Ray of hope for GMR Infra

The tribunal's ruling in its favour on the Maldives project is a positive but only the first step; bringing strategic investors in airport and power verticals is crucial

GMR Infrastructure, which operates many power, airport and road projects, got major relief as the tribunal looking at the dispute in its erstwhile Maldives airport project ruled in its favour.

Its subsidiary was to modernise and operate the airport but two years after, in 2012, the then government cancelled the contract. Then, the company and banks approached the tribunal, which has held the concession agreement was valid and binding. The bigger positive is that the damages include sums owed to the project lenders, including the consortium led by Axis Bank.

This is good news for the group, under debt pressure. The $511 million project is estimated to have a debt component of $358 million. In line with the first partial order, hearings on the amount of damages are expected and the entire process is expected to be complete by the third or fourth quarter of calendar year 2016.

Sandeep Upadhyay, managing director, Centrum Infrastructure Advisory, believes the order is positive and among the first steps to final completion of the arbitration process. This will further boost the financials of the airports vertical, largest contributor to the GMR group’s profit. One will also have to look at turnaround in performance of other verticals for the consolidated numbers to look healthy.

The key to turnaround in the company’s prospects hinge on the energy business and monetisation of assets in various verticals, such as airports. The company has high debt and there has to be some capital infusion or sale of assets, say analysts.

The group’s net debt at the end of December ’15 was about Rs 40,200 crore, a debt to equity ratio of 4.6. Even if one assumes GMR receives about $500 million and this is used to repay debt, the leverage position will only marginally reduce. Following the news, the stock initially gained on Wednesday but gave up ground to close with a net loss of 0.7 per cent, to Rs 11.17.

Currently, while the airport vertical remains profitable, the power division is incurring losses, though this reduced in the December quarter. Passenger and cargo traffic continues to grow well (20 per cent and nine per cent year-on-year in the quarter. The power vertical, though, is seeing improvement, led by thermal assets; however, gas availability remains a problem. With government efforts on improving of gas supplies, things should improve.

The bigger gains will accrue if the current low demand and realisation reverses. For thermal power assets, with GMR winning captive coal blocks for its Chhattisgarh plant, there is increased fuel visibility but analysts at IDFC Securities say uncertainty persists on the amount and pricing of power offtake from here.

Overall, though concerns persist, the visibility over cash flows is improving. Analysts at Edelweiss say they remain optimistic on the latter. Efforts by the company are on to secure power purchase agreements for the 1.4 Gw Chhattisgarh coal-based plant and to monetise land parcels and a couple of Special Economic Zones and Delhi airport. A deal with Kuwait Investment Authority has been concluded and there are efforts to bring in strategic investors for both the airport and power verticals.

Though debt remains high, looking at the management’s efforts on reducing these, analysts' fair values for the stock, even after factoring the concerns, stand substantially higher than current prices. Analysts at Edelweiss have a target price of Rs 23 and those at IDFC at Rs 17. The consensus target price of analysts polled on Bloomberg during February is Rs 17.25.