GMR Infrastructure Ltd’s move to sell two assets in quick succession will boost investor confidence, besides easing pressure on its balance sheet, which is loaded with project-related borrowings.
On Monday, it announced the sale of its total 70% stake in an energy venture in Singapore (Jurong). There are several big positives in the deal. The foremost of these is that the sale brings in a profit of S$307 million (around Rs.1,350 crore) on an infusion of S$293 million so far by GMR, and after adjusting for some balance equity still payable towards the project.
Second, the sale wipes away the debt associated with this asset (Rs.2,900 crore) from the consolidated balance sheet, thereby de-leveraging the firm. Third, and a sentimental positive, according to analysts, is that the price was twice the book value of the asset, significantly higher than expectations.
The deal further elevates confidence established barely a month ago, when GMR sold its 74% stake similarly in a build-operate-transfer road project. The deal was again at a premium (about 1.5 times the book value according to analysts) and took around Rs.300 crore debt off the balance sheet.
The two transactions are in line with GMR’s “asset-light, asset-right” approach. The net consolidated debt as of December 2012 was a Rs.37,000 crore, with a debt-to-equity ratio of about 3.5.
GMR’s decision to terminate the 555km highway project was welcome, especially since the delays in the project would cost the firm time and money. Monetizing assets (selling and releasing tied-up funds) at the right time not only lightens the balance sheet but also helps deploy resources in an optimal fashion. In fact, in the Singapore deal, the firm cashed out at a strong valuation, even before the project was completed.
A report by Edelweiss Securities Ltd said that the asset sales show the group’s intent to improve cash flows, too. That said, relief on the debt-to-equity and interest cover ratios will be seen only in the medium term, as a couple of energy projects get commissioned and cash flows improve.
GMR’s immediate plan is to deploy the money raised from asset sales in several domestic energy projects. The energy sector’s contribution to overall revenue is down to 26% from around 31% a year ago as some domestic projects are barely functional due to the lack of gas to fire the plants.
The infrastructure segment is ailing, saddled with policy issues, lack of fresh orders and financial constraints. Given this, it’s natural that GMR’s steps in selling assets to raise funds and to ease the pressure of the rising interest burden brought cheer to the market. The stock jumped 3.19% to close at Rs.19.40.