Sinking feeling: Will GTL Infra take GTL down with it?

GTL and GTL Infra, two telecom shares that were beaten down earlier this week as they were excessively debt-laden, continued to stay on a slippery slope on Thursday. While GTL touched a low of Rs 93.05, down by over 18% since Wednesday’s close, GTL Infra tumbled over 13%, hitting a low of Rs 13.25. They closed at Rs 108.20 and Rs 15.90 respectively.

GTL Infra runs telecom towers for mobile service providers, but its debts are more than four times its equity. But as an associate company of GTL, which owns a little more than a third of its shares, GTL Infra’s debt woes are now beginning to drag the former down.

[caption id=“attachment_30529” align=“alignleft” width=“380” caption=“A towering problem for GTL. Krishnendu Halder/Reuters”]  [/caption]

In an earlier article, Firstpost had indicated that GTL Infra was under great financial stress. Analysts with whom_Firstpost_ spoke now say that things are worse, as its interest costs were upped by 75 basis points (0.75%) some time ago. On a Rs 10,000-crore debt pile, this hike in rates amounts to an additional outgo of Rs 75 crore annually.

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In that case, the company’s operating profit may barely meet its interest outgoings. A decline in the tenancy ratio (number of clients for each tower owned by GTL Infra) or a rise in interest rates can create further complications. Put bluntly, there is a probability of loan default.

GTL, being the parent company of GTL Infra with a 36.22% holding, will naturally be affected by any loss in the latter’s market value. When GTL Infra loses value, a third of the losses are GTL’s. Little wonder, they are declining in tandem.

This apart, in its annual report of 2009-10, GTL says that it “has furnished the following undertaking (to GTL Infra) in respect of credit facilities of Rs 2,82,900 lakh and foreign currency loan of $175 million sanctioned by various lending institutions…”.

What this means is that if GTL Infra defaults on its loan obligations, the burden will fall on GTL. GTL, thus, has a potential loan liability of Rs 3,600 crore on its hands. But GTL had a net profit of only Rs 200 crore in 2010-11, and a cash profit of Rs 281 crore. The company itself had debts of Rs 2,800 crore - net of Rs 1,294 crore of cash. Prima facie, it does not look like GTL can honour its commitment on behalf of GTL Infra, if the latter defaults.

Analysts point out that the only way GTL Infra can come out of this financial mess is by raising capital. Which is exactly what the company intended to do while trying to raise $300 million some time ago. But the time is not ripe for capital raising. It seems no one is willing to bet on the future of the company.

The only question now is: will GTL Infra sink alone or take GTL too down with it?