GMR’s QIP to ease debt burden

Aggressive attempts by GMR Infrastructure Ltd to trim debt, lower the debt-to-equity ratio and boost cash flows from the business are sustaining investor interest in the stock.

Last week, the private sector infrastructure company raised about $200 million through a qualified institutional placement (QIP) and $100 million of preferential warrants to promoters. Some brokerages say that the move will help prune corporate debt by around Rs.3,500 crore.

Although this may do little to alleviate the total debt burden of around Rs.40,000 crore, the company’s consistent efforts have been given a thumbs-up by the Street. GMR stock has outperformed the Nifty mid-cap index significantly since January—it has returned 78% since April when the mid-cap index rose by about 55%.

GMR’s asset-light strategy—adopted a couple of years ago—was driven by the need to cut soaring interest costs that were eating into its operating profit. Its annual interest charge at about Rs.3,000 crore (fiscal 2014) accounts for about one-third of its revenue.

Revenue growth alone was insufficient to improve the company’s profits or its financial health. Further, the last couple of quarters saw subdued business in airport and road verticals, even as the energy vertical has been in a quagmire for want of fuel.

GMR, therefore, has had little choice but to trim debt. Earlier, a 40% stake sale in Istanbul airport generated Rs.1,650 crore. GMR also sold stakes in some overseas energy ventures about twelve months ago.

In the coming quarters, analysts are also expecting land monetization of Delhi airport. A windfall gain may accrue if GMR wins the case against Male airport, seeking compensation for untimely termination of the contract. Industry sources suggest a fair chance for a significant compensation to GMR.

A report by Edelweiss Research points out that GMR’s debt-to-equity ratio, thanks to the recent QIP and preferential offer, will ease from 5.6 to 4.5 in fiscal 2015. Any other asset monetization may improve the stock valuation from current levels. This explains the euphoria in the stock in spite of the expected 17% equity and per-share earnings dilution.

GMR Group