Tenaga deal positive for GMR, but investors ain’t biting

GMR will gain in at least two ways from its deal with Malaysian utility firm Tenaga Nasional—its debt will be trimmed and valuation of the energy business will get a major boost

Graphic: Paras Jain/Mint
Graphic: Paras Jain/Mint

GMR Infrastructure Ltd has struck quite a nifty deal with Malaysian utility firm Tenaga Nasional Bhd. The latter will pick up a 30% stake in GMR’s energy subsidiary for Rs.2,000 crore. GMR will gain in at least two ways from this deal.

One, this capital infusion will straightaway trim debt. In a conference call with reporters on Monday, GMR’s management said its corporate debt would reduce from Rs.6,300 crore to Rs.4,300 crore. Note that GMR’s consolidated debt, including project-specific borrowings, still stands at close to Rs.40,000 crore.

Still, any dent in that pile of debt will in turn cut interest costs, bringing relief to the profit and loss account too. In the last at least eight quarters, GMR has been reporting profits at the Ebitda (earnings before interest, taxes, depreciation and amortization) level. However, interest costs that are as much as one-third of sales meant the company was dragged into losses.

The second benefit for GMR is that this investment has catapulted the valuation of its energy business to a level higher than what the Street had estimated. Tenaga has valued the energy unit at Rs.6,700 crore. This excludes some new projects in Chhattisgarh and Indonesia. Analysts had pegged the valuation much lower at three-fourths of that offered by Tenaga.

This deal comes against a backdrop of some positives for GMR. The energy segment’s overall plant load factor and cash flows have consistently improved in the last few quarters. The airports and roads segments too have reported better operating margins throughout fiscal year 2016. The situation would only get better in these two segments as economic activity improves.

Yet, retail investor interest in GMR has been low, given that it still continues to post losses. Besides, like other private sector firms in infrastructure, the company is choked with macro issues such as paucity of gas and delays in project clearances.

That’s perhaps why the GMR stock rose just 0.81% on a day when the market benchmark performed far better. At around Rs.12.50 apiece, the shares trade just a tad above their one-year forward estimated book value.

The remaining debt will still act as a fetter to GMR’s profitability. A February report from Elara Capital Ltd said the company is likely to turn profitable only in fiscal year 2018.

Frequent stock dilution in the last 18 months, high leverage and operational risks continue to weigh on sentiment and keep investors at bay.

The writer does not own shares in the above-mentioned companies.