Risks to GMR Infrastructure Ltd’s revenue and cash flows seem to be mounting. The Maldives government terminating a contract to build the Male airport on Tuesday was a shock. It would certainly impact investor sentiment that was turning positive on the improving performance of its airports business, which in the past four quarters offset the travails of the energy segment.
To arrive at a ballpark estimate of the impact, recall that GMR’s September quarter earnings indicate net revenue from four airports—Delhi, Hyderabad, Turkey and Male—together accounts for nearly half its total revenue. Male airport’s significance is reflected in that its revenue comprises one-third of the airport segment.
More importantly, the quarter’s net profit of Rs.44 crore from Male airport was 190% higher than for the year-ago period, the highest profit (after accounting for minority interest) among airport assets. In fact, courtesy losses from Turkey and Delhi airports, net profit was down to Rs.6 crore from the airports business.
Trouble from Male started brewing a few months ago, when the government did not allow the firm from charging airport development charges. The GMR management maintains that it would adjust the loss of revenue against concession fees payable to Male authorities. Construction activity to increase traffic handling, too, was stopped, which would delay the scheduled completion in 2014, if the tussle continues.
Unfortunately, this development comes at a time when the energy business is virtually powerless, as it is starved for fuel. September quarter’s operating profit for the segment was down 78% at Rs.20.2 crore, with profit margin plunging from 17% a year back to a minuscule 3%.
In contrast, the airport segment clocked a 68% jump in operating profit, driven also by the revised tariffs at the Delhi airport and strong cash flows in Male. Operating margin of the airport segment, too, shot up from 25% to 33%.
Given this backdrop, if the final verdict goes against GMR, it would jeopardize cash flows and strain the balance sheet. As on 30 September, the company’s debt-to-equity ratio at 3.2 was higher than 2.6 six months ago, with net debt at a huge Rs.35,000 crore. Of course, with the project under its hat for over two years, it’s unlikely that GMR would relent. Yet, concerns would remain as long as the matter is unresolved.