Shares of GMR Infrastructure Ltd’s shares fell by 4% to Rs170 after it announced results for the March quarter late last week. The company’s net profit grew by a mere 6.4%, despite a 50% jump in net revenues, with high interest and depreciation charges eating into profitability.
But it’s important to note that the company’s current earnings have little to do with its valuation, and hence the results are of little importance. The company reported an EPS (earnings per share) of Rs1.50 for fiscal year 2008-09, which translates into a price-earnings multiple of 110. Being an infrastructure company with large projects in the power, airports and roads segments, GMR’s valuation depends on long-term cash flows expected from these projects, rather than near-term earnings. The company’s investments in the Delhi airport, for instance, are still not complete, and the full earnings potential of this venture is yet to be seen. Similarly, the Vemagiri power plant will be much more profitable once it gets regular gas supply from KG Basin.
But all these eventualities are factored in in analysts’ estimates of each of these projects’ value, and hence are already part of their sum-of-the-parts valuation. The company’s post-results commentary, meanwhile, hasn’t led to any major change in analysts’ estimates.
If anything, there were some negatives such as the sequential drop in profit of the power division owing to a dispute over tariffs with the Karnataka government. It’s interesting to see, therefore, that the company’s shares enjoy a valuation of Rs170 per share, even while consensus estimates of the company’s value is about Rs74.40 per share.
GMR shares got a boost after the election results, rising by 52% in just three weeks. The stock has now risen by 150% from its March lows. Ahmed Raza Khan / Mint
This is based on data compiled by Bloomberg. Even the highest estimates of the company’s value are around Rs100 per share, giving the impression that the stock is grossly overvalued.
GMR shares got a boost after the election results, rising by 52% in just three weeks. The stock has now risen by 150% from its March lows. According to an analyst, the company is expected to benefit under the United Progressive Alliance-regime.
Another reason given for the huge jump in GMR’s shares is the easing of the liquidity situation, which will make it easier for the company to fund its expansion plans.
The company, in fact, is planning to raise up to Rs5,000 crore through a qualified institutional placement (QIP) this week.
But even with all these positives, few analysts have meaningfully changed their valuation target for the company, and hence investors need to be careful about entering at current levels. In a report dated 18 May (i.e., even before the post-election rally), Nomura Holdings Inc. listed the GMR Infrastructure stock under the “ugly” category based on a composite ranking of liquidity, profitability, operating efficiency, asset turnover and market expectations.
The brokerage had noted that the stock’s valuations were “sky high”. With the stock having risen by 50% since, that would now be the consensus view among analysts.
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