We are exploring asset light biz model: A Subba Rao

Interview with CFO, GMR Group

The past four quarters have been weighing on GMR Infrastructure as the heavy investments on upgrading the Delhi International Airport and the protracted discussions with government to have the Airport Development Fee (ADF) implemented has led to the company posting its fourth consecutive quarter of losses. The company is, however, hopeful that as soon as the Airport Economic Regulatory Authority (AERA) decides to effect the fee from April 2012, there will be profitability. However, the question still remains how much of a hike will be effected. In a discussion with Raghuvir Badrinath, GMR Group CFO A Subba Rao indicated various steps GMR is taking to come out of the situation. Excerpts from the discussion:

 

While everyone understands that infrastructure has a long gestation sector when one looks at Return on Investments, isn’t GMR taking too long to deliver?
During the past decade, we have built up a wide array of assets and it has been a good learning curve. We have gained expertise in bidding, project management and execution of large infrastructure projects. On a quarter-to-quarter basis, there will be projects which will have some problems due to which margins drop. Having said that, we are now putting a high emphasis on sweating our assets, which will yield good results. In addition to that we are exploring the option of including an asset-light business model where we will work closely with companies who invest in such large assets and we will bring in our expertise to manage those assets. For instance, if there is a $1 billion airport project, we can manage that airport without owning the asset on which we can earn as much 3 per cent on the revenues, and this is quite good.

The aspects of getting a hike effected at the Delhi International Airport is nearing closure. While the AERA has suggested a 334 per cent hike in ADF, you had asked for as much as 700 per cent increase. How do you see this panning out?
First of all, we welcome the move by the AERA to come out with a discussion paper and take the view of all stakeholders. While a decision is awaited, a return of 16 per cent on the investment is certainly viable. Private equity investors look for at least a 25 per cent return, and the 16 per cent return which the AERA talks about is a difficult one. While there will be profitability in our airports business on those returns, the quality of returns will not be up to the mark. We will have to wait and watch how the AERA will finally decide on the ADF which is expected shortly.

The power business is also in the red for various reasons such as the gas allocation for two of your power projects. How do you think you will be able to address this?
We went ahead and built capacities based on government assurances that there will be gas allocation for the players. Now, the gas allocation has gone into a tailspin due to which our power plants which run on gas are running on a plant load factor of 50-60 per cent and we are in constant dialogues with the government. With the Union Government meeting various stakeholders in the power sector recently, we are confident that several bottlenecks the sector is reeling under now will soon be removed through a time-bound action plan being coordinated through a newly-formed ‘committee of secretaries’.

The gross debt has moved up to Rs 29,000 crore and so has the leverage which must be sapping the net profit? How are you looking to deleverage the balancesheet?
First of all, nearly 70 per cent of the debt is tied to projects and is serviced by the revenues of the respective projects and they are all properly ring-fenced. Having said that, we are also looking at options of reducing the debt.

One of the options is to tap the bond markets and we may be looking to raise $200-300 million. The timing, however, is yet to finalised. While that is the long-term play, in the shorter term, we are raising Rs 1,200 crore debt from our airport vertical which will be securitised against the collection of development fees.

We plan to retire some short term debt of Rs 600 crore through this which will reduce our interest outflow by as much as Rs 40 crore on an annualised basis. In terms of corporate overheads, we have formed a pact with Genpact for a shared services centre for a range of our operations such as finance, HR and administration.