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GMR Infrastructure Ltd
▲ Overweight
Previous: Neutral
GMRI.BO, GMRI IN
It's a carriage, not a pumpkin. Upgrade to OW
Clarity on airport charges, turnaround of key assets, balance sheet deleveraging,
commissioning of power projects and potential spin-off /
independent listing of subsidiaries are the likely catalysts. We upgrade
GMRI to OW. Our new Mar-12 PT is Rs.50.
• Heavy capex phase in airport vertical drawing to an end, time to
reap the returns: Completion of the Delhi airport well ahead of the
Commonwealth games provides more evidence of GMRI’s aboveaverage
execution, in our view. We believe the airport will begin
generating FCF in FY12, and could also make a net profit if mgt
executes its game plan to pay off debt with further real estate lease-outs.
Hyderabad airport has begun generating FCF in FY11, and we expect
sharp profit growth in FY12 led by higher capacity utilization.
• New airport regulator (AERA) likely to announce principles for
airport charges by 1QFY12. In our view, this would remove
uncertainties on a) acceptability of cost overruns at Delhi Airport and b)
returns on aero assets and extent of non-aero cross subsidies.
• Other positives: (1) 50% stake sale in Intergen for US$1.23B reduces
consolidated debt levels (2) Potential demerger and individual listing of
airport and power verticals would be a stock catalyst, in our view, as it
would simplify the structures and facilitate independent value discovery.
• Power to provide the next growth leg: GMRI has 823MW of operating
power assets, and an under-construction portfolio of 2.4GW. Recent PE
investment of ~US$300M in the power vertical would fund growth
through FY13, around which time management has stated that it would
IPO this vertical and seek more funds.
• The stock is trading at 19x FY13 P/E and 8.9x EV/EBITDA. As 21%
of the value arises from un-monetised real estate which is not
contributing towards earnings, the P/E and EV/EBITDA adjusted for real
estate is 15x and 8.1x, respectively. In our view, the valuation is
reasonable given potential growth in earnings beyond FY13 from the
power vertical
Valuation and stock view
Our SOTP based Mar-12 PT of Rs50/share (see Table 1 below) derives 53% of its
value from airports and associated real estate, 37% from power (assuming a 15%
equity stake owned by PE investors) and 9% from roads. We continue to use DCF to
value each SPV.
Key changes vs. our previous PT of Rs75 include a) Airports: A more conservative
view of aero charge increases as well as long-term non-aero revenues resulting in
lower value for airport assets, b) Real estate: Reduced value for DIAL real estate
assuming 75 acres used for airport funding and a reduced value for Hyderabad real
estate at Rs26M/acre vs. Rs30M/acre previously. c) SEZs: Knocked off value for
SEZs which are yet to take off d) Power: Inclusion of EMCO (600MW),
incorporating PE investment of Rs14.6B while adjusting for an assumed 15%
dilution on account of the same and e) Increased share count.
A common investor concern regarding valuation of infrastructure conglomerates
(especially GMRI) is the excessive value coming from long-term cash flows – we
believe our new valuation addresses this concern by adopting a more conservative
approach and sanity-checking the implied multiples with other publicly listed pureplays.
Ex- real estate, valuation looks more reasonable
GMR is trading at 19x FY13 P/E and 8.9x EV/EBITDA. As 21% of the value arises
from un-monetised real estate which is not contributing towards earnings, the P/E
and EV/EBITDA adjusted for real estate is 15x and 8.1x, respectively. In our view,
the valuation is reasonable given potential growth in earnings beyond FY13 from the
power vertical.
Upgrade to OW driven by visible catalysts
Clarity on airport charges, turnaround of key assets, balance sheet de-leveraging,
commissioning of power projects and potential spin-off / independent listing of
subsidiaries are the likely catalysts. Demerger of subsidiaries would simplify the
structures and facilitate independent value discovery, in our view. Other
conglomerates like Adani Enterprises, JPA, Reliance Infrastructure and L&T saw
strong stock performance ahead of potential value unlocking.
GMRI has received $300M PE investment in its power vertical, and has said it plans
to launch this business via IPO before FY14 as an exit route to investors.
The company is now looking at PE infusion in its airport vertical, with news reports
suggesting that the Macquarie SBI Infra fund was planning to invest $100-200M in
GMR Airports via convertible preference shares which may be converted to equity at
a later date.
Better visibility on profitability path and
cash flows for airport assets
The heavy capex phase in the airport vertical is drawing to an end with the
completion of Delhi International Airport. We believe the airport will begin
generating FCFF in FY12, and could also make a net profit if mgt executes its game
plan to pay-off debt with further real estate lease-outs. On the other hand the
Hyderabad airport has begun generating FCFF in FY11 itself, and we expect a sharp
profit growth in FY12 led by higher capacity utilization. With the capex phase for
Sabiha also complete we expect a positive FCFF this year onwards. Whereas we
expect the currently operational Male airport will see an influx in cash flow FY14
onwards when its planned expansion is complete and with ADC (Airport
Development Charges) kicking in 2012.
Delhi airport – debt repayment and airport regulator
decision will be key determinants of profitability
Earnings outlook
We currently model DIAL to turn around only in FY14 as capital costs depress the
bottom line in the medium term. The company’s strategy to repay debt via real estate
deposits could however fast track this turnaround. We currently model ~Rs55B of
proceeds from monetization of 75 acres of real estate over 3 years to go towards
reducing the current debt balance (~Rs74B). We expect a 12.3% CAGR in traffic and
16.3% CAGR during FY10-14 and sustainable ROE of 25-30% thru FY30 post the
turnaround in FY14.
Cash flow outlook
On a cash flow basis we expect a positive FCFF FY12 onwards as the capex phase
for Terminal 3 gets completed in FY11. The project cost of DIAL increased from
Rs98B to Rs106B (which was approved by AERA) and further to Rs127B. DIAL has
appealed to AERA for funding the Rs16.5B gap with increased ADF, although we
have modeled the gap to be debt funded. Approval of additional ADF and repayment
of debt faster than expected with real estate proceeds would be accretive to FCFE.
Hyderabad airport – higher capacity utilization the likely
profit driver
Earnings outlook
The Hyderabad airport reported a tiny profit in 2QFY11, and we believe this trend
would continue through the remaining quarters of FY11. Based on the current run
rate of PAX traffic at 7.3M, the airport is currently operating at a 61% capacity
utilization rate (54% in FY10) given 12M PAX handing capacity. We expect peak
capacity to be achieved in FY16 implying traffic CAGR of 10.7% in FY10-16. Post
recent UDF increase, we estimate PAT to grow at a CAGR of 65% FY12-16.
Cash flow outlook
Having completed its capex in Mar-08, GHIAL has already begun generating FCFF.
We expect an inflection point in FY11 itself, based on an improved operating cash
flow and reduced working capital requirements. We estimate the second phase of
expansion to increase capacity to 40M PAX to commence in FY15.
Sabiha Airport – commencement of concession fee will
depress earnings for 2-3 years, but higher capacity
utilization should mitigate the impact
Earnings Outlook
At the current run rate of 12.2mn PAX/annum, the airport is operating at 50%
utilization rate. Traffic grew by 67.5% yoy in FY10 and by 80.5% yoy in 1HFY11.
We estimate a 23% CAGR in PAX traffic thru FY15 and EBITDA growth of 49%
during the same period. However, near term profits will be depressed on account of
higher capital costs as well as payment of concession fees ($2.7B to be paid over 17
years) commencing in FY12 (JPM est. Rs3.6B/annum). We expect turnaround in
FY14.
Male airport – Commencement of user charges to drive
growth
GMR acquired a 77% stake in the Male airport in FY10 with the 25 year concession
(+ 10 year extension on mutual consent) commencing from Jan 2011. With a project
cost of $511M ($78M paid upfront as concession fees) GMR plans to increase
capacity from 2.6M PAX currently to 5.2M by 2014.
Earnings and cash flow outlook
We expect an increase in operating cash in FY12, with commencement of US$25
levy per departing International PAX. FCF would however be negative thru FY14
with the airport being in investment phase.
Clarity on airport charges expected soon
With respect to DIAL and GHIAL there has been regulatory uncertainty on
various counts including: (1) Approval of higher UDF at GHIAL (2) Approval of
increased project cost at DIAL and the proposed increase in ADF funding (3)
Increase in aero charges for DIAL (4) Application of a hybrid/single till model for
DIAL and (5) Commencement of CPI-X based regulated aero revenues. The Airport
Economic Regulatory Authority (AERA) was set up in Jun-09 with a primary
mandate to regulate and determine charges for aeronautical services and User
development fee (UDF).
Power to provide the next growth leg
GMRI has 823MW of operating power assets, and an under-construction portfolio of
2.4GW. The recent PE investment of US$300M in the power vertical and QIP of
$315M will fund growth through FY13, around which time the management has
stated that it would IPO this vertical and seek more funds. We estimate 2.4GW of
capacity addition thru FY14 and a CAGR of 66% and 40% in EBITDA and
PAT respectively. In our view the contribution from power segment earnings
will increase to 52% of EBITDA by FY14 from 27% currently
PE deals to fund equity requirement thru FY13, GMR Energy IPO imminent
GMR completed a $315M QIP in Apr’10. In addition Temasek concluded a $200M
structured investment in GMR Energy followed by a similar $100M investment by
IDFC. The convertible preference shares are to be converted into equity at the time
of IPO of GMR Energy, slated in 36 months, at the lower end of IPO price band.
However, management has said it expects to complete IPO within 24 months. In our
view GMR requires ~Rs25.5B ($570M) equity for its under-construction projects
thru FY13 and therefore an IPO is imminent to fund its development pipeline. The
valuation upside will depend upon market conditions and progress on projects.
Current operations still facing some hiccups
GMRI currently has 823MW of operational gas based capacity including: (1)
Vemagiri (389MW) (2) Basin Bridge (200MW) and (3) the barge mounted
Mangalore plant (235MW). The fully merchant Mangalore plant was relocated to
Kakinada in April 2010 and since then has been out of production. While mgt. was
expecting to recommence production in July ’10, this has been delayed and we now
expect some production in 4QFY11. While the Vemagiri plant has been restricted to
sell on a merchant basis currently, we model no merchant sales in the latter quarters
of FY11 or FY12.
Significant pipeline under construction and planning stages
GMRI has 5.5GW of additional thermal capacity planned of which 2.4GW is
currently under construction and also 2.14GW of hydro capacity under planning
stages. Management expects to add 4.1GW of capacity by FY15 compared to our
conservative estimate of 2.4GW.
For the 2.2GW of planned hydro capacity, land has not been acquired yet and only
DPRs have been submitted for most. Given the frequency of slippages in hydro
projects, the back ended profile of GMR's portfolio and little progress made on the
same, we don't assign value to these projects
Earnings Outlook
As the barge mounted plant resumes full scale operations in FY12 we expect
revenues to grow by 26% yoy. However we estimate the significant boost to
earnings will come through in FY13 onwards as under construction projects get
commissioned. We model a 3-4 month delay in commissioning compared to
guidance. In our view the contribution power segment earnings will increase to 52%
of EBITDA by FY14 from 27% currently.
Intergen sale announced; averts steep
increase in leverage
In late Nov' 10, GMR announced that it will sell its 50% stake in Intergen to China
Huaneng Group at an equity value of US$1.23B vs. its 2008 purchase price of
US$1.135B, making a relatively small book loss of $172M. GMR had de-rated post
this acquisition and without the risk of leverage escalation we are more positive on
the stock. Consolidation of the acquisition debt would have led to a deterioration of
GMRI's leverage ratios, which this sale has averted. GMRI’s current consolidated
DER stands at 1.86x, and we estimate a potential consolidation of Intergen would
have resulted in this ratio worsening to 2.25x.
Highways: Portfolio of 9 projects totaling
Rs50B
GMR currently has 6 operational road projects in its portfolio of which 3 are annuity
based and the other 3 are toll based. In addition the company has 3 projects under
construction which have achieved financial closure. We value the segment at Rs23B
and GMRI’s equity share at Rs4.6/share, with the inclusion of the three new projects.
Our valuation implies an FY12 P/B of 1.7x at a discount to IRB and ITNL trading at
2.3x and 2.0x consensus estimate respectively.
In FY10 the segment posted a loss of Rs654M vs. a profit of Rs104M in FY09 on
account of higher capital costs with the commissioning of three projects towards the
end of FY09 and in FY10. The segment generated revenues of Rs3.4B up 128% yoy
with an EBITDA margin of 80%. With the addition of these three projects in
GMRI’s road portfolio, we expect the segment to turn profitable in FY17.
Detailed notes on individual asset
valuation
Delhi airport
We adopt a more conservative view of aero charge increases as well as long-term
non-aero revenues resulting in lower value for DIAL. Based on Mar-12 DCF with a
Ke of 13.5% we value DIAL at Rs52.7B compared to Rs93B earlier. Our valuation
implies an FY12 and FY13 EV/EBITDA of 26x and 14.6x respectively, compared to
18.5x and 16.1x for GVK’s Mumbai International Airport valued at Rs48B.
Delhi airport real estate
Delhi airport has already monetized 45acres of the hospitality district at a gross NPV
of Rs830mn/acre (Rs3,504/sq ft) and a Net NPV of ~Rs727mn/ or Rs5,355/sq ft post
revenue share and tax on annual license fees (see table 13 below). The upfront
security deposit amount of Rs14.7B from the same will go towards directly funding
the airport.
We assume another 75 acres to be monetized by FY14 and expect the proceeds to go
towards reducing the debt at DIAL. Hence of the 250 acres we value 130 acres in our
SOTP at Rs45.5B implying a valuation of Rs350M/acre or Rs2,746/sq ft using a 50%
illiquidity discount.
Hyderabad airport
Using a Mar-12 DCF with a Ke of 14% we value the core airport operations at
Rs21.9B. Our valuation implies a 13.1x FY12 and 10.4x FY13 EV/EBITDA multiple
compared to 11.9x and 10.8x respectively for Bangalore airport which is comparable.
Hyderabad airport real estate
We currently value 1,000 acres of real estate surrounding the airport at Rs25.7B (Vs
Rs30B previously) implying a valuation of Rs26M/acre based on 7 year DCF with a
WACC of 17%. Mgt. has defined the plan for leasing out ~275 acres which includes
a health port, commercial district, funport and eduport. Over the next 12 months, it is
doubtful if development of land parcels can commence, given uncertainty around
separation of Telangana state from Andhra Pradesh.
Sabiha airport
Based on a DCF with a Ke of 14% we value the Turkey airport with a peak capacity
of 25mn PAX at Rs38.3B. GMRI’s 40% stake in the airport is valued at Rs3.9/share
or 7.8% of overall SOTP. Our valuation implies an EV/EBITDA multiple of 14.7x
and 10.0x for FY12 and FY13.
Male airport
Based on a DCF thru FY36 with a Ke of 16% we value the newly acquired Male
airport with a peak capacity of 5.2mn PAX at Rs7.4B. Our valuation implies an
EV/EBITDA multiple of 5.8x and 4.8x for FY12 and FY13 respectively. GMRI’s
77% stake in the airport is valued at Rs1.5/share or 2.9% of overall SOTP.
Power projects
We assign value only to projects which have crossed certain pre-commissioning
hurdles i.e. 1) Financial closure or 2) Land acquisition. As a result we assign value to
EMCO, Maharashtra (600MW), Kamalanga, Orissa (1GW, excluding the 350MW
planned expansion) and Vemagiri Expansion, Andhra Pradesh (768MW). Our
WACC ranges from 10-12% for operating projects, 14.5% for Kamalanga, 15% for
Emco and 13% for Vemagiri-2.
We currently don’t include the Chhattisgarh project on account of lack of clarity on
fuel supply. Addition of this project would imply 10% (Rs5.4/share) upside to our PT
assuming a 70:30 PPA:merchant mix and WACC of 16%.
Our implied valuation for GMR Energy equates to 29.5x FY12 P/E and 24x FY12
EV/EBITDA. Valuations begin to look more attractive FY13 onwards as under
construction capacities are commissioned. The valuation is post money incorporating
Rs14.65B of PE investments and a 15% dilution in GMR’s stake in the vertical.
Financial Analysis
We expect GMRI to post a net loss in FY11. This is mainly attributable to a) on-time
completion of Delhi airport, causing a steep increase in operating expenses, interest
and depreciation – aero charges however did not increase in time to cushion these
higher costs and b) shift of barge-mounted plant at Mangalore to Kakinada entailed
idle time of more than a year, causing a steep profit decline. On the balance sheet
front, equity raising of Rs14B combined with PE infusion of Rs14.65B and user fees
at Delhi airport (treated as capital receipt) proved saviors.
We expect a turnaround of this situation in FY12. Delhi airport would still make a
loss, as our aero charge increase estimates are conservative. However,
recommencement of barge-mounted power plant, higher cap-utilization of
Hyderabad airport and commencement of Male airport result in 21.6% EBITDA
growth. This increase would be sufficient, in our view, to absorb high fixed costs.
We expect net leverage to remain stable at below 1.6x (apart from 2012) and free
cash flows to be positive FY14 onwards.
We expect further improvement in numbers in FY13, as Vemagiri-2, Kamalanga and
Emco power projects begin operations. Simultaneously, we expect Delhi airport-real
estate monetization to result in debt repayment, thus bringing down interest cost
substantially. Around this time, we believe the energy vertical would need more
funds to grow and the company has publicly stated its IPO plans.
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