Intergen-related concerns abate as GMR sells its stake; Kotak Sec

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GMR Infrastructure (GMRI)
Infrastructure
Intergen-related concerns abate as GMR sells its stake; valuation upside Rs3/share.
We view with some relief GMR’s sale of its 50% stake in Intergen to China Huaneng at
an equity valuation of US$1.23 bn. GMR’s equity of US$300 mn (valued at zero so far)
in Intergen implies potential upside of Rs3/share. Subjective upside is larger as Intergen
was a key concern on account of the high leverage. We retain our ADD rating given the
lack of clarity on real estate monetization and structure, power project progress (fuel
linkage) and airport regulation.




Sells Intergen stake at par—equity of US$300 mn to flow back, implying upside of Rs3/share
GMR recently entered into an agreement with China Huaneng Group (largest power generation
company in China) to sell its 50% stake in Intergen for an equity valuation of US$1.23 bn. This is
almost at par as GMR had acquired this stake at a similar valuation – GMR had acquired its 50%
stake in Intergen for a value of US$1.13 bn in October 2008. The transaction is expected to close
in 1HCY11. Post the recent Intergen refinancing transaction, GMR had a total equity investment of
US$300 mn in Intergen (including investment for interest payments). The remaining acquisition
was funded through debt (total outstanding at US$737 mn). We were not valuing any of this
capital in our target price of Rs60/share of GMR Infrastructure. As this capital would now return to
GMR, it would lead to a potential upside of about Rs3/share to our target price.

A big concern abates—enthusing us more than the valuation upside
We are more enthused with our concerns abating regarding GMR’s exposure to Intergen’s high
debt levels than with the Rs3/share valuation upside from the stake sale. Intergen had net
consolidated debt (including SPV level) of about US$3.6 bn on its balance sheet. Gross debt was at
about US$4.1 bn, of which US$2.4 bn was at the corporate level and US$1.75 bn was at the SPV
level. GMR had also taken a loan of about US$1.1 bn for the acquisition of the company. Hence,
the 50% stake in Intergen and the acquisition loan combined would have lead to incremental debt
of about US$3 bn in GMR’s balance sheet. Intergen debt had been kept remote from GMR’s
balance sheet through a structure using compulsorily convertible debentures which shows the
current actual equity holding to be lower than actual intended economic interest (Exhibit 1).

Retain estimates and target price of Rs60/share; reiterate ADD
We retain our earnings estimates and SOTP-based target price of Rs60/share comprised of (1) Rs36
from airport project, (2) Rs3 from road projects, (3) Rs16 from power projects and (4) Rs6 from
other assets and cash at parent level (Exhibit 2). We retain our ADD rating despite significant
upside to our target price on account of the lack of clarity on real estate monetization (Delhi and
Hyderabad airport), power projects progress (Vemagiri) and airport regulation (Hyderabad).