GMR Infrastructure: Capitalizing on Power Resources

After GMR Energy, a wholly-owned additional of GMR Infrastructure (GMR), filed its list for an Initial Public Offering (IPO), the Street become optimistic that some of GMR’s anxiety would rest. These concerns, mainly due to the high debts, as well as regulating problems, have led to an important break down in market capitalisation over the last few years. Significantly, the market was loath to provide much value to these power resources (which GMR operates during GMR Energy) because of lack of fuel, unfavorable amount environment & require for further funding. With GMR Energy predictable to be increasing funds of Rs 1,450 cr (Rs 700 cr to be used for equity contribution towards power projects & pay back of debt) during the Initial Public Offering, the funding problems should get settled. Part of the Initial Public Offering will be an offer for existing private equity investors.

“We understand GMR Energy’s fund-raising as positive since it will set an assessment benchmark for the energy resources & also reduce balance-sheet pressures. We sustain a buy rating, with sum-of-parts based target on of Rs 30 a share,” said Shankar K of Edelweiss Securities.

Evaluation has been a key problem, as experts were discovering it difficult to allocate an important value to the resources of GMR due to regulating & other problems. GMR Infra is predictable to have spent Rs 6,500 cr in GMR Energy by means of equity, which works out to Rs 17 a share for GMR. Though, the market was not assigning any important value to these resources. Shankar has valued GMR Infra’s (assuming 80 %) share in GMR Energy at Rs 4 a share of GMR. But, this will change & the Street is likely to begin valuing these resources nearer to its actual value once the company (GMR Energy) gets catalogued separately.

With more clarity on the accessibility to gas & other problems like rate predicted to appear, experts hope to see more gains. GMR Energy has total power creation capacity of 4,800 Mw, of which 2,500 is operational while the rest is under implementation. though, of the operational capacity, 823 is powered by gas, which has suffered because of deficiency of sufficient gas, & has led to lower using the gas-based plants (rest of the operational capacity is mostly coal-based).

As a result, GMR Energy has reported losses recently. For the 6 months ended September, too, the company reported total sales turnover of Rs 1,404 cr but finished with a loss. Because of greater fixed charges & lower utilisation, it incurred a loss of Rs 849 cr, almost similar to the loss of Rs 892 cr in FY13.

Due to the losses, GMR Energy’s net worth or value capital has worn away. As of September, the equity capital had fallen to Rs 2,471 cr. Experts have been skeptical about assigning value to these resources. The pricing of the IPO should offer clarity on valuations. Since the market has been very conservative, any uptick in valuations should confirm benefits for GMR Infra’s shareholders. Even at once its one time its current equity capital (book value), the value of GMR’s stake in the additional is Rs 6.4 a share, 28 % of its market price.

Meantime, the value of GMR’s other businesses: Air-ports (Rs 18 a share), Indonesian coal mine (Rs 1 a share) and cash & liquid investment totals Rs 25 a share as against market price of Rs 23. Add the value of energy assets, and the total value of GMR is greater than the current price.

Experts say airport business, a big chunk of GMR’s value, are making profits & some regulating problems, too, are solving like in the case of the Delhi Airport. The air traffic is predicted to enhance & non-aero business should do well. During the December quarter, the airport business recorded revenue of Rs 1,605 cr, higher 0.4 % on a year ago. The segment reported 15 % development in net profit to Rs 324 cr.