GVK Power sacrifices returns for liquidity
The stake sale by GVK Power gives a breather to tide over cash flow constraints at least in the near term
On Monday, debt-laden infra firm GVK Power and Infrastructure Ltd said it would divest a 33% equity stake in Bangalore International Airport Ltd (BIAL) for Rs.2,150 crore.
Although the deal will cut debt immediately, it perhaps reflects the dire need for funds at the consolidated level and leaves a niggling question in the minds of investors about whether the firm has recovered the cost of equity in BIAL.
On the face of it, the deal is a neat one and will ease the interest burden by approximately Rs.300 crore per annum. Note that the firm is reeling under a consolidated net debt of Rs.22,143 crore (September 2015). Besides, it coughed up a huge interest cost of Rs.1,398.5 crore in fiscal 2015, higher than even its present market capitalization. Further, low revenue growth is weighing on its ability to service debt, which is mirrored in the falling interest cover ratio.
An Edelweiss Research report says, “The valuation for BIAL (based on this deal) is at a 10% premium to our value.”
It adds that it will reduce the debt of Rs.4,200 crore in the airport holding company.
The bigger question investors will be asking is whether GVK was able to recover the cost of equity funding for the airport. Given that the company is under financial duress, did it have to compromise on returns to tide over liquidity?
Recall that GVK had acquired a 43% stake in BIAL at Rs.1,800 crore between 2009 and 2011. Assuming an approximate five-year period from 2011 till date, the deal marks a compounded rate of return of about 9% on the investment, which is not great. Add to this, the firm had borrowed money to fund equity stake in its projects, which undoubtedly carries a higher rate of interest than that on project funding.
Why should GVK have exited then? After all, BIAL has been among the better performing airports with a decent growth in passenger and cargo traffic. It has been profitable in the last few quarters. For the December quarter, it clocked a net profit of Rs.114 crore. Besides, the economic revival, of which there are presumably green shoots, could have translated into better returns if the sale happened a bit later.
Certainly, the stake sale gives a breather to tide over cash flow constraints at least in the near term. Also, the consensus among the other stakeholders who are likely to continue is that GVK will continue to be at the helm of affairs, in spite of holding a mere 10% stake after the deal is completed. Hopefully, with base valuation set for airports with this deal, the improving economic milieu may help realize better returns when and if it decides to sell the balance stake.
GVK’s stock jumped 6% on the bourse, though it’s likely that the company’s highly leveraged balance sheet and losses will fail to evince investor interest on a sustained basis.