Investors from 2008 have stories about companies like Reliance Power, Suzlon, Unitech, Lanco, GMR Infra, Punj Lloyd. Their share prices contained optimism that comes from the potential for decades of growth. Fast forward a decade and a half, and most of these barely survive, staggering under mountains of debt.
One company from the list, however, is attempting a transformation – GMR Infra.
The company is in the process of demerging its business into two verticals.
- Airports business (GIL)
- Non-Airports business (GPUIL)
Post the demerger, GIL will emerge as India’s only pure play-listed airport company. In this post, we will look into the demerger process & see if this unlocking should be cause for optimism for current and future shareholders.
GMR Infra – Short History
The group started in 1978 in Srikakulam district of Andhra Pradesh by GM Rao. Over time, the company ventured into 28 different businesses (like Jute, Sugar, Ferro Alloys, Insurance, Software, etc.). The group also entered banking through a 27% stake in Vysya bank. Later in 2002, GMR sold its stake to ING Group to form ING Vysya Bank, which later merged with Kotak Mahindra Bank.
In the early 2000s, GMR consolidated its businesses & focused on Power, Highways & Airports. Like every other player, GMR had seen its heydays during the Infrastructure boom of 2003 to 2008. Decades of growth happened in years.
By 2009, the company had a diversified portfolio of assets across various sectors.
Power
GMR had built eight power plants with a total capacity of 2136 MW. It owns 2.6 Bn Tonnes of Coal mine reserves in Indonesia.
Highways
By 2009, the company held concessions for eight highways spread over a total length of around 630 km (completed + under construction).
Airports
From Power & Highways, the group set its eyes on the Airports.
In 2004, GMR won the bid to develop Hyderabad International Airport (RGAI). The airport commenced its operations in Mar 2008.
In early 2006, the company won the project to modernize & operate Delhi International Airport (DIAL), which included building a new runway and Terminal 3.
IPL
In 2008, GMR won the bid for the Delhi IPL franchise for ~400 Cr. The IPL franchise is owned by GMR Enterprises, the holding company of GMR Infra.
Such aggressive expansion helped the company grow its revenue by 4x, assets by 5x, and net worth by 8x between 2005 to 2009.
*Source GMR Infra Annual Report – 2009
By 2008, the company had 28,346 Cr as Assets under development.
Then came the 2008 Global financial crisis.
Rocky road since 2008
- GMR had to withdraw from the Male airport project following a legal tussle with the Maldivian government over the contract for the project, which accounted for a 20% loss of GMR’s airport revenues.
- GMR Infrastructure had invested close to $4 billion in its power vertical, but the returns were abysmal.
- Completion of two gas-based power plants stalled because of the KG basin tussle with Reliance & Government.
- In 2014 the company had a failed attempt to demerge its energy business and raise funds.
- The group’s debt ballooned from 1410 Cr in 2008 to 57,134 Cr by 2015. A 40x jump in 7 years. As they say, not all growth is good.
- By 2014, the company wasn’t even generating enough operating profits to pay its interest.
In the last 8 years, the company reported a cumulative loss of 16,180 Cr.
So what’s changing now for GMR Infra?
Going by its recent stock price movement, perception.
The company is actively looking to deleverage its balance sheet by selling some of its operational assets. Maybe it doesn’t really have another option?
The company operates in segments like Airports, Power & Highways. As per the proposed restructuring, GMR will demerge its non-airport business segments (Power & Highway) into GMR Power and Urban Infra Limited (GPUIL). This includes Energy, EPC, Highways & Infrastructure development.
GMR Airports Limited (GAL) will be under the listed entity – GMR Infra.
The company will issue 1 share of GPUIL for every 10 shares of GIL. The record date is yet to be announced, though.
*Source GMR Infra Investors Presentation
GMR Airports – The crown jewel of the group
Today, GMR is one of the largest airport developers in the world. It owns ~27% market share in the Indian airport sector.
The company owns & operates four airports.
- Indira Gandhi International Airport at Delhi
- Rajiv Gandhi International Airport at Hyderabad
- Bidar Airport at Karnataka
- Mactan Cebu International Airport in the Philippines
Along with these, three airports are under construction.
- Goa Airport
- Crete International Airport, Greece
- Bhogapuram International Airport
As part of their restructuring plan, the company sold 49% stake in GMR Airports to Groupe ADP, an international airport operator based in Paris, for 10,780 Cr.
This has bought in much-needed cash to the debt-laden group.
Do airports make money?
Airports generate their income from two main segments – Aeronautical & Non-aeronautical.
- Aeronautical revenue comprises take-off & landing fees, user development fees (UDF), cargo handling, fuel charges, etc.
- Non-aeronautical revenue is from income other than aircraft operations. Think of airlines as airport tenants. They pay rent for space, facilities, office maintenance, etc. It also includes retail & duty-free space rentals, commercial development land, advertising, etc. Non-aeronautical revenues are a key contributor to the financial success of airports.
Following is the segmental break up of airports revenue. These are FY20 numbers for Delhi International Airport. The contribution may change for different airports.
*click to enlarge
GMR Power and Urban Infra Limited
GPUIL is the troubled arm of the GMR group. It has two segments.
- Energy
- Roads & Highways
GMR Energy has a portfolio of 7 power projects with a total capacity of 3054 MW, of which 1678 MW is currently operational. It also has 4 hydropower projects under construction. GMR Infra also has a 30% stake in Indonesian coal mines.
In 2017, GMR Energy sold a 30% stake to Tenaga Nasional Berhad (Malaysian electric utility major) for $300 Mn. GMR Infra & other PE investors hold 52% and 18% of GMR Energy, respectively.
The Good, the Bad & the Ugly
Airports contribute around 54% of overall revenues & almost all of the group’s profits. GAL had generated a revenue of 3108 Cr & a loss of 900 Cr in FY21. Needless to say, pre-covid numbers give us a better picture. The airport segment had clocked a revenue of 4277 Cr & Net profit of 531 Cr in FY20.
GPUIL had generated a revenue of 2634 Cr in FY21. The highway is the most profitable unit for GPUIL. It had generated an EBITDA of 223 Cr in FY21 and 316 Cr in FY20. The energy segment is running out of gas. It hasn’t made a profit since 2015.
GMR Infra has a gross debt of 34,593 as of FY21. The airports business takes the lion share of 64% of the overall debt. Energy & Highways share 19% of the debt.
1+1= more than 2?
GMR Airports is currently trading at an enterprise value of ~53k Cr. It generates a consolidated EBITDA of ~2600 Cr per year. The EV / EBITDA of GMR Airports is at ~19 times. But EV / EBITDA of GMR Infra will be double, as GMR Infra owns only 51% of GMR Airports.
Post the demerger, GMR Airports will have a net debt of ~17,200 Cr. It is estimated to generate EBITDA of ~2000 Cr & a PAT of ~500 Cr next year. The deal includes an earn-out of 1060 Cr from Groupe ADP to GMR. The payout is based on performance and reported EBITDA, and divided into three years. However to be conservative, we are not considering it in our calculation.
Assigning a PE of 40 times, we are looking at a market cap of 20,000 Cr and an enterprise value of ~37,200 Cr as of FY22E. This gives an EV / EBITDA ratio of 19 times to the Airport division. The global peers like Sydney (40x), Auckland (18x), Thailand airport (70x) trade at a higher valuation.
GPUIL is estimated to have a net debt of ~5000 Cr on their books. It is estimated to generate an EBITDA of ~1000 Cr & a PAT of 150 Cr in FY22. This is on the back of the strong performance from its Coal division. It had delivered its highest PBT ever of 940 Cr in Q1FY22. Assigning a PE of 20 times, we are looking at a market cap of 3000 Cr & an enterprise value of ~8000 Cr. The EV / EBITDA ratio stands at 8 times. This seems fairly valued considering the huge debt & uncertainty of the cash flows.
Should you buy GMR Infra?
Demergers & Spin-offs gained their popularity among investors because of Joel Greenblatt. This professor-turned-hedgefund manager emphasized creating wealth using special situations like demergers, spin-offs, etc.
However, things are different in Indian markets. This strategy may work for strong companies that are undergoing strategic restructuring. But it does not hold for all.
We have many failed demergers like Sintex, Talwalkars, AB Capital, Reliance Capital, LASA, Mandhana retail, etc. The list goes on.
The reasons can be many like high leverage, management quality, growth, etc. But none of them was able to keep up with the initial euphoria & sustain the valuations.
Bottomline
GMR may or may not be a successful turnaround story.
True, there is general euphoria around everything including the demerger story of GMR Infra. It is easy to get carried away by projecting high growth & assigning high valuations to a debt-ridden company.
But history says highly leveraged loss-making companies have the deck stacked against them.
Investors are better off waiting to see how the demerger eventually plays out and if the Airports business shows the potential to be a long-term compounder.
This article is for information only and should not be considered a recommendation to buy or sell any stocks.
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