Infrastructure firms are known to be huge cash guzzlers with long payback periods. Any move that reduces the leverage and improves cash flows benefits shareholders, as both valuation and sentiment improve. Shares of GMR Infrastructure Ltd are no exception, jumping about 3% to Rs 42.70 apiece on Wednesday, as they reacted positively to the firm’s sale of its 50% equity stake in global power entity InterGen NV.
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GMR has realized $1.2 billion (about Rs 5,350 crore) from the sale. It will instantly offset the huge debt of $1 billion in the subsidiary, leaving a balance of $200 million.
The management is yet to disclose whether the deal is at a loss or a gain on its original investment. A broad-brush estimate indicates GMR invested equity worth about $300 million by way of initial infusion and later to fund interest costs since InterGen’s stake acquisition in 2008.
Adjusting for dividends worth $75 million received from InterGen, which has a capacity of about 8,200 megawatts (MW), analysts reckon that GMR may incur a marginal loss, after accounting for debt servicing costs.
But the move brings relief on several counts. “It instantly improves GMR’s leverage. Although the loan was taken in the subsidiary, the exit releases huge guarantees from the parent firm that were used to raise funds for the subsidiary,” said A. Subba Rao, chief financial officer of the group.
The management view is that the global recession and a strong case for infrastructure growth prospects in India compelled the exit from InterGen. Analysts say it will improve managerial focus and fund deployment in existing projects—the firm is expanding energy capacity by five times in the next two-three years from the present 825MW.
It may also deploy funds to acquire coal mines or invest in the existing two coal assets it has acquired. InterGen’s exit is not a major negative from the earnings perspective. Going by the sum-of-parts method, it contributed barely 6-7% to valuation, say analysts.
In the last few quarters, GMR has made concerted efforts to reset its funding structure to lower balance sheet leverage. Funds were recently raised in respective business subsidiaries —airports, energy and highways—to fund projects through structured private equity infusion.
This will result in improved profitability as interest costs will be contained. For instance, in the December quarter, the airports segment contributed 46% to GMR’s consolidated revenue from 35% a year ago. But high interest costs, which were capitalized until then, dragged the net profit down.
For now, higher revenue in airports hinges on the revision of tariffs expected in the next six months. Energy revenue hinges on fuel availability. As these fall in place, complemented by its strong balance sheet, earnings at the consolidated level will gain momentum.
Graphic by Sandeep Bhatnagar/Mint
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