Infusion of funds into companies at the right time is essential for capital-intensive projects. But it comes at a price, which is often either higher interest costs due to debt or an equity expansion. Both mar earnings growth, unless backed by strong revenue growth.
GMR Infrastructure Ltd has tapped the markets frequently in the last few months—$315 million (around Rs1,500 crore) through a qualified institutional placement, another $200 million in the energy subsidiary through convertible instruments, besides Rs500 crore through an issue of non-convertible debentures. Together, the funds meet the equity requirement for most of its road and power projects envisaged for the next 18-24 months.
GMR’s challenge is now to ramp up revenue generation and earnings, which was lacklustre in the last two quarters. In the March quarter, net revenues were down 15% year-on-year (y-o-y) at Rs1,124.9 crore, though up sequentially by 5.5%.
This was mainly because the power segment revenue, which accounts for around 45% of the total, was down 34% at Rs428.8 crore.
Relocation of one of its plants from Mangalore in Karnataka to Kakinada in Andhra Pradesh led to this drop in revenue. The management says the plant should be operational from July.
What lifted revenue was the 56% rise in revenue from the airport segment and 90% increase in the roads business.
Nonetheless, GMR reported 10% higher operating profit y-o-y at Rs314.6 crore. It was 9% lower on a sequential basis.
However, this may improve in the coming quarters as the relocated power plant comes into operation from the second quarter of fiscal 2011. Also, rising air traffic at both the Hyderabad and New Delhi airports that are under the firm’s management will add to revenue and profits.
While the funds raised will be used for expansion in the energy segment, it will take a couple of quarters for these to add to revenues. Until then, high interest costs are worrisome. At Rs222.7 crore, it was 93% higher y-o-y and 36% higher sequentially.
In fact, the interest cost for the whole year was Rs720 crore, with a total debt of around Rs20,000 crore. The profit before interest and tax is barely 1.1 times the interest cost during the March quarter, compared with 1.5 times a year ago.
The funds raised will entail an equity expansion from Rs364.1 crore to Rs386.6 crore.
The energy unit could also list independently in the next 18-24 months, which could lead to a dilution in the parent company and promoter holding in the entity.
Analysts are hopeful of a 10-15% growth in revenues during fiscal 2011 over the Rs4,615 crore posted in fiscal 2010.
The GMR stock has been going downhill steadily, but at the current market price of Rs57.50 and the estimated fiscal 2011 earnings per share of around Re1, the share has no potential upside.
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