GMR Infra: Project win a plus

The company’s 30 per cent stake sale in GMR Energy Singapore at a premium is not factored into valuations.

GMR Infrastructure, which has a presence in airports, road construction and power generation, has been in the news of late. In recent times, investors have run out of patience with infrastructure stocks, as new projects are hardly coming up and interest rates are high. Under these circumstances, GMR Infra’s winning an award for six-laning of the biggest stretch (Kishangarh-Udaipur-Ahmedabad) of the Golden Quadrilateral, covering 555 km, is some reason to cheer. As of now, this is a four-lane highway and will also pass through the Delhi-Mumbai Industrial Corridor.

According to Amit Srivastava of Nirmal Bang Securities, GMR Infrastructure bid for the project with a negative grant (the amount a company pays upfront to the National Highways Authority of India as premium to get the contract in a lucrative stretch of road) of Rs 636 crore. There will be an increase of five per cent each year. Analysts say this is a rather aggressive bid, Rs 120 crore higher than the second closest bidder. They believe infrastructure companies are aggressively bidding for road projects in the absence of any movement in other projects, which could dent profitability. The company is expected to commence work on the project from April 2012. “Based on the debt-equity ratio of 3:1, the company will have to raise a debt of Rs 5,400 crore and invest in equity of Rs 1,800 crore over the next three years,” says Nirmal Bang.

Apart from this trigger, the company has struck a deal with Petronas International to divest 30 per cent in GMR Energy (Singapore) Pte. The value of the deal is at a 30 per cent premium to its equity investment (S$127 million). According to ICICI Securities, based on this deal, GMR’s investment in the Jurong Island project is valued at S$165 million, implying contribution of Rs 1.6 a share. Currently, the Singapore project is involved in developing a gas-fired 800 Mw power project on Jurong Island. The total cost of the project is S$1175 million, with a S$670-million debt.

At the current price of Rs 27, the stock is trading at a valuation of 1.1 times the FY13 price/book value. However, most analysts have not incorporated the Singapore investment and mega project into their SOTP (sum of total parts) valuation, as the project will be commissioned in the third quarter of FY13. While the airports business accounts for a majority of the SOTP valuation, mining and power come second. As of now, roads comprise a very small piece of the SOTP valuation.