Continuous focus on sale of non-core assets to reduce the debt burden seems to be reflecting on the improving net debt-to-equity ratios of most infrastructure developers. However, less than satisfactory operational performance is keeping net debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) still at elevated levels, which means divestments hold the key to further debt reduction as companies struggle operationally.
Though the levels have improved in the financial year 2017-2018 compared with three years ago, in most cases it is still above the acceptable limits. A healthy net debt-to-Ebitda ratio is considered to be 4 or 5 times, as higher than that raises a red flag because it shows a company may find it hard to handle its debt burden, making it difficult to raise more debt to grow the business.
According to data sourced from Bloomberg, in three out of five companies, the ratio is in the range of 6 to 7 times —though much lower compared with the financial year 2014-2015.
The highest net debt-to-Ebitda ratio among infrastructure developers for FY18 is of Hyderabad-based GVK Power & Infrastructure, at 7.36X, followed by GMR Infrastructure at 7X. Though it is a significant improvement from the levels of 28.68X for GVK and 15.94X for GMR in FY15, at these levels too, the ratios are still high.
To be fair, GVK reduced the company’s net debt by over 28% in FY18 as it brought it down to `11,458 crore as on March 31, 2018 versus a year ago. The sale of its entire 43% stake in the associate company Bengaluru International Airport (BIAL), which operates the Bengaluru airport, to Fairfax India Holdings Corp, aided in bringing down the debt significantly. GVK’s founder chairman and managing director GVK Reddy has said that deleveraging is currently the top priority, as the company closed the sale of 33% stake for `2,200 crore in March 2017, and later in June sold its residual 10% stake as well for `1,290 crore.
However, continuing stress in its energy business due to uncertainty regarding availability of gas to power plants of GVK Industries (GVKIL), a subsidiary company, and GVK Gautami Power (GVKGPL) is hindering operational performance, and a hydro project in Jammu and Kashmir has remained a non-starter. The airport and road segments, however, have been performing well, which has led to a nearly 35% rise in Ebitda levels to `1,556 crore in FY18. GVK’s road segment revenues surged a good 15% to `435 crore during the year ended March 31, 2018, while the airport segment were up 10% to `3,424 crore.
The operator of Delhi and Hyderabad airports, GMR Infrastructure, too has seen some significant deleveraging in the last few years. The net debt of the company is down to `15,301 crore, which has more than halved from `44,001 crore in FY15. However, in the last one year the debt came down by about 9%, while the Ebitda has declined by about 40% to `2,186 crore in FY18, Bloomberg data shows. The leverage ratios were impacted marginally due to reduction in aeronautical revenues in Delhi airport, company management stated in its investor presentation for the March 2018 quarter. In FY17, GMR’s net debt-to-Ebitda was 4.6X, data shows. However, with continuous focus on reducing debt the company’s net debt to equity has improved to 2.7X versus 4.56X in FY15.
Analysts believe that with some more asset sales lined up, GMR’s corporate level debt will reduce. “Going forward, GMR plans to monetise its road assets and SIR land holdings as well as unlock value in its airports business. We believe this will help GMR meaningfully reduce its corporate debt of `4,900 crore,” analysts at IDFC Securities observed in a recent note. The company released `4,100 crore of its equity and reduced its liabilities by `7,600 crore through divestments of eight projects over the last few years, analysts noted.
Meanwhile, Tata Power, which saw its debt levels rise around 2010-2011 as it was developing large power assets such as Maithon and the ultra mega power plants of Mundra, has also embarked upon a significant deleveraging exercise now, which is improving the company’s net debt-to-equity ratio.
Analysts at Kotak Institutional Equities observed in a recent note that Tata Power has improved its net-debt to equity to 2.6X in FY18 from 2.7X in FY17. This is likely to reduce to 2.3X upon completion of asset sales of `5,000 crore announced so far, they noted. The asset sales announced include `200 crore from Indian Energy Exchange, `2,150 crore from Tata Communications and another `2,230 crore from the sale of its strategic engineering division. Of the proposed divestments, `2,500 crore has been realised till date.
However, operationally losses at Mundra continue to be a drag on the earnings of Tata Power. In FY18, the company’s Ebitda increased by a marginal 2% to `6,357 crore against a year ago, though the growth was better because in FY17 the operating profit had declined 21% over the previous year. Consequently, company’s net debt to Ebitda also improved slightly to 6.22X, after hitting a peak of 7.45X in FY17.