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GMR Infrastructure
Losses peaking, we see relief ahead
We think losses have peaked: higher revenue from Hyderabad airport and power
plants should continue to offset Delhi airport commissioning costs. However, a
change in strategy at the power division prompts us to trim our EPS forecasts
and target price. Buy, as we see the ambitious infra asset sweat paying off.
Losses widen in 3Q due to Delhi airport commissioning
GMR Infra’s 3Q net loss widened 23% qoq to Rs854m as commissioning of Delhi airport, its
largest asset, raised interest and depreciation costs (+18% qoq). The power division’s PAT
post minority interests doubled qoq to Rs400m, but missed our estimates on lower gas supply
and merchant tariffs. Delhi airport’s losses post minorities nearly doubled qoq to Rs884m;
Hyderabad airport’s PAT improved sharply. Consolidated debt grew 10% qoq to Rs193bn.
We adjust our estimates following a change in strategy at the power division
The recent management strategy change in the power division (see page 4), in response to
the sharp slide in merchant tariffs, was a negative surprise for us, while the shortage of gas
supply from the KG-D6 field weighs on profit growth prospects from existing power plants. As
a result, we cut our power division PAT forecasts for FY11-12 by nearly half. For the airports,
we factor in a slow ramp-up in Delhi non-aero revenue and management’s guidance that the
tax shield for Delhi airport no longer applies from the December 2010 quarter.
Worst fixed-cost fears behind us, we see relief ahead, equity requirement funded; Buy
We feel the worst of the fixed-cost pressure is over and revenue improvement will be the key
share price driver going forward, notably at Delhi airport. Early fixing of new user charges for
Delhi airport could be a key catalyst. This prospect has little impact on our valuation as we
value Delhi airport on an assured return basis as per the state support agreement, although
the inclusion of recently acquired Male airport does support our valuation for this division.
However, our power division estimates take a bigger hit from the strategy change, pushing
our SOTP-based target price down to Rs64.6. The stock currently trades at 1.0x FY11F P/B.
We see the sharp share price correction in recent months as offering a good opportunity to
buy into a leading infrastructure developer with large assets in operation in high-entry-barrier
segments. The plan to fully fund its equity requirement for existing projects from proceeds
from the planned sale of its 50% stake in Intergen provides additional comfort.
Worst seems behind us; relief visible
We believe losses have peaked, with depreciation/interest costs from Delhi airport having
fed through in 3Q. On higher user charges at Hyderabad airport and the capacity utilisation
rise in the power division, we see a turnaround ahead. Buy for attractive 1x P/BV in FY11F.
3QFY11 consolidated highlights: normalised net loss appears to have peaked
Net sales Rs13.6bn, +27% yoy, +11% qoq, vs the RBS estimate of Rs15.1bn. Lower
merchant tariffs and gas supply weighed on sales in the energy division.
EBITDA margin 30%. In line with the RBS estimate.
EBITDA Rs3.8bn, +10% yoy, +7% qoq, 16% below our estimate of Rs4.5bn. Consolidation of
Homeland Energy loss weighed on EBITDA.
Depreciation Rs2.36bn, +18% qoq. In line with our estimate.
Interest cost Rs2.94bn, +18% qoq due to Delhi domestic terminal commissioning.
Net loss before tax of Rs1.3bn, up 72% qoq. RBS estimate: Rs841m loss.
Normalised net loss after tax was Rs854m, +23% qoq. Adjusted for deferred tax credit of
Rs1.04bn for Hyderabad airport and Rs41m forex impact at Turkey airport.
Normalised EPS was a negative Rs0.22 for the quarter and a negative Rs0.5 for 9M.
Power division performance highlights
Net sales Rs4.6bn (up 3% yoy, down 8% qoq). The EBITDA margin for 3Q stood at 22% (flat
qoq), mainly due to higher merchant sales in the quarter. PAT doubled to Rs400m.
The company consolidated Homeland Energy numbers with GMR Energy results in 3QFY11.
This resulted in consolidated profit declining to Rs287m, due to losses suffered in Homeland
Energy.
Plant load factors (PLFs) were lower due to: 1) lower demand in the Chennai plant since it is
naphtha–based (since the power generated from this plant became expensive due to
increased naphtha prices); and 2) lower gas availability for the Kakinada and Vemagiri plants.
Merchant realisation at the Kakinada plant fell 10% qoq to Rs3.66/unit owing to seasonality in
demand, which also weighed on sales.
Management said it expected the expansion at its Vemagiri plant (Andhra Pradesh) to start
operation by end-CY11, while the EMCO and Kamalanga plants should become operational
by March 2012.
According to management, fuel availability for gas-based plants should be lower than
requirements in the coming quarters, due to technical issues at the supplier’s end.
Airport division performance highlights
Despite an improved margin (19% in 3Q vs 2% in 2Q), Delhi airport’s losses doubled qoq to
Rs1.6bn due to higher depreciation and interest costs as Terminal 3 was close to fully
capitalised during the quarter.
After adjusting for a one-time deferred tax credit of Rs1.06bn, Hyderabad airport (HIAL)
reported a post minority normalised net profit of Rs67m (vs Rs7m in 2Q), mainly due to an
increase in the user development fee from November.
At Istanbul Sabiha Gokcen International Airport (SGIA) in Turkey, the net normalised loss
increased 21% to Rs180m, due mainly to lower traffic on account of seasonality.
The Airports Economic Regulatory Authority of India (AERA) has issued new tariff guidelines
for airports (not applicable to Delhi airport) while the company is planning to contest the tariff
order for Hyderabad airport. For Delhi airport, the company is expecting a separate order from
the AERA and it hopes the new tariffs will enable it to recover the losses (in line with the state
support agreement) as most of the required capex on the airport is done .
Management said the company achieved financial closure for a debt amount of US$358m for
developing Male airport. It added that the equity requirement for the project would be around
US$180m, out of which the company had already invested US$30m and the rest would be
met through internal accruals at the airport.
Other division highlights and balance sheet items
The road division made a net loss of Rs126m (vs a Rs175m loss in 2Q) as depreciation and
interest costs continued to erode EBITDA profits.
According to management, of the three operational projects, Jadcherala is about to break
even while the Ulunderpet project should break even next year.
Management is pleased that both these projects will have broken even in the second year of
their respective operations.
However, the Ambala-Chandigarh project is facing issues due to a parallel state-run road,
which is resulting in traffic diversion. Management believes this constitutes a breach of the
state support agreement and said the company would be taking legal action.
The EPC division’s net profit declined 12% qoq to Rs84m despite a 26% jump in EBITDA on
account of higher other expenses.
Net debt increased 5% qoq to Rs225.6bn, leading to a rise in net debt-to-equity to 1.33.
Gross block rose 21.5% qoq to Rs235.2bn on account of the complete commissioning of the
new Delhi airport terminal.
Earnings forecast changes
We have revised our forecasts due to our downward revisions in airport profits and the change in
strategy at the power division.
The main reasons for the downgrade of our airport division forecasts are:
Higher interest cost forecasts (particularly at Delhi and SGIA) following the increase in base
rates we are currently seeing.
Increase in operational expense forecasts at Delhi and SGIA.
Removal of tax shield for Delhi Airport post December 2010, as per management guidance.
We had previously incorporated the tax shield into our forecasts for FY11 (but not for FY12
onwards) in line with the company’s accounting treatment for the first six months.
For the power division, we lower our estimates due to changes in the following assumptions:
Reduced merchant realisation and a shift in the sales mix towards regulated / PPA-based
tariffs in light of the recent change in management’s strategy to sell more power through longterm contracts to reduce the cash flow volatility.
Lowering of plant PLFs due to lower gas availability (Vemagiri and Kakinada).
Delay in completion of the Vemagiri expansion project.
We also reduce our investment income forecasts for FY11, chiefly due to the lower-than-expected
investment income during 3QFY11, which was about half the level in each of the previous two
quarters. We expect this trend to continue in 4Q given the tight liquidity position, but think the
Intergen payment (expected by end-March) should ease the situation.
SOTP valuation trimmed due to revisions in our estimates for the power division
We trim our SOTP valuation, primarily due to a reduction in our estimate of the power division’s
value, whereas our airport division valuation is maintained. For the power division valuation, apart
from our EPS revisions, we also raise the risk-free rate in the respective project value. This has
resulted in our power division SOTP valuation falling to Rs21.3 from Rs29 (excluding Intergen).
For airports, we introduce a value for Male airport of Rs2.6 (using a DCF methodology, in line with
our treatment of other airports under our coverage), which offsets the reduction in our valuation of
other airport projects due to higher expenses and interest costs.
Overall, this leads to a lower SOTP-based target price of Rs64.6, at which the stock would trade
at a P/BV of 1.6x FY11F and 1.5x FY12F.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GMR Infrastructure
Losses peaking, we see relief ahead
We think losses have peaked: higher revenue from Hyderabad airport and power
plants should continue to offset Delhi airport commissioning costs. However, a
change in strategy at the power division prompts us to trim our EPS forecasts
and target price. Buy, as we see the ambitious infra asset sweat paying off.
Losses widen in 3Q due to Delhi airport commissioning
GMR Infra’s 3Q net loss widened 23% qoq to Rs854m as commissioning of Delhi airport, its
largest asset, raised interest and depreciation costs (+18% qoq). The power division’s PAT
post minority interests doubled qoq to Rs400m, but missed our estimates on lower gas supply
and merchant tariffs. Delhi airport’s losses post minorities nearly doubled qoq to Rs884m;
Hyderabad airport’s PAT improved sharply. Consolidated debt grew 10% qoq to Rs193bn.
We adjust our estimates following a change in strategy at the power division
The recent management strategy change in the power division (see page 4), in response to
the sharp slide in merchant tariffs, was a negative surprise for us, while the shortage of gas
supply from the KG-D6 field weighs on profit growth prospects from existing power plants. As
a result, we cut our power division PAT forecasts for FY11-12 by nearly half. For the airports,
we factor in a slow ramp-up in Delhi non-aero revenue and management’s guidance that the
tax shield for Delhi airport no longer applies from the December 2010 quarter.
Worst fixed-cost fears behind us, we see relief ahead, equity requirement funded; Buy
We feel the worst of the fixed-cost pressure is over and revenue improvement will be the key
share price driver going forward, notably at Delhi airport. Early fixing of new user charges for
Delhi airport could be a key catalyst. This prospect has little impact on our valuation as we
value Delhi airport on an assured return basis as per the state support agreement, although
the inclusion of recently acquired Male airport does support our valuation for this division.
However, our power division estimates take a bigger hit from the strategy change, pushing
our SOTP-based target price down to Rs64.6. The stock currently trades at 1.0x FY11F P/B.
We see the sharp share price correction in recent months as offering a good opportunity to
buy into a leading infrastructure developer with large assets in operation in high-entry-barrier
segments. The plan to fully fund its equity requirement for existing projects from proceeds
from the planned sale of its 50% stake in Intergen provides additional comfort.
Worst seems behind us; relief visible
We believe losses have peaked, with depreciation/interest costs from Delhi airport having
fed through in 3Q. On higher user charges at Hyderabad airport and the capacity utilisation
rise in the power division, we see a turnaround ahead. Buy for attractive 1x P/BV in FY11F.
3QFY11 consolidated highlights: normalised net loss appears to have peaked
Net sales Rs13.6bn, +27% yoy, +11% qoq, vs the RBS estimate of Rs15.1bn. Lower
merchant tariffs and gas supply weighed on sales in the energy division.
EBITDA margin 30%. In line with the RBS estimate.
EBITDA Rs3.8bn, +10% yoy, +7% qoq, 16% below our estimate of Rs4.5bn. Consolidation of
Homeland Energy loss weighed on EBITDA.
Depreciation Rs2.36bn, +18% qoq. In line with our estimate.
Interest cost Rs2.94bn, +18% qoq due to Delhi domestic terminal commissioning.
Net loss before tax of Rs1.3bn, up 72% qoq. RBS estimate: Rs841m loss.
Normalised net loss after tax was Rs854m, +23% qoq. Adjusted for deferred tax credit of
Rs1.04bn for Hyderabad airport and Rs41m forex impact at Turkey airport.
Normalised EPS was a negative Rs0.22 for the quarter and a negative Rs0.5 for 9M.
Power division performance highlights
Net sales Rs4.6bn (up 3% yoy, down 8% qoq). The EBITDA margin for 3Q stood at 22% (flat
qoq), mainly due to higher merchant sales in the quarter. PAT doubled to Rs400m.
The company consolidated Homeland Energy numbers with GMR Energy results in 3QFY11.
This resulted in consolidated profit declining to Rs287m, due to losses suffered in Homeland
Energy.
Plant load factors (PLFs) were lower due to: 1) lower demand in the Chennai plant since it is
naphtha–based (since the power generated from this plant became expensive due to
increased naphtha prices); and 2) lower gas availability for the Kakinada and Vemagiri plants.
Merchant realisation at the Kakinada plant fell 10% qoq to Rs3.66/unit owing to seasonality in
demand, which also weighed on sales.
Management said it expected the expansion at its Vemagiri plant (Andhra Pradesh) to start
operation by end-CY11, while the EMCO and Kamalanga plants should become operational
by March 2012.
According to management, fuel availability for gas-based plants should be lower than
requirements in the coming quarters, due to technical issues at the supplier’s end.
Airport division performance highlights
Despite an improved margin (19% in 3Q vs 2% in 2Q), Delhi airport’s losses doubled qoq to
Rs1.6bn due to higher depreciation and interest costs as Terminal 3 was close to fully
capitalised during the quarter.
After adjusting for a one-time deferred tax credit of Rs1.06bn, Hyderabad airport (HIAL)
reported a post minority normalised net profit of Rs67m (vs Rs7m in 2Q), mainly due to an
increase in the user development fee from November.
At Istanbul Sabiha Gokcen International Airport (SGIA) in Turkey, the net normalised loss
increased 21% to Rs180m, due mainly to lower traffic on account of seasonality.
The Airports Economic Regulatory Authority of India (AERA) has issued new tariff guidelines
for airports (not applicable to Delhi airport) while the company is planning to contest the tariff
order for Hyderabad airport. For Delhi airport, the company is expecting a separate order from
the AERA and it hopes the new tariffs will enable it to recover the losses (in line with the state
support agreement) as most of the required capex on the airport is done .
Management said the company achieved financial closure for a debt amount of US$358m for
developing Male airport. It added that the equity requirement for the project would be around
US$180m, out of which the company had already invested US$30m and the rest would be
met through internal accruals at the airport.
Other division highlights and balance sheet items
The road division made a net loss of Rs126m (vs a Rs175m loss in 2Q) as depreciation and
interest costs continued to erode EBITDA profits.
According to management, of the three operational projects, Jadcherala is about to break
even while the Ulunderpet project should break even next year.
Management is pleased that both these projects will have broken even in the second year of
their respective operations.
However, the Ambala-Chandigarh project is facing issues due to a parallel state-run road,
which is resulting in traffic diversion. Management believes this constitutes a breach of the
state support agreement and said the company would be taking legal action.
The EPC division’s net profit declined 12% qoq to Rs84m despite a 26% jump in EBITDA on
account of higher other expenses.
Net debt increased 5% qoq to Rs225.6bn, leading to a rise in net debt-to-equity to 1.33.
Gross block rose 21.5% qoq to Rs235.2bn on account of the complete commissioning of the
new Delhi airport terminal.
Earnings forecast changes
We have revised our forecasts due to our downward revisions in airport profits and the change in
strategy at the power division.
The main reasons for the downgrade of our airport division forecasts are:
Higher interest cost forecasts (particularly at Delhi and SGIA) following the increase in base
rates we are currently seeing.
Increase in operational expense forecasts at Delhi and SGIA.
Removal of tax shield for Delhi Airport post December 2010, as per management guidance.
We had previously incorporated the tax shield into our forecasts for FY11 (but not for FY12
onwards) in line with the company’s accounting treatment for the first six months.
For the power division, we lower our estimates due to changes in the following assumptions:
Reduced merchant realisation and a shift in the sales mix towards regulated / PPA-based
tariffs in light of the recent change in management’s strategy to sell more power through longterm contracts to reduce the cash flow volatility.
Lowering of plant PLFs due to lower gas availability (Vemagiri and Kakinada).
Delay in completion of the Vemagiri expansion project.
We also reduce our investment income forecasts for FY11, chiefly due to the lower-than-expected
investment income during 3QFY11, which was about half the level in each of the previous two
quarters. We expect this trend to continue in 4Q given the tight liquidity position, but think the
Intergen payment (expected by end-March) should ease the situation.
SOTP valuation trimmed due to revisions in our estimates for the power division
We trim our SOTP valuation, primarily due to a reduction in our estimate of the power division’s
value, whereas our airport division valuation is maintained. For the power division valuation, apart
from our EPS revisions, we also raise the risk-free rate in the respective project value. This has
resulted in our power division SOTP valuation falling to Rs21.3 from Rs29 (excluding Intergen).
For airports, we introduce a value for Male airport of Rs2.6 (using a DCF methodology, in line with
our treatment of other airports under our coverage), which offsets the reduction in our valuation of
other airport projects due to higher expenses and interest costs.
Overall, this leads to a lower SOTP-based target price of Rs64.6, at which the stock would trade
at a P/BV of 1.6x FY11F and 1.5x FY12F.
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