Returns from infrastructure firms are normally seen only when the long-gestation, capital-intensive assets bring in revenue momentum, as this helps cover the large fixed costs incurred in setting them up.
GMR Infrastructure Ltd is at a similar inflection point, even as rising debt and the consequent interest burden, along with regulatory issues about its airport and energy projects, have hit profitability.
June quarter revenue rose 51% from a year ago, higher than estimates. Much of this came from the airport segment where revenue more than doubled, with its four key airports registering a 27% increase in passenger traffic. The energy sector, which accounts for one-third of its revenue, grew 18%.
Also See | Value Collapse (PDF)
But GMR has to manage some concerns. One is the tariff revision pending for the T3 terminal at the Delhi airport, which the management reckons is expected in the near term. This will raise revenue, along with the 20% estimated rise in passenger traffic expected for the current year. At present, high fixed costs, with the airport operating at about half its capacity, are hurting profitability. June quarter’s operating profit fell 20% and margins fell to 27% from 46% a year ago.
Next, of its three power projects, two rely on gas to fire its plants. Short supply led to lower-than-expected plant load factor at one of the plants, while the Chennai unit appears to have payments due from the electricity board.
Analysts say merchant tariffs may see a downward trend in the near term, which could hurt revenue growth and profitability. That said, all its power projects are on a fast track and the management believes the energy segment would drive revenue and profit in three-five years.
Three, its huge debt of about Rs 21,700 crore at end-June would eat into earnings if its revenue does not generate enough operating profits to cover interest costs and repayments. An Icra Ltd report says, “Re-leveraging the balance sheet is imminent given the substantial group capex (capital expenditure) plans. We expect debt/equity to peak at 2.2 times by FY12 and moderate thereafter, with the progressive commissioning of assets under development.” In the June quarter, interest cover (Ebitda/interest paid) was a low 1.3, compared with 1.4 a year ago. Any downside in revenue would be a risk to profit growth. The June quarter’s net loss of Rs 66.7 crore was partly due to higher interest costs. Ebitda refers to earnings before interest, tax, depreciation and amortization.
The above concerns, along with negative sentiment towards infrastructure stocks, have seen GMR shares underperform the CNX Nifty of the National Stock Exchange since January. A sustained upside could come only with easing of these concerns and strong revenue momentum.
Graphic by Ahmed Raza Khan/Mint
We welcome your comments at email@example.com