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GMR and The Pile Of Cash

Don’t you just love it when companies have too much cash.

The reason there is no question mark there is : it’s meant to be rhetorical.

GMR Infrastructure announced Q4 results and on the face of it, they look great. On a YoY basis, profits are up 128%! 50 crores of profits even before the company has started ops in Delhi and Hyd! Fantastic no?

No.

From Bloomberg:

Net income climbed to 500 million rupees ($12 million), or 0.27 rupee a share, in the three months ended March 31 from 218.50 million rupees, or 0.13 rupee, a year earlier, the Bangalore-based company said in a statement today. Sales rose 43 percent to 8.85 billion rupees.

Profit before tax and interest from investments in mutual funds and other plans surged to 565.7 million rupees in the fourth quarter from 29.7 million rupees a year earlier, GMR said. The company reported a loss of 433.8 million rupees from its airport operations in the fourth quarter, compared with a gain 190.20 million rupees a year earlier, it said.

Profit in the quarter was crimped by a one-time loss of 578.1 million rupees on account of starting costs and building expenditure on the GMR Hyderabad International airport, which began operations on March 23, the GMR said. The company also made a provision of 250 million rupees for salary dues to employees of the Airports Authority of India at the New Delhi International Airport, GMR said.

So, of 50 crores in profit, 56.57 crores have come from investments in mutual funds. Net of that, the company’s lost money.

Still, some of these losses seem to be non recurring in nature. (Read GMR’s press release here) The 57 cr. initial expenditure for Hyderabad, the 25 cr. provision for higher pay to employees due to the pay commission reports etc. But these costs are not going away – the Hyd airport will need more capital for upgrades, and the pay commission costs will continue to exist. In fact most of the upfront cost of the Hyd airport will be amortised over years, otherwise they will show massive losses.

They mention that if we take away non recurring costs their profit would be 62.5 cr. for the quarter. But if you remove the mutual fund income (they won’t have this level of cash much longer as they’ll need it for the airports, power plants and roads – their income would then be down to 12.5 crores.

Now forget all that. Take their 50 cr. noted results at face value, and let’s see how phenomenal this growth is.

EPS growth has literally died. From a (split adjusted) 2007 ended full year EPS of 1.11, the 2008 EPS is only Rs. 1.23. Meaning about 10% EPS growth. Current market price: Rs. 150, which is about 120 P/E.

And their existing operations aren’t doing that well. Power has grown 10% in income. Roads have given a 1% growth. Airports are meant to be losing anyhow. I expected a lot more of their existing operations to justify the stock price.

They have a lot of interesting stuff coming along. Roads, power plants, and of course, the Hyd, Delhi and Istanbul airports. All these take a long time to turn around, and given the revenue sharing agreements, tend to be profitable only years later. Plus, there’s this recession and oil price thing that will further slow things down. The real question is – why are we paying this P/E to a company that has the slow road to profits and that has to borrow and share for everything they do? Answer: it is the pot of gold at the other end.

But that end is getting further and further away.

Disclosure: No positions.