Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Debt recast raises hopes for GMR Infra investors

While restructuring makes for a healthier and lighter balance sheet, it has taken the unproductive assets off the GMR Infra's books and retained those generating strong cash flows

GMR Infrastructure Ltd’s strategic debt restructuring (SDR) has cast away a huge chunk of debt that was weighing on its balance sheet for several years. Consolidated net debt for fiscal year 2017 (FY17) shrank by half to Rs14,900 crore from Rs31,800 crore in FY16, as its lenders took charge of two of its beleaguered energy assets at Chhattisgarh and Rajahmundry.

Indeed, this took the Street by surprise especially since the firm declared its consolidated numbers after four quarters, citing that it needed time to align its diversified businesses to the new Indian Accounting Standards (IndAS).

But the restructuring brings hope for better rewards to shareholders of GMR Infra in many ways. While it makes for a healthier and lighter balance sheet, it has taken the unproductive assets off the conglomerate’s books and retained those generating strong cash flows.

Under the SDR scheme, almost Rs4,400 crore of debt linked to two of the energy projects (mentioned above) was converted into equity for the lenders. As GMR Infra will now hold only 48% stake in these entities, they are classified as “associate companies", which means that the balance Rs8,200 crore debt will not be reflected on its balance sheet.

This is not all. The divestment of stake in some road assets also helped cut debt. Further, under the IndAS accounting norms, the airport joint ventures and the energy business too ceases to get consolidated, bringing further relief in terms of debt associated with these entities. To sum up, end-FY17, GMR Infra’s debt is down to 1.6 times its equity, far healthier than FY16 when it was five times the equity.

More importantly, both these assets under SDR were a drag on overall financials as cost overruns and lack of fuel supply made them unviable.

Meanwhile, through these travails, the company has successfully steered its airport operations to greater heights. The segment’s revenue now accounts for 53% of the total from 46% in FY16. Likewise, its contribution to operating profit has grown from 77% to 82%. The segment’s operating margin rose by 300 basis points on the back of robust increase in passenger traffic at its Hyderabad and Delhi airports.

The airports segment will continue to spew out healthy cash flows. The management’s steady expansion in airports mirrors its confidence in the sector too. In addition, GMR Infra continues to own some energy and road assets that are profitable at the operating level.

The company’s prospects now look more favourable than in the past, when all revenue and profit generated was eaten up by high interest costs. Lower debt implies lower interest cost outflow and depreciation charges, translating into higher retained profit for the benefit of shareholders. No wonder the GMR Infra stock moved up several notches after the results were declared last week. If robust revenue growth continues, the stock could see a rerating too.

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