After a tough year, GMR hopes to perform better in FY13

Shaheen Mansuri
Moneycontrol.com

Mention the high debt on GMR�s balance sheet, and you have chief financial officer A Subbarao immediately on the defensive.
�If the country wants to execute trillion dollars worth of power projects in the coming years, and 50% of that money has to come from the private sector, where will all that money sit? Obviously on the balance sheets of private sector firms,� he tells moneycontrol.com.

Financial year 2011-12 has been a difficult one for GMR Infrastructure. High interest, fuel shortage at its power plants, legal tussles in one of its road projects and with the airport regulator, have all dragged the company�s share price lower. The company's share price has fallen 17% as against the 3% fall in Sensex.

The biggest problem that is scaring investors right now is the mountain of debt on the company�s books---roughly Rs 25,000 crore.

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�As long as my assets are yielding me the cash flows to service my debt, how is the debt on my books a problem?� asks a defiant Subbarao.

That could well be the case, but then much would depend on whether the company will succeed in getting the airport regulator to allow it to increase the airport development fee by more than five-fold from the current level. The other crucial factor will be the availability of coal for its power plants at a price that makes the tariffs quoted by the company viable.

Subbarao is hopeful of the company improving performance in all its three verticals�airports, roads and energy, in the coming financial year.

�We have got indications from the Airport Economic Regulatory Authority (AERA) that the new passenger fee structure is likely to come into effect from April at our Delhi Airport,� Subbarao told Moneycontrol.com. But he did not specify if the quantum of hike would be in line with what GMR has asked for.

Currently, passengers entering Delhi Airport pay anything between Rs 250-280 as airport development fee. GMR wants the charges to be increased to Rs 1500-1800, while AERA has proposed a figure midway between the current rate and what GMR is asking for. A final decision is yet to be taken on the matter. In the meantime, GMR has been incurring losses at Delhi Airport and in the December quarter alone, it bled Rs 229 crore despite there being a 29% increase in traffic.

The company generates 40% of its revenues from its airport segment and also runs Hyderabad airport which has broken even. The same trend follows for its international airport projects in which Istanbul Airport is making losses but Male Airport is generating strong cash flows with operations stabilizing since its takeover in 2010.

Talking about GMR�s road division, Subbarao says the vertical has got into a stable phase with six highway projects already in use and the losses are far less compared to its other businesses. The roads division reported a loss of Rs 1 crore in the December quarter.

However, the company is fighting a legal case against the state government because it is losing nearly 40% traffic on one of its road project due to an alternative road built by the latter. �But even after discounting this project, we will be profitable in this vertical from next year onwards,� asserts Subbarao.

But things are not so fine with the energy division. With gas availability issues, GMR has not been able to operate its power plants at full capacity and reported a loss of Rs 37 crore loss in during the December quarter. The company has power plants across the country having 835.6 megawatt capacity and 7078 megawatt capacity in under pipeline.

�Fuel shortage has been constant in the past few quarter and we are seeking some solution from the government,� says Subbarao further suggesting that fuel can be imported but certain policy decisions need to be taken which will enable companies to pass on incremental import costs to end consumers.

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Below is an edited transcript of A Subbarao's interview with moneycontrol.com's Shaheen Mansuri.

Q: We have seen your revenues grow significantly in the past few quarters but you have been consistently struggling to protect your margins, do we see you exit FY12 in the black?
A: Our revenues have been growing consistently in the past few quarters almost closer to 50% on account of certain factors. We keep inducting new projects in certain year. Our Male Airport got inducted on a full year basis in this year. This is a significant factor why the revenues have been going up predominantly. Along with this, we have higher footfalls at our Delhi and Hyderabad Airports. Higher traffic has been contributing to the revenues but we are taking a hit at Delhi airport where we are following a decade old tariff structure. Once, a new price structure comes into effect from April 1, I think we should be in a much better position next year.

Q: What does the future looks like for your roads and energy division also?
A: Roads have got into a stable period now hence from the next year onwards we should get profitable as a sector, though we have one bad project-- Ambala-Chandigarh which is under litigation because of an alternate road made by the state government and is diverting 40% of our traffic.
In the energy sector, we are just waiting for the resolution on gas availability issues from the government. In fact, previously, we went ahead and setup the project based on the government�s promise at  that point of time that the gas would be made available to us when the project comes up for a commissioning. So we are waiting for solutions from the government so is the coal availability; coal availability has to be abundant to the full capacity so the energy sector also will do very well subject to these factors.  

Q: Would you be adding capacities in the energy sector?
A: Including our Singapore project, 800 mw project in Singapore. So as of now till the issues on coal and gas are resolved we are not going to take up any new project in this space. We keep executing the projects which are already under execution.

Q: GMR is keen to take up international projects in the airport division so which countries you would be looking at?
A: Though we prefer the emerging markets because of the returns being attractive in the emerging markets. We keep looking at emerging market for the airport asset opportunity. We are also shifting our model slightly. Wherever it is possible we are looking at asset light model where we have beat our expertise in the last half a decade or so in the airport business and the quality of operations that we have brought to the existing airports; Hyderabad airport is number on in its category, Delhi airport is number two in its category in terms of operations. We want to encash this kind of experience and expertise that we have build and wherever there are opportunities we would give this kind of services; we may run the airports, we may offer the project management solutions for the airports and we are also planning to sell these services on a asset light model to increase our revenues as we go forward now.  

Q: These days investors are shying away from the infra space. How crucial is government role in accelerating capital infusion in this sector?
A: The government creates macro environment for a country and if you go and talk to the investors the first thing that they are saying let your macro situation improve and we would bring the capital. Macro situation being your fiscal deficit, your policy environment, government find solutions for the ongoing problems. If these issues are resolved, if the fiscal management is better, if the political system works to find solutions for ongoing problems for the various industries, if that creates a good and trustworthy macro environment then the capital will come. There is abundant capital waiting in the world to come into the country provided the right situation prevails here. That's what we are all waiting for.

Q: What is your current debt size and what is the plan to scale it down?
A: Cash about Rs 25,000 crore as quarter three figures. But you must fundamentally understand one particular thing. As long as we keep adding the assets in the infra business the capital infusion keeps happening. Money is our basic raw material in this business. If you create more and more projects you have to raise more and more capital. The capital includes two components, equity and debt. The debt would get reduced in the normal course as the projects generate the cash. This we borrow from the banks, the debt and deploy in the various assets. The various assets are long-term assets that generate the cash over a period of 10-15 years and the scheduled repayment of any loan in infra asset is about 10-15 years. Over a period of 10-15 years the debt would get reduced completely repaid as the project matures in the cash flow profile. But otherwise if you stop the growth in the infra business the debt would keep coming down. But as long as you keep growing in the infra business the capital pool will keep going up, the debt will keep going up and what you must see is the quality of the debt not the sheer quantum of the debt. The quality of the debt whether the debt borrowed has been injected as project finance in the various assets and whether those assets are churning out the cash flow required to repay and service the loans. As long as there are no NPAs in the asset profile, as long as the debt is deployed in the assets the volume of the debt is not a concern at all. It is like a bank borrowing deposits and deploying in various loans. If there are no NPAs in the loan portfolio you should not question, you should not be worried about the deposit base, and so is the case for infra company.