Home >companies >GMR group moves to strengthen balance sheet

Mumbai: With investors starting to look at Indian assets more favourably, the debt-laden GMR Group is moving quickly to strengthen its balance sheet.

The Bangalore-based infrastructure conglomerate, which has accumulated debt of 33,599 crore, plans to raise funds by selling shares in at least two group companies, even as it continues to consider selling some of its assets.

The GMR Group will sell shares for the first time to the public in units GMR Energy Ltd and GMR Airports Ltd, the group’s chief financial officer Madhu Terdal said.

Early this month, the group’s flagship GMR Infrastructure Ltd had tested the equity market by raising $350 million by selling shares to financial institutions. The group also has plans to sell a partial stake in road assets to pare debt.

“We are open to exploring selling partial stake in our entire nine road assets," Terdal said in an interview last week. “One thing is sure. I am not going for a distress sale as I am in a comfortable position."

The GMR Group is also reducing the number of people it employs by 1,300 to a little less than 5,000.

GMR’s decision to tap the equity market and selected asset sales come at a time when wealthy investors, financial institutions, sovereign funds and financially sophisticated investors are taking riskier bets, anticipating that the new government will unleash reforms to revive the Indian economy.

Indian firms, including GMR Infrastructure, have started the process of public offers and purchase or sale of assets to cut debt and expand business.

“We shall be back in the game during this year. GMR is at the cusp of a positive turnaround. We are on a rigorous drive to strengthen the balance sheet," Terdal said, referring to the timing of the equity sales.

The market capitalization of GMR Infrastructure was 11,012.16 crore on 25 July against 6,111.07 crore on the same day a year ago. To be sure, shares of GMR Infrastructure closed at 20.85 on 18 August 2006 when it was listed and have risen only by 3.61% on a compounded annual growth rate basis till 25 July. On 6 December 2007, the shares rose to a record 133.39.

All infrastructure firms including GMR have had no choice but to borrow to support projects, according to Nirmal Gangwal, founder and managing director at financial advisory firm Brescon Corporate Advisors that specializes in liability management and structured finance.

“As a liabilities management practitioner, I believe that the group should raise sufficient equity to fund its current and future projects. Now when the equity markets are looking good, raising equity is a welcome move," Gangwal said. Considering the group’s credentials, the possibility of executing its equity sales strategy is bright as the tide in the market is turning with supportive government policies, he said.

In the initial phase, GMR Infrastructure created assets across segments including airports, energy, highways and urban infrastructure. At present, the firm has 15 power generation assets, of which eight are operational and seven are at various stages of development. It also has nine road assets, of which eight are operational and one is under construction.

GMR operates India’s busiest airport in New Delhi and commissioned the new international airport at Hyderabad. It has upgraded and is operating Istanbul’s Sabiha Gökçen International Airport. It has recently won a bid to develop the Mactan-Cebu airport project in the Philippines along with partners.

However, to complete many of these projects, GMR had borrowed large amounts of money. “We could have abandoned some of the projects but that was not an ideal solution," Terdal of GMR said. “Our preferred route was to complete the projects even though during short time we will be seemingly over-leveraged."

He admitted his group misjudged the environment and acquired assets too rapidly, expecting the economy would continue to remain buoyant.

“We went on adding projects by accumulating debt. The economic slowdown was not well judged by us. Anticipating huge growth we had created a fat organization," Terdal said. However, he justified the debt by saying, “Who is saying debt is bad? Bad debt is bad. Good debt is not bad."

As the economy slowed in India and interest rates surged, it became clear the debt levels were not sustainable. So GMR Group started selling assets. It has sold five assets in the past one year, including power, road and airports, to raise 4,300 crore and retired 6,000 crore debt.

One of the group’s units, GMR Highways Ltd, sold 74% in GMR Jadcherla Expressways Ltd to Macquarie SBI Infrastructure Investments Pte Ltd and SBI Macquarie Infrastructure Trust for more than 200 crore in 2013. GMR Highways also sold a 74% stake in GMR Ulundurpet Expressways Pvt. Ltd for 222 crore to IDFC Ltd.

In the energy business, the group sold a 70% interest in GMR Energy (Singapore) Pte Ltd to FPM Power Holdings Ltd for a total equity value of Singapore $660 million. Most recently, GMR Group has sold a 40% stake in Istanbul Sabiha Gökçen International Airport, which it manages in Turkey, for €225 million, to Malaysia Airport Holdings.

“We have reached the peak of debt. We have completed almost all projects and we don’t have major capital expenditure in the pipeline for next one to two years," Terdal said. “Now we have just entered into equity sale phase. We would be selling select assets, too."

Terdal said assets have started generating cash. Two power plants—Emco Energy and Kamalanga Energy—have contributed revenues of 980 crore in the last fiscal. The Chhattisgarh power plant will start generating cash in next two to three months.

He added that uncertainties surrounding the airport unit have also reduced. In mid-June, an international tribunal had declared that its concession agreement to upgrade Male international airport in Maldives at a cost of $500 million was valid.

GMR Male International Airport Ltd (GMIAL), a unit of GMR Infrastructure, had entered a concession agreement with the government of Maldives and Maldives Airport Co. Ltd for modernization and operation of Ibrahim Nasir International Airport in 2010.

This contract was unilaterally terminated by the Maldives government, which subsequently initiated arbitration proceedings on 29 November 2012, seeking a declaration that the concession agreement was void ab initio. GMIAL had disputed this termination. The compensation amount is not known yet. GMR Group says that amount can be used in the Philippines airport project.

In a 3 July report, Edelweiss Securities Ltd said it expects the signing of a power-purchase agreement (PPA) for its Chhattisgarh project, partial land monetization of the Delhi airport land at revised rates, settlement of Male airport dues and clarity on gas projects could provide further impetus to the stock valuation. The note, however, added that slowdown in passenger traffic in toll roads and airports due to faltering economic growth can be a drain on valuations.

Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt. Ltd, also cites external risks as many Indian firms are in the market for equity sale. He cautioned that even though the current market is looking good, any change in the external economy can derail GMR’s ambitions like in the past.

Terdal is unperturbed.

“On the contrary, we are strengthening our balance sheet. Last year, we had a networth of 11,000 crore," he said. “Now it will be around 13,000 crore with QIP (qualified institutional placement) fund in addition to 150 crore that promoters will bring in next 45 days and 450 crore in next 18 months."

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