Getting ready for India? GMR, getting India ready’ – investors from 2007 will remember this famous advertising slogan, a time when GMR Airports Infrastructure (formerly GMR Infrastructure) was a poster child of that bull market. While the company has come to the spotlight after a long lull, following GQG Partners buying a stake in the company last week, back then, the company was hardly out of the spotlight.

Having won the most coveted airport modernization project -Delhi Airport, in 2006 and followed up with a successful IPO, it appeared the sky was the limit. The infrastructure boom then was akin to the new-age business craze in the current bull market. Opportunities appeared boundless for infrastructure companies in 2007.

‘CHINDIA’ (China and India) was the global theme then, and these two fast-growing large economies were the investment hotbeds for global investors and businesses. A fast-growing India with cranky infrastructure required 100s of billions of dollars in investments in airports, roads, metro, power plants etc. GMR’s business spawned many of these, and when the 123 Agreement was signed between India and the US, GMR ambitiously also expressed intentions to get into nuclear power.

But as they say, Man proposes, and God disposes; similarly, when it comes to stock markets, company/investor proposes, and the economic cycle disposes. The way things transpired for GMR and many other shining infrastructure companies was way different from how euphoric investors expected it to pan out. As they say in markets, history rhymes. Hence today’s Investors today will do well to learn lessons from that euphoric phase.

2007 versus now

GQG buying a stake in GMR this December is a tale in contrast to the history of a major FPI stake buy in GMR exactly 16 years back in December 2007. Back then, a consortium of FPIs and banks bought a 9 per cent stake in the company for $1 billion, giving GMR an equity value of $11 billion. At that time, Sensex was at 21,000. Today, the Nifty is at 21,000 while Sensex has bulldozed to 70,000. In the same time period, the GMR investors have moved in reverse direction, with markets assigning an equity value (market cap) of a little over $5 billion today.

Following the recent vote of confidence, GMR finally managed to cross levels last traversed in 2010 when infrastructure and real estate stocks attempted to rebound from the bear market lows of 2008/09.  In retrospection, the best stories of 2007/2010 have turned out to be amongst the worst stocks, as a different theme led the markets from 2013-14. So, the important lesson investors need to learn from this is to never overpay for any great story and to plan for alternate possibilities.

To its credit, GMR appears to have delivered well on many projects it has taken on – whether it is Delhi or Hyderabad airports and power plants or roads it built. But economic slowdown (impacting revenue), inflation (higher interest rates), fuel supply issues (power plants) and regulatory challenges (domestic and international airports) made well-crafted business plans turn awry.  Project- wise excel models built on expectations of a goldilocks economy continuing for a long time, if not ever, had to be junked.

So, if the urge to invest in the next big theme is strong in you, give scope for ‘what ifs’ and plan for alternative possibilities. This apart, as Warrant Buffett says, ‘price is what you pay and value is what you get.’ Make sure you never overpay when you buy a stock.       

In December 2007, investors assigned GMR a valuation of EV/revenue of 18 times and EV/EBITDA of around 65 times. Now, GQG has bought a stake at EV/revenue of 8 times and EV/EBITDA of 26 times. The stock, even after a recent upside, is trading at around 30 per cent below its peak in 2007 (price adjusted for value of its demerged power business). Today, trading at a valuation of EV/EBITDA of 30 times, it is amongst the most expensive airport stocks globally and is not reporting net profits. But India’s growth story and outlook for airport business look firmer today than they did 16 years ago, and it needs to be seen whether GMR will reward investors this time around.

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