From poster boys to fallen heroes

GVK & GMR struggle to return to profits even as investors lose interest

Technically, GVK Power and Infrastructure and GMR Infrastructure should be on the 'buy' list of most fund managers as these two own some of the best infrastructure assets in the country. The two are the gateway to India, with GMR Power and Infrastructure operating the Mumbai International Airport and GMR Infrastructure running the Delhi and Hyderabad airports.

Despite their line-up of roads, airports and power assets, share prices of both have fallen 40 per cent over the last year, as both are battling high debt and operational challenges across businesses. Goldman Sachs has terminated its coverage of four infrastructure stocks, including GVK and GMR, to better focus resources. 

So is it endgame for these or can they come out of the slowdown unscathed? The first quarter numbers of both justify the apathy of analysts and investors. While GVK Power's topline declined 15 per cent year-on-year to Rs 700 crore, GMR reported a per cent increase in revenues to Rs 2,634 crore.

While GVK's poor sales performance was largely due to the zero contribution from its gas-fired power plants (JP-II and Gautami), GMR's performance was due to some projects, not fully commissioned, and the slowdown in other businesses. It's the airport business that helped GVK narrow its net loss to Rs 30.6 crore against estimates of Rs 52 crore. GMR's revenues from its airports business grew five per cent year-on-year to Rs 1,394 crore. 

While the airport assets are performing well after the rate revision, the roads and power businesses are a drag. Also both are realising their debts are not sustainable and, therefore, have tried to put in place action plans to deal with those. GVK is looking at selling a part of its stake in the airport business and raise Rs 3,000 crore. The company is also looking at monetising 1.8 million sq ft at the Mumbai International Airport. Despite the deleveraging plans, PhillipCapital says: "We remain negative on the stock, with the stretched balance sheet (debt:equity of 6.5x) and lack of natural gas availability." 

GMR is not only looking at asset sales but also at improving the liquidity across businesses. In power, it has started commissioning units at EMCO and Kamalanga. The company claims to have added Rs 80 crore in revenues from these. Once those stabilise, the contribution would rise. While the gross debt has risen from Rs 40,834 crore in March to Rs 41,141 crore in June, the company has converted expensive rupee loans into dollar loans of $100 million for the Delhi International Airport, where they have a natural hedge of dollar earnings. This would save the company Rs 40 crore in interest. These may sound promising on paper, but the market will want to see proof of profitability before turning positive.