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GMR Infrastructure Ltd Overweight
GMRI.BO, GMRI IN
Cash flow tunaround intact, clarity on airport regulations a potential stock catalyst
• GMRI reported strong operating results, with strong growth in air
traffic and non-aero revenues. Reported net loss, at Rs225M, was lower
than our estimated loss of Rs760M, mainly due to a deferred tax write-back
of Rs0.7B at Hyderabad Airport. The loss is on account of high interest and
depreciation charges at airports and would reduce with better capacity
utilization / higher aero charges and real estate monetization if any. Power
segment operating results were weak, as expected, due to a reduction in KG
Basin gas availability.
• The thesis behind our recent upgrade is largely intact, viz, cashflow
turnaround in airport assets, balance sheet de-leveraging via Intergen sale
and growth via new power projects. However, keeping with our recent PLF
cuts across the IPP space to factor in fuel availability concerns, we cut
GMRI’s EBITDA estimates by 4% and 7% for FY12 and FY13,
respectively.
• Recent airport regulator pronouncements: negative impact probably
over-feared, our model had already assumed these. Contentious issues a)
single-till approach for Hyderabad airport and b) inclusion of real estate
market value for Delhi airport returns. Our Hyderabad airport model has an
implied project IRR of 14%, and, notwithstanding the regulatory approach
used, it looks less probable that the regulator will slash user charges below
our assumed level of return. For Delhi, we have anyway subtracted the
value of monetized real estate to arrive at a regulatory asset base in our
existing model.
• Our SOP-based PT of Rs50 derives 25% of its value from airports, 13%
from Delhi real estate, 31% from power. It implies 24x FY13E adjusted (exreal
estate) P/E, 8x EV/EBITDA and 1.5x P/B. Given high growth from
power beyond FY13, we think these multiples are reasonable. We retain our
preference for GMRI amongst infra asset owners as the company has shown
best in-class execution capabilities, has exited unrelated business, and assets
are poised for a turnaround.
Airports Assets: Cash flow turnaround and
impact of regulatory change
The negative impact of recent airport regulator pronouncements is probably overfeared
in our view. Contentious issues: a) single-till approach for Hyderabad airport
and b) inclusion of real estate market value for Delhi airport returns.
Delhi airport – hybrid till approach, real estate market value
already in the model, but return > 11.6% is a potential
upside
According AERA and GMR, the Delhi airport will operate based on the hybrid till
model as per the original OMDA with a 30% subsidy from non-aero revenues.
However, the rate of return on the regulated asset base not been decided and a greater
than 11.6% return (our estimate) would be a positive outcome. GMR has submitted
its cost of capital to AERA for approval and some clarity is expected soon.
AERA has also suggested the deduction of real estate at a pre determined fair value
from the regulated asset base to determine aero charges. However it is unclear at this
point whether the deduction will be only for monetized or unmonetized real estate as
well. For Delhi airport, we have anyway subtracted the value of monetized real estate
to arrive at regulatory asset base (see table 1 below), in our existing model. We
expect the Delhi airport to turnaround in FY14 and become FCF positive in FY12 as
well.
Hyderabad airport: single till the likely approach, but our
assumed IRR is quite reasonable, in our view
In mid January AERA issued a notification stating that both Bangalore and
Hyderabad airports will operate on a single till model i.e. aero revenues would be
subsidized by 100% of non-aero revenues. GMR and GVK will both contest this
change if effective given that it is a deviation from the concession agreement.
However, our Hyderabad airport model has an implied project IRR of 14%, and,
notwithstanding the regulatory approach used, it looks less probable that regulator
will slash user charges below our assumed level of return. Excluding the one off tax
credit, the airport is showing signs of a turnaround and we expect it to be free cash
flow positive through FY14 until the second phase of capex commences.
3QFY11 Key result highlights
GMRI reported better than expected results with a loss of Rs225M vs JPM estimate
of a loss of Rs760M. GMR benefitted from a Rs1.1B of deferred tax credit at the
Hyderabad airport, adjusting for which loss would have been higher. Consensus
estimate was a loss of Rs178M. The company was likely to report a loss due
commissioning of T3.
While capital costs (interest and depreciation combined) were broadly in line with
expectations, the company surprised on the topline (up 27% yoy) while EBITDA
margin at 28% was in line with expectations.
The fully merchant barge mounted plant recorded an improved PLF qoq while Delhi
and Hyderabad airports topline benefitted from higher non aero revenues.
Power Segment
• GMR's gas based power plants reported lower PLFs on account of lower demand
in the region following a good monsoon and reduced gas supply from RIL.
• YTD PLF for Basin Bridge reduced from 78% to 47% yoy, and for the Vemagiri
plant from 85% to 82%, while in the quarter Vemagiri’s PLF was ~76%. The
barge mounted plant recorded a PLF of 66% in 3Q vs. 46% in 2Q as operations
stabilized further.
• Total power revenues declined ~8% qoq due a decline in offtake from the Basin
Bridge and Vemagiri plants, while merchant sales increased 23% qoq from
Kakinada at Rs3.66/unit.
• Adjusted for a one off in the previous quarter PAT was down 32%qoq to
Rs401M, while EBITDA margin was flat.
• Also Homeland Eenrgy was consolidated in 3Q vs. previously being accounted
for as an associate and contributed a loss of Rs113M.
Airports segment
• Delhi Airport: The capitalization of T3 resulted in an expected loss at DIAL to
the tune of Rs0.9B. YTD loss of Rs1.2B vs. our FY11 loss estimate Rs2.4B. We
expect 4Q to be loss making as well since partial capitalization is yet to occur.
However, EBITDA margin improved substantially qoq to 19%, given the
increase in non aero revenues (+23% qoq). Traffic growth of 12.5% yoy YTD to
21.7M is broadly tracking in line with of our estimate of 30.7M (+17.5% yoy) in
FY11.
• Hyderabad Airport: The airport reported a PAT of Rs740 on account of a
deferred tax asset benefit. Adjusted for which PAT would be ~Rs67M vs a minor
Rs7M profit in 2QFY11, marking a turnaound in profitability. Profitability was
also aided by a 22% qoq growth in aero revenues with the commencement of
increased UDF rates in November. YTD traffic growth has been 17.4% yoy.
• Turkey Airport: Traffic growth at Turkey continues to be strong. YTD traffic of
9.4M PAX was up 70% yoy. The airport posted a loss of Rs221M in the quarter
compared to ~Rs289M loss in 2Q as licensee fees impact profitability. We expect
the airport to turnaround in late FY13. Operating margins remained firm qoq at
60%.
• Male Airport: It was the maiden quarter of revenue generation from this airport
for GMR. Post consolidation in end Novermber the airport contrbuted Rs29M to
the bottomline for its one month as a part of GMR Group.
Highways segment
• Stable operating performance in the highways segment with revenues up 8% yoy
and 4% qoq to Rs983M, while EBITDA margin was flat at 84%. The segment
recorded aloss of Rs126M vs. a loss of Rs175M in the prvious quarter as capital
costs impacted bottomline.
• Of the 6 projects currently under operation, the three annuity projects were
profitable while the three toll road projects reported a loss, but are nearing break
even. However the loss at the Ambala – Chandigarh expressway loss was flat
yoy. Traffic growth for the three projects ranged between 7-21% yoy.
Key Model Revisions
We take a more conservative view on PLFs of operating and under construction
power projects resulting in an earnings cut in FY12 and beyond. We reduced the
sustainable PLF for operating gas based projects (824MW) by 1,000-1,500bps to 70-
75% while cutting PLF for EMCO (600MW) based on linkage coal by 500bps to
75%, for captive coal based Orissa project (1,050MW) from 90% to 80% and for gas
based Vemagiri 2 (768MW) from 90% to 70%. We also trim PAT estimates at DIAL
due to increase in depreciation and slight reduction in margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GMR Infrastructure Ltd Overweight
GMRI.BO, GMRI IN
Cash flow tunaround intact, clarity on airport regulations a potential stock catalyst
• GMRI reported strong operating results, with strong growth in air
traffic and non-aero revenues. Reported net loss, at Rs225M, was lower
than our estimated loss of Rs760M, mainly due to a deferred tax write-back
of Rs0.7B at Hyderabad Airport. The loss is on account of high interest and
depreciation charges at airports and would reduce with better capacity
utilization / higher aero charges and real estate monetization if any. Power
segment operating results were weak, as expected, due to a reduction in KG
Basin gas availability.
• The thesis behind our recent upgrade is largely intact, viz, cashflow
turnaround in airport assets, balance sheet de-leveraging via Intergen sale
and growth via new power projects. However, keeping with our recent PLF
cuts across the IPP space to factor in fuel availability concerns, we cut
GMRI’s EBITDA estimates by 4% and 7% for FY12 and FY13,
respectively.
• Recent airport regulator pronouncements: negative impact probably
over-feared, our model had already assumed these. Contentious issues a)
single-till approach for Hyderabad airport and b) inclusion of real estate
market value for Delhi airport returns. Our Hyderabad airport model has an
implied project IRR of 14%, and, notwithstanding the regulatory approach
used, it looks less probable that the regulator will slash user charges below
our assumed level of return. For Delhi, we have anyway subtracted the
value of monetized real estate to arrive at a regulatory asset base in our
existing model.
• Our SOP-based PT of Rs50 derives 25% of its value from airports, 13%
from Delhi real estate, 31% from power. It implies 24x FY13E adjusted (exreal
estate) P/E, 8x EV/EBITDA and 1.5x P/B. Given high growth from
power beyond FY13, we think these multiples are reasonable. We retain our
preference for GMRI amongst infra asset owners as the company has shown
best in-class execution capabilities, has exited unrelated business, and assets
are poised for a turnaround.
Airports Assets: Cash flow turnaround and
impact of regulatory change
The negative impact of recent airport regulator pronouncements is probably overfeared
in our view. Contentious issues: a) single-till approach for Hyderabad airport
and b) inclusion of real estate market value for Delhi airport returns.
Delhi airport – hybrid till approach, real estate market value
already in the model, but return > 11.6% is a potential
upside
According AERA and GMR, the Delhi airport will operate based on the hybrid till
model as per the original OMDA with a 30% subsidy from non-aero revenues.
However, the rate of return on the regulated asset base not been decided and a greater
than 11.6% return (our estimate) would be a positive outcome. GMR has submitted
its cost of capital to AERA for approval and some clarity is expected soon.
AERA has also suggested the deduction of real estate at a pre determined fair value
from the regulated asset base to determine aero charges. However it is unclear at this
point whether the deduction will be only for monetized or unmonetized real estate as
well. For Delhi airport, we have anyway subtracted the value of monetized real estate
to arrive at regulatory asset base (see table 1 below), in our existing model. We
expect the Delhi airport to turnaround in FY14 and become FCF positive in FY12 as
well.
Hyderabad airport: single till the likely approach, but our
assumed IRR is quite reasonable, in our view
In mid January AERA issued a notification stating that both Bangalore and
Hyderabad airports will operate on a single till model i.e. aero revenues would be
subsidized by 100% of non-aero revenues. GMR and GVK will both contest this
change if effective given that it is a deviation from the concession agreement.
However, our Hyderabad airport model has an implied project IRR of 14%, and,
notwithstanding the regulatory approach used, it looks less probable that regulator
will slash user charges below our assumed level of return. Excluding the one off tax
credit, the airport is showing signs of a turnaround and we expect it to be free cash
flow positive through FY14 until the second phase of capex commences.
3QFY11 Key result highlights
GMRI reported better than expected results with a loss of Rs225M vs JPM estimate
of a loss of Rs760M. GMR benefitted from a Rs1.1B of deferred tax credit at the
Hyderabad airport, adjusting for which loss would have been higher. Consensus
estimate was a loss of Rs178M. The company was likely to report a loss due
commissioning of T3.
While capital costs (interest and depreciation combined) were broadly in line with
expectations, the company surprised on the topline (up 27% yoy) while EBITDA
margin at 28% was in line with expectations.
The fully merchant barge mounted plant recorded an improved PLF qoq while Delhi
and Hyderabad airports topline benefitted from higher non aero revenues.
Power Segment
• GMR's gas based power plants reported lower PLFs on account of lower demand
in the region following a good monsoon and reduced gas supply from RIL.
• YTD PLF for Basin Bridge reduced from 78% to 47% yoy, and for the Vemagiri
plant from 85% to 82%, while in the quarter Vemagiri’s PLF was ~76%. The
barge mounted plant recorded a PLF of 66% in 3Q vs. 46% in 2Q as operations
stabilized further.
• Total power revenues declined ~8% qoq due a decline in offtake from the Basin
Bridge and Vemagiri plants, while merchant sales increased 23% qoq from
Kakinada at Rs3.66/unit.
• Adjusted for a one off in the previous quarter PAT was down 32%qoq to
Rs401M, while EBITDA margin was flat.
• Also Homeland Eenrgy was consolidated in 3Q vs. previously being accounted
for as an associate and contributed a loss of Rs113M.
Airports segment
• Delhi Airport: The capitalization of T3 resulted in an expected loss at DIAL to
the tune of Rs0.9B. YTD loss of Rs1.2B vs. our FY11 loss estimate Rs2.4B. We
expect 4Q to be loss making as well since partial capitalization is yet to occur.
However, EBITDA margin improved substantially qoq to 19%, given the
increase in non aero revenues (+23% qoq). Traffic growth of 12.5% yoy YTD to
21.7M is broadly tracking in line with of our estimate of 30.7M (+17.5% yoy) in
FY11.
• Hyderabad Airport: The airport reported a PAT of Rs740 on account of a
deferred tax asset benefit. Adjusted for which PAT would be ~Rs67M vs a minor
Rs7M profit in 2QFY11, marking a turnaound in profitability. Profitability was
also aided by a 22% qoq growth in aero revenues with the commencement of
increased UDF rates in November. YTD traffic growth has been 17.4% yoy.
• Turkey Airport: Traffic growth at Turkey continues to be strong. YTD traffic of
9.4M PAX was up 70% yoy. The airport posted a loss of Rs221M in the quarter
compared to ~Rs289M loss in 2Q as licensee fees impact profitability. We expect
the airport to turnaround in late FY13. Operating margins remained firm qoq at
60%.
• Male Airport: It was the maiden quarter of revenue generation from this airport
for GMR. Post consolidation in end Novermber the airport contrbuted Rs29M to
the bottomline for its one month as a part of GMR Group.
Highways segment
• Stable operating performance in the highways segment with revenues up 8% yoy
and 4% qoq to Rs983M, while EBITDA margin was flat at 84%. The segment
recorded aloss of Rs126M vs. a loss of Rs175M in the prvious quarter as capital
costs impacted bottomline.
• Of the 6 projects currently under operation, the three annuity projects were
profitable while the three toll road projects reported a loss, but are nearing break
even. However the loss at the Ambala – Chandigarh expressway loss was flat
yoy. Traffic growth for the three projects ranged between 7-21% yoy.
Key Model Revisions
We take a more conservative view on PLFs of operating and under construction
power projects resulting in an earnings cut in FY12 and beyond. We reduced the
sustainable PLF for operating gas based projects (824MW) by 1,000-1,500bps to 70-
75% while cutting PLF for EMCO (600MW) based on linkage coal by 500bps to
75%, for captive coal based Orissa project (1,050MW) from 90% to 80% and for gas
based Vemagiri 2 (768MW) from 90% to 70%. We also trim PAT estimates at DIAL
due to increase in depreciation and slight reduction in margins.
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