Putting all speculation to rest, GMR Infrastructure Ltd (GIL) has announced that Singapore’s government investment arm Temasek Holdings Ltd will invest $200 million (Rs888 crore) in its wholly owned subsidiary, GMR Energy Ltd. The firm will issue preference shares to Temasek, which will be converted into equity at a later date.

Graphic: Naveen Kumar Saini / Mint

The energy division has a capacity to produce 800MW of power mainly from three assets. The funds will be used to boost capacity to 6,500MW in a three-four year horizon. In an analysts’ conference in January, the firm indicated that it had achieved financial closure and started construction of another 3,000MW of projects.

The energy business accounts for around 47% of GIL’s revenue and 40% of its profit. According to senior executives in the firm, the new power projects will contribute significant revenue and earnings only from FY12.

Power revenue had declined during the third quarter of FY10 by around 12% from the year-ago period as two of its units operated at lower than optimum capacity. While the fourth quarter could see an improvement over the preceding quarter, existing assets could function at optimum levels from the first quarter of FY11 onwards.

GIL has two other key verticals—airports and roads. The assets under these segments will see higher monetization and, therefore, register higher revenue and profit margins in the coming quarters.

In fact, GIL’s move to leverage the power division’s strength could be a precursor to the group’s strategy for other verticals too. According to an analyst from a Mumbai-based research house, “Raising funds in a subsidiary when assets are generating revenues helps promoters bring in new investors at a premium to fund further growth. As the business expands, its earnings contribution to the holding company also expands, thereby improving valuations at both levels."

Hence, while investors have not taken kindly to the group’s high appetite for capital, the deal needs to be looked at differently. The incremental earnings growth in the holding firm will be visible only over a longer horizon. A re-rating in the stock could happen at that time or as the new investors offload their stake at a premium to their cost.

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