India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
• A Cinderella asset class; markets are ignoring potential
transformation: Complexity of business structures, regulatory
uncertainties and heavy capex phase without cash inflows have
combined to cause significant value erosion in this space. Over the next
12 months, we see a turnaround in stock performance, led by: a)
turnaround / cash flow generation by key projects (e.g. Delhi, Hyderabad
airports); b) independent listing of key verticals for easier value
discovery; c) clarity on regulations and policy decisions – e.g. airport
charges, electricity distribution license, Mumbai airport real estate
monetization, and d) sizeable contribution of power segments.
• We upgrade GMR Infrastructure (GMRI) to OW, as it will likely top
the list of positive catalysts listed above, with asset turnaround / demerger
and regulatory clarity on airport charges. GVK Power &
Infrastructure (GVK) – We stay OW, as we believe there is deep value
and the stock has corrected disproportionately to real estate monetization
delay. GVK seems to have higher absolute upside, but we believe GMRI
could see shorter-term triggers.
• We downgrade Reliance Infrastructure (RELI) to Neutral, as we
think it will continue to suffer from a lack of big-bang catalysts and
regulatory uncertainty on electricity distribution licenses. We keep our
Neutral rating on Adani Enterprises (ADE), which has outperformed
peers following the strong performance of power / port subsidiaries and
value unlocking, but recent coal mine acquisitions and MDO business
are likely to take a while to play out in SOP. We recommend switching
from RELI and ADE (on upticks) to GMRI / GVK and buying
Mundra Port and SEZ (MPSEZ, Neutral), on declines.
Nothing (almost) went right for the sector
The past decade signifies the first meaningful privatization of infrastructure
ownership in India, but several things went awry. It was a phase of massive asset
creation and balance sheet expansion, which was not matched by returns and cash
flows. It took longer than expected to implement an independent regulatory
framework and the government ended up making most of the decisions. Enterprising
companies pioneered infrastructure asset ownership, but stock market performance –
especially in the past two years – reflected all these unmet expectations.
GMRI, GVKP, RELI and JPA have generated negative returns in a rising market.
The two clear outperformers were a) MPSEZ: strong execution, investor preference
for pure plays; and b) ADE, mainly during the time of listing of Adani Power and
merger of Mundra Ports, facilitating easy value discovery for the parent company.
We expect a significant turnaround in
underperformance-causing events over
the next 12 months
Underperformance reason # 1: high investment phase
without commensurate cash flows / returns. How is this
changing? Key assets will turnaround / generate cash
As a corollary, balance sheets are going to look better with less need for equity
dilution, at least in the next 12 months.
Underperformance reason # 2: regulatory and political
issues. How is this changing? Some clarity expected on
issues such as airport charges
Regulatory and policy decision-making uncertainties have also uniformly plagued
the sector. GMRI and GVK face uncertainty on adequacy of airport charges for
generating expected returns on their airport assets. RELI, until recently, invited
regulatory disapproval of raising electricity tariffs to meet its targeted returns in
Mumbai. The status of its distribution license in Mumbai is uncertain, with the
impending expiry of the same (on 15 August 2011) and other players bidding for it.
The delay in Mumbai airport real estate monetization, due to delay in approval of the
masterplan by MMRDA, has been a key cause for underperformance of GVK. Both
GMRI and GVK faced disapproval of merchant power from AP state power
regulator, from their gas-based power plants.
MPSEZ, after a strong performance during the better part of the year, has seen slight
underperformance since the Ministry of Environment & Forest (MoEF) issued a
show-cause notice to the company on 15 December for the alleged violation of
Coastal Regulation Zone (CRZ) notifications.
Underperformance reason # 3: Complexity of business
structure. How is this changing? Verticalisation,
independent listing
Complexity of business structure and difficulty in comprehending valuations arising
from several revenue streams is a strong common theme for less investor preference
for the sector. Conglomerates like Adani Enterprises and RELI have already listed
their key verticals, while GMRI and GVK are in the process of creating independent
verticals with a view to eventually hiving them off.
Underperformance reason # 4: balance sheet dilutive
acquisitions / investments. How is this changing? Sale of
these assets
The recent transaction of GMRI selling its stake in Intergen was an isolated one and
we do not see complete asset sell-offs in future, as the sector is on an asset creation
spree. However, we do see demerger and partial sale to PE and listing as value
creators.
Stock preferences in the light of above
themes
In our view, GMRI is exposed to the maximum number of potential catalysts we see
within the space. Uncertainties on regulations and heavy investment phase had
impacted GMRI the most, thus it is also the highest-beta play on resolution of these
problems. We upgrade to OW. Our new Mar-12 PT of Rs50, although lower than
our earlier Mar-11 PT of Rs75, stems from a more conservative view on aero charge
increases and long-term non-aero upsides, which now makes the airport asset
valuation comparable to global peers. Delay in resolution of regulatory issues and
power plant commissioning delays are downside risks to our PT.
We retain our OW rating on GVK, with a downward revision to our PT to
Rs53. The steep correction in the stock makes it a deep value play and we believe the
correction is disproportionate to the delay in monetization of real estate, which has
caused investor concern. Thus, any lease-out of real estate would be the primary
catalyst for GVK. Our downard revision in PT arises from a more conservative
valuation for airport assets benchmarked to global pure plays.
GMRI vs. GVKP – which one?
GVK is not carrying the burden of loss-making assets, and is still in a high
investment phase. Power listing is 4-5 years away. Barring news flow of Mumbai
real estate monetization, the swing factor seems to be weaker for GVK, although
absolute upside is higher. On the other hand, GMRI’s Delhi airport is making loss /
negative cash flow and is poised for a turnaround, in our view, if things go well.
Thus near-term triggers seem to be higher for GMRI.
We downgrade RELI to Neutral. Our PT of Rs950 is lower than before, as we
have factored in a haircut on inter-corporate deposits that have surfaced in the
balance sheet and assumed no terminal growth in Mumbai distribution. Although the
stock has done badly and the downgrade appears delayed, we are recommending a
switch to stocks that have seen similar declines (e.g. GMRI, GVKP) but may
have stronger catalysts. Associate company Reliance Power accounts for 49% of
value. Regulatory overhang on electricity distribution in Mumbai may remain.
Upside risks stem from reduction in ICD investments, and a pick-up in execution of
the EPC order book and infrastructure projects.
We keep our Neutral rating on ADE; with a new PT of Rs665 (up from Rs640).
This stock has outperformed peers in the past year, following strong performance of
power / port subsidiaries and value unlocking. However, recent coal mine
acquisitions and MDO business will take a while to play out in SOP. We suggest
switching from ADE (on upticks) to pure-play MPSEZ on declines, and also to
GMRI / GVK.
We maintain Neutral rating on MPSEZ, with a PT of Rs161, which implies 16%
upside from the current level. After outperforming the markets earlier in the year,
MPSEZ has underperformed the Sensex by ~17% over the past three months on
account of rich valuations accompanied by absence of catalysts. Fruition of new
investment avenues (concessions to develop green field ports in India, visibility on
capex and development timeline for overseas coal terminals) for deploying healthy
FCF the business is expected to generate is likely to be SOP-accretive, as their
execution capabilities are among the best in the private sector. A 10% correction
from existing levels would provide an attractive entry opportunity, in our view.
Valuation analysis and global comparables
We use the Sum-of-Parts (SOP) method to value stocks, using long-term DCF to
value individual SPVs. Our SOP values are summarized below.
A common investor concern is that DCF places too much value on long-term upside
potential that is not clearly visible. To allay this concern, we show how our target
values for individual verticals stack up against their Indian / global pure-play comps.
Airport valuation
In our view, our target valuation for the airport verticals of GMRI and GVKP,
excluding real estate, should be benchmarked on an EV/EBITDA basis to their
global peers. As Indian airports are barely coming out of the loss-making phase, P/E
comparison does not providemeaningful numbers. P/BV, too, appears high vs. peers
as these are at the initial investment phase, where (equity + accumulated reserves) is
low and debt is high. The implied EV/EBITDA multiples, on the other hand, are
comparable to Macquarie airports as well as to Beijing Capital. The premium to
European airports is warranted, in our view, due to higher traffic growth potential
and non-aeronautical revenue growth possibilities at Indian airports.
Power valuation
Markets tend to use both earnings-based and asset-based multiples to compare power
valuations. Indian power IPPs trade at a mean P/E of 11-12x FY13E earnings.
EV/EBITDA for FY13 is generally around 7-7.5x. On both these parameters, the
implied valuation for GVK's power vertical appears higher. This is due to 26% of the
power valuation coming from gas-based project expansion that will be commissioned
around early FY15, and contribute significantly to earnings (19% of FY15 power
segment EBITDA).
RPWR is expensive, justifying our 20% holdco discount approach to value RELI's
stake in RPWR, in our view. Adani Power appears cheap, justifying our lower
holdco discount of 10% to value ADE’s stake, in our view. We believe our valuation
of GMRI's power assets is reasonable.
P/B for the sector is close to 2x. GMRI / GVKP power valuations based on P/B
appears cheap: infusion of equity funds and independent listing would facilitate
better value discovery, in our view.
Roads valuation
On a P/BV basis, GMR and RELI’s road projects trade on par with Indian and
regional road companies.
Ports valuation
Prima-facie MPSEZ appears to be the most expensive stock in the listed port
universe (see valuation comps in Table 10). The stock trades at 15.6x FY12E
EV/EBITDA vs. the global average of 11-12x.
The premium is justified, in our view, as MP is one of the fastest growing port
businesses with an FY10-14E EBITDA and earnings CAGR of 36% and 37.5%
respectively. Also the scalability potential of the port asset is high, to which the
markets seem to be attributing value (we estimate ~380MT traffic in FY31, the
terminal year of the MP concession, from ~40MTPA at end of FY10).
We expect MP to be the largest port in India, surpassing Kandla port (which handles
~79MT in FY10) by FY14. MP has the largest contiguous SEZ with a notified area
of 15,995 acres.
Valuation for airport real estate
DIAL has set a precedent for valuation of its land bank when it bid out the 45 acres
of the hospitality district in two phases between Mar-09 and Dec-09. The NPV of
upfront deposit and net-present value of annuities worked out to ~Rs5355/sq.ft. The
bids were awarded to Accor, InterGlobe Hotels, Lemon Tree, DB Hospitality, and a
few others. We have conservatively valued the remaining DIAL real estate (130
acres, assuming 75 acres is used to fund early repayment of debt) at a 50% discount
to the valuation precedent set for the 45 acres.
At MIAL, we value 12.6mn sq ft at an implied value of Rs3,990/sq ft (the first
tranche at DIAL had been bid out at this rate).
At Hyderabad, given the sheer volume of the land bank (1,000 acres), we value it at a
modest Rs26MM/acre based on a DCF approach. Management has made plans for
the first 275acres but is unlikely to see any sales in the next 12 months due to the
Telangana issue. Similarly due to the lack of clarity on timing, we estimate a modest
Rs20MM/acre valuation for Bangalore real estate.
Consolidated valuation
Valuations for GMRI and GVK should be viewed ex-real estate, in our view, as the
latter is valued at NAV and does not contribute significantly to earnings. Valuations
have begun to look reasonable on P/E, P/B and EV/EBITDA if adjusted for real
estate.
No comments:
Post a Comment