GMR Infrastructure has been in news lately for divesting a few of its assets like a highway project, coal mines and an energy plant. In an interview with FE?s Anand J, GMR Group CEO, strategy & corporate development, Parmit Chadha said they have now embarked on a ?Asset Light Asset Right? strategy and its debt position was not the primary reason for moving into this direction.
How did the Asset Light Asset Right strategy get started?
In 2011-12, we started doing a stress test on our businesses. Given the maturity stage of the infrastructure industry we needed to do things differently. Most of the infra companies are supported by bank funding and supplemented by equity markets. Once you reach a certain size, there are certain challenges. From the banks side, they start hitting the sector cap, etc. The velocity of investments required in infra is different. We internalised the strategy a year back and took six months to start implementing.
Do you think that you went into this strategy a bit late?
Most of our projects would not have been ready and complete a few quarters back, with investors not seeing us in good light. Assets need to have come to a certain stage where you could command a premium to sell. From a practical point of view, this is the earliest we could have done this.
Was the debt position of the group a reason for shedding assets?
It is partly the reason. When we took the Asset Light strategy, the slowdown had not started with economic growth projection being 7.5%, and nobody was talking about debt-equity ratio. Just that our shedding of assets coincided with the slowdown. The point of view was of sustainable growth. For an infra company, debt is raised against a specific project. This debt does not always come back to the parent company. The cash from one project cannot go anywhere else. So the lenders are also more comfortable in an infra project.
Was going for big projects a reason for this stress?
We see the impact it will have on a standalone project as well as on the group. You cannot build an airport or a 1,000 MW power plant for less than R5,000 crore. We are comfortable with a project size in the range of R4,000-R7,000 crore. In bigger projects we have an advantage; whether it is the technical challenge, project execution or financial backup. Smaller projects in the size of R500-R1,000 crore is highly commoditised, and we are not interested in this segment.
When will the Group begin to reinvest?
We have two plants coming up in energy sector in the next few months. The power plant in Chhattisgarh will be onstream next year and will generate a lot of cash which will stabilise our position. In infra business, the cash flow starts very late and is cash negative till completion. We are creating value but it doesn?t generate cash.
After a certain stage, all infra companies will have to follow the constant churning model. After you develop, you sell it to someone with lower risk appetite who are satisfied with lower returns while we move on to the next project. You divest an asset because you see a higher return and I have achieved the maximum return from a particular project.
When we started the airport operation five-six years back we didn?t know how to run an airport and it was a new business for us. If we were to go for an international project five years back, I could have gone in only as a developer, today I can also handle operations. In airports operations, there is very strong cash flows without putting in heavy investments. This is an example of asset light strategy based on our learning and experience.
Why did you decide to walk out of an important project like the Kishangarh-Udaipur highway?
We have given our representation to the NHAI. We did the financial closure in May. You can imagine in such a difficult market we raised R2,200 crore from 21 banks but the project did not get the environmental clearance. A lot of work and commitment have gone into it in terms of our IT team, road plazas, contractors, etc.
How will the future businesses of GMR look like?
There will be two parts. In the asset-based projects, we will have energy, highways and airports which we will keep on churning. On the asset light side, we will have the operations of airports, energy projects and highways. On the operations side, the cash flow will be very high. In future, the situation could be us running an airport where we did not invest or develop. Currently, our operational side is less than 5% of our revenues and it may touch 20% in five years? time. The operations business is likely to make a steady contribution to our direct cash flows.