GMR Infra: More power to grow

The price of $1.1 billion (Rs 4,700 crore) that GMR Infra has paid to acquire a 50 per cent stake in InterGen NV is high, but the company appears to have decided to buy sustainable and visible revenues, even if means it paying a premium.

That may pay off in the long run. The EV/EBITDA (enterprise value/earnings before interest, tax and depreciation) multiple for the deal works out to 10.7 for 2007, which say analysts, is at a premium of about 20 per cent to multiples that global peers are trading at currently.

In terms of price earnings multiples(P/E) too, the transaction has taken place at over 21 times, a premium of nearly 30 per cent to the average multiple commanded by competitors globally.

The only concern is that InterGen is financially leveraged, with an outstanding debt of $4.3 billion on an equity of around $544 million, leaving little room for any slippages.

Nonetheless, the Rs 2,709 crore infrastructure development company, has acquired some good assets which makes it the biggest independent power producer in the country.

The $1.6 billion InterGen, based in the Netherlands, has interests in 12 power plants in countries such as Philippines, Australia and Mexico with a total capacity of 8033 mw, of which its proportionate share would be about 6180 mw.

Most of InterGen's projects are operating under long-term agreements; that lowers the risk considerably. Moreover, the cost of production is relatively low and the plants are well located close to the source of fuel or the demand centres.

GMR, which has around 808 mw of capacity, is expected to close FY09 with revenues of over Rs 5000 crore and an operating profit of about Rs 1900 crore. The stock has come off sharply in line with the rest of the market.

At the current price of Rs 81, the stock trades at 22 times estimated FY09 earnings per share of Rs 4. While the company is a good play on the fast-growing infrastructure sector in India, there are some risks relating to execution as also falling returns""which makes the stock expensive even at these levels.