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GMR Infra: FY07 result analysis

Jul 3, 2007

Performance summary
  • Sales grew by a robust 75% YoY and 60% YoY in 4QFY07 and FY07 respectively, driven by higher capacity utilisation (PLF) in the power business and additional revenues from the Delhi Airport
  • EBITDA margins contracted by 9.7% to 22.3% in 4QFY07 due to increased expenditure in the airport business and increased fuel consumption (on account of higher PLF) in the power business.
  • De-growth at net profit level is due to interest and depreciation expenses (Rs 850 m) provided in respect of the 'Vemagiri Power Plant', which is yet to commence operations.
  • The Board has approved the sub-division of existing equity shares of Rs 10 each into 5 equity shares of Rs 2 each subject to approval of shareholders

Performance Snapshot - Consolidated Numbers
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Gross revenues 3,545 7,007 97.6% 10,617 19,687 85.4%
Less: Annual fee paid to AAI* - 812 - - 2,720 -
Net Sales 3,545 6,196 74.8% 10,617 16,967 59.8%
Expenditure 2,412 4,815 99.7% 6,086 11,531 89.5%
Operating Profit (EBDITA) 1,134 1,380 21.7% 4,530 5,437 20.0%
EBITDA margin (%) 32.0% 22.3%   42.7% 32.0%  
Other income (33) - - 33 183 450.5%
Interest 270 535 98.0% 1,303 1,441 10.6%
Depreciation/amortisation 264 354 34.5% 1,054 1,346 27.7%
Profit before tax 568 490 -13.6% 2,207 2,833 28.4%
Tax 36 94 163.0% 125 415 232.1%
Profit after Tax 532 396 -25.5% 2,082 2,418 16.1%
Minority interest 120 177 47.1% 559 673 20.4%
Net profit 412 219 -46.7% 1,523 1,744 14.5%
Net profit margin (%) 11.6% 3.5%   14.3% 10.3%  
No. of Shares (m)   331.0     331.1  
Diluted earnings per share (Rs)         5.3  
Price to earnings ratio (x)         147.3  
*AAI - Airport Authority of India

What is the company's business?
GMR Infrastructure Ltd. (GMR) is a private sector infrastructure development company engaged in the verticals of 'power', 'roads' and 'airports'. In FY07, the contribution from 'power', 'airports' and 'roads' segments stood at 70%, 18% and 8% of its revenues respectively. GMR currently operates two power plants with a total installed capacity of 420 MW. However, on account of fuel shortage, these plants have been operating at low plant load factor (PLF, or capacity utilisation). The company's Vemagiri power plant (Andhra Pradesh) has been unable to start operations due to gas procurement problems. GMR has 3 power projects under development with a combined power capacity of 1,300 MW. In the road segment, the company has been awarded six road projects to develop stretches of national highways in Punjab, Tamil Nadu, and Andhra Pradesh with a combined length of 421 kms. Out of these, two projects have been completed while the rest are in implementation phase. In the airport infrastructure space, the company is developing and modernising the Indira Gandhi International Airport, New Delhi. It is also involved in the greenfield development of Hyderabad International Airport. GMR has a 50% and 63% stake in these projects respectively.

What has driven performance in 4QFY07?
Airport and power business drives topline: Net sales grew by a strong 75% YoY and 60% YoY in 4QFY07 and FY07 respectively. This was mainly on account of additional revenues from the Delhi Airport business and higher PLF (plant load factor) achieved in the power business. In 4QFY07, the PLF for the Mangalore Power Plant stood at 76.4%, against 31.6% in 4QFY06. The same for Chennai Power Plant was 73.0% in 4QFY07, compared to 57.3% during the previous year. Under the take or pay contracts, power companies are entitled to fixed payments on the basis of availability and not the PLF. In case the PLF of a plant increases, the companies are reimbursed for the increase in fuel cost as they are completely pass-through in nature. Hence an increased PLF will lead to higher revenues but not higher profitability.

Segment-wise performance...
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Airport
Revenue* - 943 - - 3,160 -
%share - 14.8% - - 18.4% -
PBIT - 190 - - 618 -
PBIT margin - 20.2% - - 19.6% -
Power
Revenue 3,178 4,505 41.8% 9,060 11,949 31.9%
%share 78.1% 70.8% - 81.3% 69.7% -
PBIT 840 1,018 21.2% 2,920 2,816 -3.6%
PBIT margin 26.4% 22.6% - 32.2% 23.6% -
Roads
Revenue 371 335 -9.8% 1,504 1,432 -4.8%
%share 9.1% 5.3% - 13.5% 8.4% -
PBIT 74 167 126.6% 643 714 11.1%
PBIT margin 19.9% 49.9% - 42.7% 49.9% -
Others
Revenue 518 579 11.8% 574 592 3.1%
%share 12.7% 9.1% - 5.2% 3.5% -
PBIT (76) 30 - (53) 127 -
PBIT margin - 5.1% - -9.2% 21.5% -
Total
Revenue 4,067 6,361 56.4% 11,138 17,133 53.8%
PBIT 838 1,405 67.7% 3,510 4,274 21.8%
PBIT margin 20.6% 22.1% - 31.5% 24.9% -
*Net of annual fees paid to AAI

Operating margins take a plunge: During the quarter, operating margins contracted by 9.7% to 22.3%. The decline in margins can be partly explained by the lower contribution of the power business to the overall topline. Since operating margins are lower in the airport business for GMR as compared to the power business, there was an overall decline in operating margins. PBIT for the power business includes depreciation of Rs 380 m charged towards the Vemagiri power plant, which did not contribute to the topline. Adjusting for the same, PBIT margins stood at 22.6%, compared to 26.4% in the previous year. This decline in margins is due to the take or pay contractual nature of power business where the EBITDA quantum is relatively fixed. Hence, higher revenues in a particular quarter or year lead to lower EBITDA margins.

Cost break up
as a % of sales 4QFY06 4QFY07 FY06 FY07
Generation, operations and maintenance expenses 60.1% 65.1% 47.6% 52.1%
Employee cost 2.2% 5.3% 3.0% 8.1%
General and administrative expenses 5.7% 7.3% 6.7% 7.7%

Higher finance and tax expense roils bottomline: GMR's net profit declined by 47% YoY in 4QFY07 due to 98% YoY jump in finance cost and 163% YoY increase in tax outgo. The increase in finance cost is due to additional interest cost of Rs 183 m in respect of the Vemagiri plant. The increase in tax expense was due to increase in MAT rates, payment of tax arrears in case of GMR, and no tax set-off benefit received at the consolidated level in respect of loss in Vemagiri plant. Excluding the loss of Rs 396 m for the Vemagiri Plant, net profits would have grown by 50% YoY for the quarter.

What to expect?
At the current market price of Rs 776, the stock is trading at 147 times it FY07 earnings. Over the past few years, the company has been aggressively growing its asset portfolio. We believe that the airport business will be the key revenue driver for the company in the next few years. The property development opportunity at the Delhi Airport, which is likely to be completed by March 2010, is to the tune of 5.9 m square feet (msqft). Delay in procuring gas for the power projects and the consequent use of expensive fuels would, however, dampen profitability in the medium term.

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