GMR Infra: Flying low

Profitability could be under pressure in the near term due to high fixed costs on various projects.

GMR Infrastructure’s operating profit margins, at just over 27 per cent in the June 2009 quarter, were somewhat disappointing and came in 250-300 basis points lower than what analysts had pencilled in. While the margins were up 30 basis points year-on-year, they were muted thanks to the weaker profitability of the power division, for which margins came off by about 700 basis points.

The power division contributes slightly more than 50 per cent to the company’s revenues, with airports and roads bringing in the rest. During the June quarter, GMR was precluded from selling power from its Tanir Bavi plant in Karnataka as merchant sales. As a result, power was diverted to the state government and fetched lower realisations, leaving only a small surplus after production costs were taken care of. Nevertheless, GMR’s revenues for the quarter rose a reasonably good 33 per cent year-on-year to Rs 1,180 crore, with a couple of new roads commissioned and also revenues flowing in from the joint venture constructing the Sabiha Gokcen airport.

However, with air traffic yet to pick up, revenues from airports were up just 16 per cent. On the cost side, the commissioning of new roads led to higher depreciation and the company also paid out nearly Rs 200 crore by way of interest. All in all, the muted operating margins, coupled with high interest and depreciation charges, resulted in a fairly steep fall of 70 per cent in the profit after tax to Rs 22.5 crore. GMR has a fairly strong balance sheet and is well–positioned to cash in on the growth in infrastructure in the country in the next few years, given that it has a presence across sectors such as power, roads and airports.

However, industry watchers believe that revenues from airports and roads would remain muted in the near term, with the economy yet to recover from the downturn, while the high fixed costs (interest and depreciation) on the newer projects could hurt profitability. GMR is expected to turn in revenues of around Rs 5,300 crore in the current year, an increase of around 20 per cent over 2008-09, while the earnings per share are expected to go up by about 35 per cent. IDFC SSKI has a fair value of Rs 124 for the stock which currently trades at around Rs 132.