt) through the IPO, the funding issues should get resolved. Part of the IPO will be an offer for sale for existing PE (private equity) investors.

"We perceive GMR Energy’s fund-raising as positive since it will set a valuation benchmark for the energy assets and also relieve balance-sheet pressures. We maintain a buy rating, with sum-of-parts based target of Rs 30 a share," said Shankar K of Edelweiss Securities.

Valuations have been a key issue, as analysts were finding it difficult to assign a significant value to the assets of GMR due to regulatory and other issues. GMR Infra is estimated to have invested Rs 6,500 crore in GMR Energy in the form of equity, which works out to Rs 17 a share for GMR. However, the market was not assigning any significant value to these assets. Shankar has valued GMR Infra’s (assuming 80 per cent) stake in GMR Energy at Rs 4 a share of GMR. But, this will change and the Street is likely to start valuing these assets closer to its real value once the company (GMR Energy) gets listed separately.

With more clarity on the availability of gas and other issues like rate expected to emerge, analysts hope to see more gains. GMR Energy has total power generation capacity of 4,800 Mw, of which 2,500 is operational while the rest is under implementation. However, of the operational capacity, 823 is powered by gas, which has suffered because of lack of sufficient gas, and has led to lower utilisation of the gas-based plants (rest of the operational capacity is largely coal-based).

As a result, GMR Energy has reported losses in recent years. For the six months ended September, too, the company reported total sales turnover of Rs 1,404 crore but ended with a loss. Because of higher fixed charges and lower utilisation, it incurred a loss of Rs 849 crore, almost equal to the loss of Rs 892 crore in FY13.

Due to the losses, GMR Energy’s net worth or equity capital has eroded. As of September, the equity capital had fallen to Rs 2,471 crore. Analysts have been sceptical about assigning value to these assets. The pricing of the IPO should provide clarity on valuations. Since the market has been very conservative, any uptick in valuations should prove an advantage for GMR Infra's shareholders. Even at one time its current equity capital (book value), the value of GMR's stake in the subsidiary is Rs 6.4 a share, 28 per cent of its market price.

Meanwhile, the value of GMR’s other businesses: Airports (Rs 18 a share), Indonesian coal mine (Rs 1 a share) and cash and liquid investments totals Rs 25 a share as against market price of Rs 23. Add the value of energy assets, and the total value of GMR is much higher than the current price.

Analysts say the airport business, a large chunk of GMR’s value, is making profits and some regulatory issues, too, are resolving like in the case of the Delhi Airport. The air traffic is expected to improve and non-aero business should do well. During the December quarter, the airport business recorded a revenue of Rs 1,605 crore, higher 0.4 per cent on a year ago. The segment reported 15 per cent growth in net profit to Rs 324 crore.