nvestors can avoid the initial public offer of GMR Infrastructure (GMR) for now. The offer is stiffly priced; lack of visibility in earnings growth from the current revenue model, which is dominated by power, and the risks involved in relatively new ventures such as airport and road projects, outweigh the positives of being a unique infrastructure developer.
GMR develops, owns and operates infrastructure projects through a number of special purpose vehicles, some wholly-owned and others joint-ventures. The company's primary business segments are power, road and airport. The IPO proceeds of Rs 800-950 crore are to be used to fund road and airport projects and pay a promoter group company towards acquisition of GVL Investments, which holds a 9 per cent stake in Delhi International Airport Ltd (DIAL). The offer price band of Rs 210-250 is at a price earnings multiple (PEM) of 75-89 times the consolidated, fully-diluted, FY-06 earnings.
While international players in the concession business such as Cintra of Spain command a PEM of close to 150, their business model cannot be directly equated to that of GMR, as the latter, even after considering the road projects on hand, would remain mainly a power generation company.
Challenged by power
The power and road construction businesses accounted for 83 per cent and 14 per cent respectively of sales for the year-ended March 2006. In the power segment, all the revenues are now generated by two projects — the 220-MW Chennai power plant and the 200-MW Mangalore unit — both of which are suffering from low utilisation because of the high tariff brought about by oil-based fuels.
The current power purchase agreements (PPA) ensure that the fixed costs along with a fixed return on equity are recovered from the respective State electricity boards. However, the PPA for the Mangalore project expires in 2008 and the terms of its renewal are clouded in uncertainty.Further, the company's third power project at Vemagiri, Andhra Pradesh, based on natural gas, is unlikely to generate power in the near term for want of adequate gas supply. GAIL, the gas supplier, will supply only on "best efforts" basis as enough gas is not available in the region now to service the needs of all the customers.The picture may not improve until gas discovered in the Krishna-Godavari basin is brought to shore in the next three-four years.
Given the uncertainty over the Vemagiri plant's commercial operation, the company is re-negotiating the terms of the present PPA. GMR has also planned some hydropower projects but they are long gestation ones and, hence, do not add any immediate revenue visibility. The growth prospects for the power business are, therefore, likely to remain stunted.
Paving the way
GMR has quickly strengthened its position in the road segment with two annuity projects and four more, which will commence operation by 2008-09.
The road segment is likely to attain balance with 50 per cent of its revenues coming as they would from annuity projects. The rest would accrue from high-risk, high-return toll-based projects. GMR is, however, not a construction player and will be outsourcing much of the building work. It may, thus, lose the edge in terms of margins compared to the engineering procurement and construction (EPC) players in the field.
GMR has agreed to transfer the right to receive 73 per cent and 68 per cent of the receivables from its current two annuity roads projects to a consortium of banks and financial institutions for 15 years from May 2005 against secured loans received.
This means the present revenues from the road segment would not directly fill the company's coffers. The road segment is, nevertheless, likely to drive volumes on the back of the huge investment plans of the Centre and the States.
Take-off yes, but...
The success of the concession for the Hyderabad Airport, which is likely to be operational by August 2008, would depend on the actual traffic that the airport is able to attract. As of now, Mumbai and New Delhi remain the primary transit hubs in the country. The lease for this project, however, provides the right to develop hotels, resorts, and so on, in conjunction with the airport within the 5,500 acres of total land provided.
This leaves considerable scope for commercial revenue generation, if the Hyderabad airport consortium is able to plan and develop such area.
While the operation management and development agreement of the Delhi airport has commenced, the agreement is still under legal contention from one of the unsuccessful bidders.
Further, about 46 per cent of the gross revenues from the Delhi airport (unlike a 4 per cent concession fee and annual lease rent on a deferred basis in the case of Hyderabad airport) would be shared with the Airport Authority of India for the entire duration of the concession. This takes the sheen away from the seemingly lucrative project.
The key to ramping up revenues in airports may lie in increasing the proportion of non-aero revenues which, in turn, depend on passenger traffic.
The current mix of aero-to-non-aero revenues of 70:30 in Indian airports may have to undergo a drastic change. Singapore's Changi Airport started with a 60:40 mix in 1981, but that ratio has now reversed in favour of commercial revenues.
While we are positive about the potential from the airport infrastructure segment, the above issue appears to cloud the medium-term earnings visibility.
The structuring of the group that involves complex cross-holdings among group companies and promoter outfits does not add to the comfort levels on the offer.
Offer details: The offer will be open from July 31 to August 4. Enam and JM Morgan Stanley are among the book running lead managers. Retails investors will get a discount of 5 per cent on the issue price.
