Column : When ambition overtakes ability

Written by Shobhana Subramanian | Updated: Dec 10 2012, 07:04am hrs
It was in early December 2007 that the GMR Infra stock hit its lifetime high of R134.35. Five years down the road, it commands a fraction of that value, at R17-18 apiece. The stock crashed last week after the Maldives government decided to annul an agreement that allowed a GMR-led consortium to run and renovate the Mal International Airport, and while the case is in the courts, it doesnt look good for GMR. Unlike the Sabiha Gken International Airport in Turkey, and the Delhi International Airport Limited (DIAL) closer home, Mal was a profitable proposition. And airports, it must be added, bring in a big chunk of the revenues. The crunch in cash flows looks like its going to get worse.

GMR group chairman Grandhi Mallikarjuna Rao says the Maldives episode has been a learning experience. But the setback in Mal is a major one and only adds to the several other problems that GMR has been grappling with over the last couple of years. That story is best told through its performance on the bourses; after turning in negative returns in both 2010-11 and 2011-12, the GMR counter is threatening to do an encore this year too, having already lost 35%. Not the kind of track record one had expected when the group drew up a blueprint for straddling the infrastructure space in a country that is short on roads, ports, power and airports.

GMR may not be short on execution skillswitness the world-class airport in New Delhibut the groups ambitions have, at times, overtaken its abilities. So, while roads have been rolled out (GMR owns the countrys largest highway concession, all 556 kilometres of Kishangarh-Ahmedabad) and numerous power plants are in the making72% of the planned 6.2GW of capacity is in the works and 13% up and runningthe pace and ambition could have been tempered.

That would not just have lightened the mountain loads of debt its carrying on its balance sheetGMRs net debt has shot up by some R6,000 crore in the three months between June and September to R35,200 croreit would have saved its management time that it badly needs to deal with the myriad regulatory and other hurdles. For instance, GMR could have done without the Intergen deal altogether; offloading the 50% stake for $1.23 billion to Huaneng, two years after having picked it up for $1.14 billion in a leveraged buyout, barely breaking even in the process, didnt do anything for it.

In fact, the episode only ended up hurting the groups reputation; much of the analyst fraternity believed GMR had bought the asset only to flip it by housing it in a separate company and then listing that on the exchanges.

Indeed, its not too often that analysts appreciate a company going slow on capex plans; after all, thats where the future earnings and fortunes of the business lie. But with GMR, the Street is actually relieved that the firm plans to take an investment holiday. Of course, the firm has little choice; it is leveraged to the hilt and if it doesnt pare its debt, the interest bill could balloon to R2,500 crore next year, eating away half the operating profits that its expected to make.

It doesnt help the group that the CAG had a report out on the New Delhi airport saying GMR had received undue benefits arising out of the commercial use of the realty, cross-subsidisation through non-airport revenues and so on. But its not as though GMR hasnt got its breakstariffs were upped by the Airports Economic Regulatory Authority of India at the New Delhi airport, the Airport Development Fee was back and money to build the Kishangarh-Udaipur expressway came through.

Unfortunately for small shareholders, though, theres no sign of cash flows. Starved for gas and coal, the power plants are performing way below potential, resulting in lower output and single-digit revenue growththe 768MW Rajahmundry project has been delayed by more than a year to early 2014 since theres not enough gas to feed it. The airports, too, arent really doing brisk businesstraffic at the Delhi airport dropped 10% yoy in the three months to September and it was the tariff hikes that helped boost revenues. But the cash flows remain crimped, analysts point out that DIALthe JV between GMR and the Airports Authority of Indiahad receivables of close to R700 crore at the end of September, much of it overdue.

As for roads, no project bid out after 2010-11 can make money, say experts, at least not for five years. Last year, GMR reported losses of close to R400 crore bigger than the R225 crore in the year before. This year, revenues are tipped to grow at their slowest in three yearsto somewhere around R9,300 croreand with losses in the six months to September of close to R275 crore, theres little hope of the P&L being back in the black. The nation may be benefiting from the infrastructure build-up, shareholders clearly arent.