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GMR Infrastructure: High profile, long-term bet news
02 August 2006

The GMR IPO offers a very good opportunity for investors who desire an exposure to the booming infrastructure sector. But the steep pricing leaves very little scope for short- to medium-term investors and only very long-term investors ought to consider the IPO. By Rex Mathew.

After a forced delay because of market weakness, GMR Infrastructure has finally launched its IPO. This is one of the larger issues to hit the markets in recent times and has attracted a lot of investor attention, especially after its pre-IPO placement to high profile private equity investors at high valuations.

GMR Infrastructure is promoted by the Hyderabad-based GMR group, one of the pioneers in the infrastructure sector. The company has a diverse business portfolio focussed on the infrastructure sector, with large projects in airports, roads and power generation.

A consortium led by the company has taken over the Delhi airport for further development and expansion in one of the most controversial public-private partnership initiatives in recent years. Another consortium led by GMR Infrastructure is currently building a greenfield airport in Hyderabad.

The company is raising resources to part-finance various projects in hand besides repayment of existing unsecured loans. The issue would raise slightly over Rs800 crore at the lower end of the price band and Rs953 crore at the upper end.

The GMR project basket

Delhi Airport project

GMR owns a 50.1 per cent stake, both directly and indirectly, in Delhi International Airport Private Limited (DIAPL) – the company that is designated to operate, manage and develop the Delhi airport. Other stakeholders include Airports Authority (AAI) with 26 per cent and German and Malaysian airport management companies with 10 per cent each. Private equity investors hold a 3.9-per cent stake.

DIAPL has taken over the operations of Delhi airport with effect from 3 May, 2006, for an initial period of 30 years with an option to extend it further by another 30 years. The company has paid an amount of Rs150 crore to AAI and would also pay 46 per cent of the gross revenues from the airport every year.

During the initial period, the focus would be on improvement of existing facilities at the airport. Subsequently, expansion would be considered depending on passenger traffic growth. The company would also develop nearly 200 acres of land within the airport complex for commercial uses like hotels, retail etc.

An amount of Rs93.2 crore from the issue proceeds would be invested in DIAPL.

Hyderabad Airport project
GMR owns a 63-per cent stake in GMR Hyderabad International Airport Limited (GHIAL), which is constructing a new international airport near Hyderabad. Other stakeholders are Malaysia Airports Holdings, AAI and the government of Andhra Pradesh.

The first phase of the project is scheduled to commence operations by the end of first quarter 2008, with a single runway and terminal buildings for passengers and cargo. On completion of the first phase, the airport would have 7-million passengers per annum handing-capacity. On full completion, the capacity would go up to 40 million per year.

The project is being executed on a BOO basis with an initial license period of 30 years, extendable for another 30 years at the option of GHIAL. Of the gross revenues generated by the airport 4 per cent have to be paid to the government. Payment of this amount has been deferred till the 11th year of commercial operations.

Once GHIAL is ready to start commercial operations, the existing airport in Hyderabad would be closed for commercial operations and the government has also agreed not to allow any new airports within a 150km radius for a period of 25 years. The company would also have the right to develop nearly 700 acres of land for commercial purposes within the airport complex.

The company is planning to invest Rs102.5 crore from the IPO proceeds in GHIAL.

GMR's existing projects in the power sector

  • 220 MW power plant mounted on a floating barge in Mangalore, Karnataka which uses naphtha as fuel. The company owns 100 per cent of the plant which became operational in 2001. The plant has power purchase agreements with distribution companies of Bangalore and Mangalore for a period of 7 years from the commencement of operations.

    Plant load factor (PLF) has been steadily declining for this unit as the power produced is costly because of high naphtha prices. From a high of 61.2 per cent for FY 2002-2003, the PLF declined to just 12.5 per cent in FY 2005-2006. Sale of power from the unit declined from 1,180 million Kwh to 242 million Kwh during the same period.

  • 200 MW Low Sulphur Heavy Stock (LSHS) plant near Chennai, Tamil Nadu. The plant started operations in 1999 and GMR owns 51 per cent of the venture. The plant has power purchase agreement with Tamil Nadu electricity board for a period of 15 years from the commencement of operations.

    Rising fuel costs have affected the performance of this unit as well and PLF has declined to 43.9 per cent in FY 2006 from 67.4 per cent in FY 2003.

  • 388 MW gas fired plant in Vemagiri, Andhra Pradesh which is nearing completion. The company expects the plant to be operational by end-August 2006 when natural gas supplies by Gail India would start. GMR owns 100 per cent of this project. GMR has signed power purchase agreement with the four transmission companies in Andhra Pradesh for a period of 15 years.

Future power projects

  • A 140 MW hydro-electric power project in Uttaranchal. Preliminary development activities have been commenced but no construction work has started and no scheduled completion date has been set for this project.
  • GMR has been shortlisted to bid for the Sasan ultra-mega thermal project in Madhya Pradesh with a capacity of between 3,500 MW and 3,800 MW.
  • The company has a license to start power trading operations. A power distribution venture is also being considered

GMR's existing projects in the road sector

  • The 59km Tudi-Anakapalli road project on NH-5 connecting Chennai and Kolkata, which started commercial operations in 2004. The company would receive an annuity of Rs29.48 crore from NHAI for the Rs380-crore project. The concession is for a period of 20 years, including construction period, and the company would have to maintain the road during this period.
  • The 93km Tambaram-Tindivanam road project on NH-45 connecting Chennai and Dindugal, which also started operations in 2004. The company would receive an annuity of Rs41.86 crore for the Rs480 crore project and the concession is for a period of 20 years, including construction period.
  • The Adloor Yellareddy-Kalkallu road project with a total distance of 103km, which is under construction. The project is scheduled to be operational by end of 2008. The project is expected to cost Rs690 crore and the annuity payment from NHAI is Rs54.18 crore.

Future road projects

  • The 35km Ambala-Chandigarh road project on NH-21/NH-22 which connects New Delhi and Chandigarh. The project is expected to cost Rs390 crore and the concession period is 20 years till May 2026. The company is proposing to spend Rs104.8 crore from the issue proceeds in this project.
  • The 46km Faruknagar-Jadchela road project on NH-7 connecting Bangalore and Hyderabad. The project is expected to cost Rs470 crore and the concession period is 20 years till August 2026. Rs94.8 crore out of the IPO proceeds would be invested in this project.
  • The 73km Tindivanam-Ulundurpet road project on NH-45 connecting Chennai and Dindugal. The project is expected to cost Rs720 crore and the concession period is 20 years till October 2026. Nearly Rs145 crore from the issue proceeds would be invested in this project.

Pre-IPO placements
GMR has successfully placed around 2.85-crore shares to various private equity investors on a private placement basis during the period April-June 2006. Prominent investors include Citigroup and Quantum Fund promoted by legendary investor George Soros.

Investor
No. of shares in crores
Issue price in Rs per share
India Development Fund
1.17
85.20
ICICI Emerging Sectors Fund
0.96
261
Quantum Fund
0.25
270
Citigroup
0.37
270
Punjab National Bank
0.1
270

The private placements were completed when the stock market indices were at higher levels and the IPO pricing has been set lower because of the recent market correction.

Shareholding pattern
Promoters currently hold 89.42 per cent of GMR Infrastructure while private equity investors control 9.72 per cent. Public shareholding is currently less than a per cent.

After the issue, public holding – including holdings by institutional investors – would rise to 12.24 per cent. Promoter shareholding would decline to 79 per cent and private equity investors would hold 8.6 per cent.

Analysis
The IPO cannot be analysed on the basis of current financials or performance of the company's existing assets. There are no other similar listed entities, with such diverse exposure to multiple infrastructure projects, for a comparative assessment of valuations. To make it more difficult, future projects - especially the airport projects - would contribute a large part of the company's valuation.

Performance of the company's existing assets in the power sector is not up to the mark and they would have to start using cheaper feedstock like natural gas to be viable. The company has recently securitised the cash flows from completed road projects, which would help improve cash flows and help fund future projects.

However, the high profile projects, which are under implementation, would give the company high visibility among large investors. The company would definitely be one of the best infrastructure pure plays in the country in the foreseeable future. The infrastructure sector would definitely offer very exciting and large opportunities and GMR would be one of the major beneficiaries.

Risks
The promoters of GMR have already proven that they have the ability to bid for and win projects, which are politically sensitive, and high profile, the best example being the controversial Delhi airport modernisation. The company would be one of the strong contenders for similar large projects in the future, which means there would be no dearth of business opportunities. Project execution skills of the promoter group are also well established.

Though the company has many exciting projects in hand, most of them would start commercial operations only by the financial year 2008-09. The company is very likely to follow the model of securitising, or selling in advance at a discount to receive a lump sum amount, the future cash flows from completed projects. These cash flows would help the company to take up other projects. Hence, future growth would depend on timely execution of projects.

Timely execution of existing projects may become a challenge for the company. Since the projects are all very high profile, they have already attracted their fair share of controversies and would continue to face political and legal risks. The award of the Delhi airport modernisation project to GMR has been challenged by the Anil Ambani group and the matter is pending before the Supreme Court. Any long delays in project completion would severely affect future cash flows.

Another significant risk is the rising interest rates. Since the company is executing large projects involving large debt financing, higher interest rates would affect profitability. If there is any runaway increase in interest, it may even affect the viability of some of the projects.

Valuations are very steep even after considering the future projects, which are already in the company's basket. But the company deserves a premium as it has the potential to win many such large projects in future and can execute those using cash flows from other projects, without further equity dilution.

Though there are significant risks associated with the business model of the company, very long-term investors who can stay invested for five years or more and those who do not want to time the markets can consider the IPO. Short-term and medium-term investors may do well to avoid the issue.

The issue opened on 31 July and will close on 4 August. The minimum bid size is 25 shares and thereafter in multiples of 25. Retail investors are being offered a 5-per cent discount to the issue price. They also have the option to pay only part of the total amount at the time of placing the bid and the balance would be payable after allotment.

also see : Should you subscribe to the GMR Infra issue?

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GMR Infrastructure: High profile, long-term bet