The test of viability for most infrastructure firms is timely and appropriate funding through the long-haul project cycle. GVK Power and Infrastructure Ltd (GVKPIL)—with significant presence in energy, airports and roads—has chalked out aggressive growth plans that need funding in the near term.
It proposes to hike its stake in Bangalore International Airport Ltd (Bial) to as much as 43% from the present 29% and that in Mumbai International Airport Pvt. Ltd (Mial) to 50.5% from 37%.
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This is a long-term positive factor as it entitles GVKPIL to proportionately higher share in profits earned. But the manner of funding is critical to future profitability.
For example, given the stated price of Rs 114 per share for the Bial stake purchase, the firm will have to garner around Rs 614 crore. About twice this amount is needed for the Mial deal.
“The acquisition cost of $284 million (around Rs 1,300 crore today) for Mial includes financing cost for three years through a letter of credit opened by Standard Chartered Bank, in favour of GVKPIL,” says a report by Motilal Oswal Securities Ltd.
So far, both airports have shown steady growth in revenues and profit margins with year-on-year improvement in realizations. Mial’s June quarter revenue grew by about 19%, while that of Bial grew by around 10% from the year-ago period; operating margins improved at both the airports, too.
But then one must note that both airports are at the capex stage. On commissioning, when depreciation and interest costs are charged to the profit and loss account, there could be a temporary blip in earnings growth.
Of course, reports suggest GVKPIL is confident of wooing private equity (PE) investments into the airports vertical, but this could take time. In one such move, it sold a 25% stake in its energy vertical to infuse PE funds of Rs 1,500 crore.
There appears to be no immediate concerns on either its energy or roads segments. Both posted robust revenue and profit growth during the June quarter. However, GVKPIL’s plans to acquire coal mines in Australia to secure fuel supplies for its power projects again call for funding.
Will these acquisitions stress the balance sheet of the consolidated entity over the long term? For example, according to an infrastructure analyst, completion of Mial acquisition (awaiting approval from the Reserve Bank of India) could increase leverage and affect earnings in the interim until operating cash flows are able to offset the interest outflows. For now, the airports are treated as associate firms.
GVKPIL share price jumped 2.3% on BSE on news of increasing its stake in Bial. Nevertheless, clarity on funding issues, which in turn would affect consolidated earnings adversely (as it happens), will be key to the stock price performance.
Graphic by Yogesh Kumar/Mint
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