GVK Power needs quick asset monetization

Infrastructure firms have had to contend with fund-raising challenges in the past two years, particularly because of tight liquidity conditions prevailing globally. Last week, media reports said that Korea Electric Power Corp. is talking to GVK Power and Infrastructure Ltd (GVKPIL) for acquiring a stake in its power business. If that happens, it could be a boon for the debt-laden private sector infrastructure giant.

Unfortunately, the firm has met with little success in its endeavour to raise funds in its businesses—airports, roads and energy. Operational cash flows have been hit due to reasons beyond its control. For instance, lower operating income at one of its power projects (Gautami) was due to shortfall of gas. So the plant load factor fell to 73% in fiscal 2012 from 90% in the previous year.

Likewise, the firm has not got any relief from revision in airport development charges as in the case of its closest peer, GMR Infrastructure Ltd. Further, GVKPIL’s intent to ramp up revenue in Mumbai airport through monetization of land is delayed due to slum rehabilitation issues.

Meanwhile, bridge loans taken to fund the equity increase (via acquisition) in Bangalore airport to 49% and Mumbai airport to 50.5% have increased interest costs. These loans are also more expensive than project-linked loans. According to analysts, unless the projects throw up cash, interest on such loans will kill the firm’s profitability. It’s no surprise then that GVKPIL’s consolidated net profit for fiscal 2012 at Rs 61.4 crore was down to less than half that of the previous year.

Interest cost burgeoned at the consolidated level to Rs 467 crore in fiscal 2012 from Rs 263 crore a year before. The debt has ballooned by nearly three times to around Rs 14,000 crore at end-fiscal 2012 at a time when project cash flows are troubled.

A report by Edelweiss Securities Ltd after the March 2012 financial results says, “Apart from ongoing capex in Mial, Bial (Mumbai and Bangalore airports) and power projects, GVK will need funding for three under-development road projects (upwards of Rs 1000 crore), which will stretch the company’s balance sheet even further.” And with operational revenue growth taking a beating, interest cover ratio, too, has been falling.

Given such funding constraints and a huge line-up of projects under development, any equity stake sale or quick asset monetization will certainly bring relief to the company. To compare, GMR, too, carries a huge debt of around Rs 36,000 crore on its books as at March. But equity requirements for future projects have been tied up, according to analysts, given its cash balance of around Rs 5,000 crore as on 31 March.

GVK’s stock price would, therefore, get a shot in the arm only when balance sheet pressures ease.

We welcome your comments at marktomarket@livemint.com