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GMR Infrastructure IPO: Not worth buying

GMR Infrastructure is coming out with an Initial Public Offering (IPO). The price band is Rs. 210 to Rs. 250. Retail investors will get a 5% discount on the discovered price, and have an option to pay only Rs. 125 per share on bidding with the balance, if payable, upto 12 days after listing. But is the IPO worth it?

Business

The company is in the infrastructure business. GMR Infrastructure itself is simply a holding company for all the other companies as vehicles. For instance, the Delhi International Airport contract is bagged by a subsediary company (“Delhi International Airport Private Limited”) in which GMR holds 50.1%.

There are a number of projects that the company does – very large infrastructure projects. GMR builds roads, power plants, airports and the like. 85% of current revenue comes from the power sector. Two of its road projects are currently operational with revenues of around 150 cr. The remaining projects (four in number) will be operational only mid 2008.

GMR is currently help build two international airports: Delhi and Hyderabad. These will finish only after 2008, with visible revenues after 2009.

Financials
Net profit for 2006, 2005 and 2004 was Rs. 70.5 cr, 69 cr and 68 cr respectively. This is an average increase of around 2% per annum.

Earning per share (EPS) is Rs. 2.5 for 2006.

Revenues for the last three years grew at about 4% p.a. with 2006 generating 10,900 cr.

Debt stands at around Rs. 2500 cr. This is approximately Rs. 80 per share.

Verdict: Do not buy

I do not recommend this as a buy for a number of reasons:

1) P/E is too high at 98: For a company that has grown only 2% in the past three years, the price is way too high.

2) Debt is too high: Only Rs. 55 cr. of the total debt of Rs. 2500 cr is being retired from IPO funds. The interest burden, in the light of increasing interest rates, is likely to hurt bottomline growth.

3) Growth is too far away. All the road and airport projects, where the IPO funds will be deployed, are going to start generating revenue only in 2008. This means they will be visible on the FY 2009 statements, so the accuracy will only be known then. This is too far away for a 98 P/E stock!

4) Government risk: Nearly all their revenues can be blocked by government inaction or interference. Imagine the government changes and dilly dallies on some projects – in the past this has happened many times, so chances are that this will continue. Increasing communist influences in the government will also try to block private participation and limit GMRs profits.

5) Limited growth: From what I see, their net profits in 2009 will be around Rs. 240 cr. This gives us an EPS of Rs. 7.5 per share in 2009. Even that means a three year forward P/E of 33 – way too high!

If you really want this stock, please choose to purchase it between 3 to 6 months after the IPO – low visibility stocks (like Reliance Petroleum) tend to come down to their expected values. I would recommend a buy only if the price is between Rs. 35 to Rs. 50 today. Anything above that is overpriced.

My recommendation: Do not buy into the GMR IPO.

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