Delhi airport ruling puts GMR back on investor radar

After a game of patience, GMR Infrastructure Ltd’s sustained focus on airports is slowly paying off. Return on investments in airports’ development and maintenance is improving, as regulations are being eased and traffic at key airports is rising.

On Tuesday, the company detailed its expansion plans for its prized asset, Delhi International Airport (Pvt.) Ltd (DIAL), where it leads the consortium. A 60% increase in capacity for passenger traffic and increase in cargo handling infrastructure, besides world-class facilities, will be done in three phases over a decade. Although this would imply cost increases in the near term, it would gradually ramp-up revenue and profit. In fact, June quarter passenger traffic at Delhi airport grew by 14%.

That’s not all. Last week GMR Infrastructure’s stock rallied 13% in one trading session, when the Supreme Court’s decision to allow the use of DIAL-leased land for a larger variety of commercial purposes was perceived as a tailwind for revenue growth. Indeed, it will enable faster monetization of leased land that already accounts for 29% of DIAL’s revenue.

Assuming the same benefits extend to other airport assets like Hyderabad, the private sector infrastructure company will be on a better wicket. The airports segment accounts for nearly two-thirds of the consolidated revenue and 93% of the earnings before interest, tax, depreciation and amortization (Ebitda). June quarter’s Ebitda from airports improved on the back of reasonable revenue growth.

What puts GMR Infrastructure on more stable ground is its phenomenal reduction in debt, after a strategic debt restructuring scheme for two of its beleaguered power units. Thereafter, the energy segment’s revenue and Ebitda rose by 12% and 22%, respectively, on the back of higher plant load factor and realizations, when compared to a year ago.

However, the power sector, being less attractive on account of surplus capacity and fuel-related problems, is likely to be underplayed.

For the next few years, GMR Infrastructure’s focus is clearly on airports, where it has over a decade gained expertise in operation and maintenance, including cost management. Still, at the consolidated level, it posted a loss of Rs133 crore during the June quarter. One cannot expect wonders in the near term as interest and depreciation eat into operating profit.

This is evident from the fact that in spite of consolidated net debt falling from Rs31,800 crore to Rs14,900 crore, the interest cover ratio (Ebitda/interest) improved only marginally from 1.5 a year ago to 1.7. GMR Infrastructure’s profit ramp-up has to move up significantly for investors to see higher returns.