Sunday, April 12, 2015

GMR Infra - Equity Dilution in Progress.

GMR Infrastructure Ltd is making a considerable progress in shedding debt. As the company completes a series of fund-raising activities, its consolidated gross debt is estimated to fall from Rs.45,800 crore in September last year to less than Rs.40,000 crore in two years.

One is the Rs.1,400 crore rights issue, which is under way right now. The second is conversion of preference shares worth Rs.1,137 crore in September this year. The third is the conversion of 18 million warrants allotted to promoters by February 2016.

The company does not have large capital expenditure plans in the near term. It plans to use most of the new funds to repay debt. If the conversions into equity shares take place as scheduled, there will be a commensurate rise in GMR Infrastructure’s net worth, easing the overall debt to equity ratio, which in September 2014 stood at 3.7. Apart from this, it plans to pursue asset divestment and monetization efforts.

In the first nine months of 2014-15, the company’s finance costs exceeded its operating profit (Ebitda, or earnings before interest, taxes, depreciation and amortization) by Rs.730 crore, resulting in a loss. If these measures actually lead to debt reduction, there is a good chance that financial pressure will ease.

Markets, however, have given a mixed reaction. As GMR Infrastructure announced the rights issue, the stock lost 11% in March. One reason is the 15% discount it offered in the issue.

The other is the fear that power assets will remain a sticky problem. The segment is losing money for some time now. Despite the recent positive developments, it is not yet clear when the troubled assets will turn around.

One-fourth, or 623 megawattS (MW), of its current operating power capacity is idle. If one includes the 768MW GMR Rajahmundry Energy Ltd plant that is waiting for fuel to start operations, the non-operating power capacity can be substantially higher.

The new scheme from the government can light up these plants. It, however, supports only 30% of the capacity and is not a long-term solution. Also, companies are not allowed to provide return on equity, which means value accretion from these plants can be low or limited for now.

The other grey area is the 1,370MW GMR Chhattisgarh Power Project. The project—which has gained coal blocks in the recent auctions—is able to tie up 45% of the capacity through power purchase agreements (PPAs) till now.

Government rules stipulate that a company sell the majority (85%) of the power generated from bagged coalfields through long- or medium-term PPAs. With state electricity boards slow in clinching the pacts, GMR Infrastructure can face a challenge in finding a solution in the medium term. “The only problem with GMR is that it has to quickly hunt for PPAs as only 15% of the coal allotted can be used for merchant capacity and the balance if not used under PPA will have to be sold at a loss to Coal India,” Antique Stock Broking Ltd said in a 17 March note.

Overall, it is good that GMR Infrastructure is deleveraging its balance sheet. But shareholders may see notable value when the power segment stops making losses or is on a definitive revival path.