A business could see cash shortages due to various reasons; one is leverage: it may have operating profits but not much cash at its disposal due to debt.
GMR infrastructure recorded a loss of about Rs.490 crores for the nine-month period ended 31 December 2012 compared to Rs.237 crores loss in 2011. Operating earnings were Rs.940 crores on revenues of Rs.7,400 crores.
The damage was naturally done by the finance costs of about Rs.1,500 crores, 25% higher than last year.
So it is a case of a business facing challenges of high leverage: About Rs.43,000 crores debt; Rs.5,300 crores cash; and equity (31 March 2012) of about Rs.7,500 crores. Naturally, we cannot calculate a meaningful return on equity. Approximate return on capital including preferred stock (assuming it is still there in the books) is less than 3%. Note that we don't have the latest balance sheet and statement of cash flows. Not sufficient interest coverage; not sufficient cash from operations. If the company has to go for a credit rating, you know what it should expect.
Return on investment so far: none for equity holders; not much for debt holders.
You may not have enough cash from operations; but that does not mean you keep funding your long-term projects with debt. But it is amazing to see how businesses all over practice this, and how lenders, for lack of a better word, keep fooling themselves.
The reality will have to catch up. This is how it goes: The obligation to pay off debt. But there is no cash! Can't borrow more. Let's sell assets. But there aren't any non-operating (i.e. excess) assets. Need to sell something that could be bought by someone. Let's sell some of our core operating assets. But isn't that a crazy idea? Why in the first place that was funded? Let's not get into any of that argument. We need to reduce debt. GMR has found itself in a cage along with its shareholders and lenders.
GMR is selling its Singapore asset and making a profit of Rs.1,350 crores. Cool! But is it? I don't know who has got the better deal here, GMR or FMP Power, the buyer. If the project is indeed profitable it is a bad idea to sell; if it is not, it is a bad idea to buy. That we will get to see sooner than later.
GMR will receive about Rs.2,600 crores from sale. Is that enough? What about the rest of the debt? Now the entire company is selling at about Rs.7,500 crores, significantly low compared to its 2009 value.
The puzzle is who is taking who for a ride: The management and board; the controlling shareholder; or the lender? It is a puzzle for sure.
GMR infrastructure recorded a loss of about Rs.490 crores for the nine-month period ended 31 December 2012 compared to Rs.237 crores loss in 2011. Operating earnings were Rs.940 crores on revenues of Rs.7,400 crores.
The damage was naturally done by the finance costs of about Rs.1,500 crores, 25% higher than last year.
So it is a case of a business facing challenges of high leverage: About Rs.43,000 crores debt; Rs.5,300 crores cash; and equity (31 March 2012) of about Rs.7,500 crores. Naturally, we cannot calculate a meaningful return on equity. Approximate return on capital including preferred stock (assuming it is still there in the books) is less than 3%. Note that we don't have the latest balance sheet and statement of cash flows. Not sufficient interest coverage; not sufficient cash from operations. If the company has to go for a credit rating, you know what it should expect.
Return on investment so far: none for equity holders; not much for debt holders.
You may not have enough cash from operations; but that does not mean you keep funding your long-term projects with debt. But it is amazing to see how businesses all over practice this, and how lenders, for lack of a better word, keep fooling themselves.
The reality will have to catch up. This is how it goes: The obligation to pay off debt. But there is no cash! Can't borrow more. Let's sell assets. But there aren't any non-operating (i.e. excess) assets. Need to sell something that could be bought by someone. Let's sell some of our core operating assets. But isn't that a crazy idea? Why in the first place that was funded? Let's not get into any of that argument. We need to reduce debt. GMR has found itself in a cage along with its shareholders and lenders.
GMR is selling its Singapore asset and making a profit of Rs.1,350 crores. Cool! But is it? I don't know who has got the better deal here, GMR or FMP Power, the buyer. If the project is indeed profitable it is a bad idea to sell; if it is not, it is a bad idea to buy. That we will get to see sooner than later.
GMR will receive about Rs.2,600 crores from sale. Is that enough? What about the rest of the debt? Now the entire company is selling at about Rs.7,500 crores, significantly low compared to its 2009 value.
The puzzle is who is taking who for a ride: The management and board; the controlling shareholder; or the lender? It is a puzzle for sure.
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