Should you subscribe to the GMR Infra issue?

The GMR Infrastructure IPO has opened for subscription with an initial public offering of 38,136,980 equity shares of Rs10 each through 100-per cent book building process.

Jigar Shah of KR Choksey Securities believes that the GMR IPO offers a very exciting prospect for investing in various infrastructure projects at the same time. He feels that it is a good issue for long-term investors with a risk appetite.

Anantpadmanabhan Sarma, executive vice president, IDBI Capital, echoes the same opinion; he feels that long-term and sophisticated investors would gain from the GMR IPO. Sarma feels that retail investors would have to see if they have the patience and the long-term risk appetite before investing in the IPO. CNBC-TV18 shares with domain-b its exclusive interview with Shah and Sarma.

What is your take on GMR?
Shah: I think GMR issue offers a very exciting prospect for investing in various infrastructure projects at the same time. The company has a lot of experience in exploiting such segments earlier. But I believe, in terms of valuations, it is not very cheap because one will see that it will debut with more than Rs8,000-crore market cap, which is very close to what Tata Power and Reliance Energy have. So I think it is not very cheap. For the long-term investors, who have a risk appetite, it's a good issue to invest in.

How do you feel about GMR Infrastructure?
Sarma: I think that I would echo the views but I would go one step further. The business model of the company basically relies on the completion of the project and then securitising the cash flows of the project, so that it can take on bigger projects. So it will rely more on its growth of business and explosion in the business rather than anything else.

So long-term and sophisticated investors will gain. As far as the retail investor is concerned, he has to see whether he has the patience and the long-term risk appetite before he could invest directly in the IPO.

What is the element of risk in buying into something like GMR because it is a company, which derives most of its revenue from power and is trying to transform itself by getting more into expressways, airports, etc. Would you factor in some execution or would you be bullish about what they could achieve two years down the line?
Shah: There is an execution risk, which leads to the lengthening of the waiting period or the time period for which one holds the investment. The other factor is that holding the company's valuation has always been a matter of lot of debate. Therefore, we have not seen the full blossoming of holding the company's valuations in the market place so far, which is a very good concept.

What about the current business that is underway? How do you rate the way they have been running their power business because the plant load factor seems to be quite low for it?
Sarma: What happens is that the price of naphtha and LSHS (low sulphur heavy stock) being what they are, there is no way that the electricity board will buy this power on priority basis. So naturally, PLF will fall but I am more focused on the road and the airport project; the Hyderabad airport especially, which ought to be completed by 2008.

Even in the annuity projects, they have substantially securitised the cash flows, which is why I feel that the small investor, unless he knows the business well and has the risk appetite, should be cautious in this particular investment. Whereas the person who knows, can get in because the valuations seem a bit stretched at this point of time and therefore he can take higher risk.

What linkage will the airport project have on GMR's prospects in the IPO and listing price?
Shah: GMR's airport project is definitely a very key project but it also has its plate full with other projects in other sectors. I think that the issue will still get subscribed despite the fact that there is some amount of controversy, which is going on. I believe that the issue should get subscribed given the attractive platter of the projects that the company is offering.

What would you compare it against in terms of the listed entities; there seems to be some real estate plans as well. What are your thoughts on that?
Sarma: I would rather stick to the projects that are disclosed in the document namely the four road projects and two power projects that are in the offing and the two airports, that is Hyderabad and Delhi.

Delhi is a bit mild on the controversy but the Hyderabad airport is a clear winner in terms of giving revenues to the company. Once the project is over, it will give enormous leverage to GMR to actually go out and sell the cash flows of the airport and raise capital for bidding for further projects. The project execution implementation seems to be the forte of the company. If the company sticks to that, then it should do well.

Nevertheless, those dates are far away and therefore, I think that only the sophisticated investors can take a call on this company and if the retail investors want to invest, then they should be very sophisticated.