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Infrastructure
India
Regulator continues to bat on front foot. AERA report mandates operationalization
of strict single till model as well as imposes higher disclosure requirements and user
consultation process on capex. We cut our TP on GMR to Rs45 (from Rs60) on lower
value of GHIAL airport (on single till model), removal of Hyderabad real estate (adjusted
out of RAB) and lower DIAL real estate value. GVK’s MIAL stake purchase (13.5% for
US$287 mn) appears expensive versus current regulatory and real estate uncertainties.
AERA starts operationalizing strict single till model; mandates higher information disclosure norms
Key highlights from recent AERA report (28
th
Feb, 2011) include (1) operationalization of single till
model; entire regulated revenue to be brought under a single parameter of yield per passenger (no
categorization between various airport users), (2) mandates formation of an Airport Users
Consultative Committee (AUCC) for the purpose of consultation with the users of the airport
aimed at effective consultation between the airport operator and users on key elements of project
planning and implementation and (3) higher level of information documentations—airport
operator is required to submit quarterly reports to AERA on performance standards based on
several objective and subjective performance measures.
GVK’s MIAL stake purchase value appears expensive versus regulatory and real estate uncertainties
GVK has purchased 13.5% stake in Mumbai International Airport Ltd (MIAL) from BSDM for a
value of US$287 mn (to be paid over the next three years). This implies a value of about US$1.7 bn
(about Rs75-77 bn) for MIAL. This is at a significant premium of about 23-24% to our target
valuation of US$1.4 bn for MIAL. The stake purchase also implies a high P/B of about 6.4X for
MIAL (required equity investment of US$270 mn. Valuation appears expensive in context of
current regulatory and real estate (monetization and slum rehabilitation) uncertainties.
Looking for private equity investment in airports vertical; but may impact cash flow fungibility
The management has cited that GVK continues to look for potential private equity investment in
the airport vertical. While private equity investment would help meet funding requirements of
acquiring stakes in the airport projects it may have issues of (1) interest alignment between the
private equity investor and the airport developer over long-term, and (2) creation of holding
companies in individual business verticals of GVK which may lower cash flow fungibility.
GMR—cut target price to Rs45 (from Rs60) on lower Hyderabad airport and real estate valuation
We cut the target price of GMR to Rs45 from Rs60 based on (1) GHIAL—cut by Rs6/share under
regulated returns methodology; based on rough assessment of regulated returns, UDF for
Hyderabad airport may be more than halved in FY2014-15E and may be completely removed from
FY2023-24E onwards (built into model). We have also removed the value of real estate from our
target price as the new regulatory regime mandates real estate value to be adjusted out of the
regulated asset base, and (2) DIAL real estate—cut by Rs8/share; reduced our value for DIAL
real estate from Rs124 bn to Rs77 bn based on assumption of lower proportion of upfront deposit.
Retain ADD rating on GMR; however, note several risks related to regulations, gas availability
Retain ADD for now awaiting clarity on DIAL airport regulation and treatment of associated real
estate (Rs15/share) and gas availability issues in light of capital expenditure already incurred
(Rs4/share) in Vemagiri expansion project. Valuations are more reasonable now at about 2.3X P/B.
AERA mandates single till model; imposes strict disclosure requirement and user
consultation process on capex
Airports Economic Regulatory Authority of India (AERA) recently released a report detailing
key guidelines on the terms and conditions to be used for the determination of tariffs
(aeronautical charges) for the airport operators. The report highlights operationalization of
single till model with entire regulated revenue brought under a single parameter of yield per
passenger (no categorization between various airport users). The report also mandates
higher levels of information disclosures (quarterly performance measurement of airports) and
a user consultation process on airport capital expenditure (formation of Airport Users
Consultative Committee).
The document specifies various details such as (1) procedure for submission and review of
tariff proposals, (2) procedure for determination of Aggregate Revenue Requirement (ARR)
and tariffs for regulated service, (3) requirement of formation of Airport Users Consultative
Committee (AUCC), (4) quality of service measures and measurement mechanism and (5)
procedure for collecting data and information required.
Full non-aero revenues set off for determination of airport charges (single till model)
The methodology for determination of the aggregate revenue requirement from
aeronautical services is depicted in the exhibit below. The fair rate of return (as determined
by AERA) is applied on the regulated asset base to which the depreciation, operational costs
and tax expense are added back. This would be the total revenue requirement for all services
provided by the operator. From this we set off the total revenues from non-aeronautical
services to determine the aggregate revenue requirement from aeronautical services.
Dividing this by the total number of passengers would result in the aero yield per passenger
(aero charges).
AERA has used the single till methodology in determining regulated tariffs in which the
entire non-aero revenues are used towards subsidizing the aero charges. Furthermore, AERA
has included revenues from (1) ground handling services, (2) cargo handling facilities, and (3)
fuel supply in the scope of Aeronautical revenues versus non-aero earlier. However, this does
not make a significant difference in a single-till model.
Consultation protocol—formation of Airport Users Consultative Committee (AUCC)
AERA report also mandates the airport operator to form an Airport Users Consultative
Committee (AUCC) for the purpose of consultation with the users of the airport. The AUCC
is aimed towards effective consultation between the airport operator and user on key
elements of project planning and implementation. The AUCC would have representatives
from various stakeholders such as
` Airlines. Federation of Indian Airlines (FIA), International Airport Transport Association
(IATA), Board of Airline Representatives (BAR), the Indian registered scheduled airlines
` Passengers. FICCI, ASSOCHAM, CII and any local chamber; representative of the state
government; Voluntary Organization in Interest of Consumer Education (VOICE);
Consumer Education and Research Center (CERC); Consumer Unity & Trust Society
(CUTS); representatives each of AAI and APAO in case of concession or private airports
` Cargo facility users. Local associations of Freight Forwarders; Custom House Agents;
and apex chambers namely FIEO, FICCI, CII and ASSOCHAM, Express Industry Council of
India, express cargo operators operating at that airport and cargo airlines
` Representatives of independent service providers. Cargo facility at an airport; ground
handling services relating to aircraft, passengers and cargo at an airport; supplying fuel to
the aircraft at an airport
Any major capital projects to the tune of greater than 5% of the total RAB of Rs500 mn
(whichever lower) would be undertaken post consultation with the AUCC. The AUCC would
have to be consulted during several stages of the capex such as (1) needs identification stage,
(2) options development stage and (3) detail project design stage. In case of conflicts arising
between the operator and the users, AERA may choose to intervene in the consultation
process in order to facilitate the same.
While this committee would help ensure, to a certain extent, the interests of various users of
the airport, it may lead to delays in airport development projects. There could be various
conflicts of interests between the different airport users thereby jeopardizing the airport
operator’s ability to deliver its investment program.
Higher degree of information disclosures; periodic performance measurements
The airport operator is required to submit quarterly reports to AERA on the performance
standards based on several objective and subjective performance measures. These reported
(airport-wise) would be published by AERA on its website, on a quarterly basis. The airport
operator shall also maintain records of the actual quality of service and rebates made. In
addition to objective performance measures (detailed in the exhibit below) the airport would
also be measured for subjective parameters (based on a survey) to determine the overall
satisfaction with the airport.
GVKPIL
MIAL stake purchase appears expensive versus regulatory, real estate
uncertainties
GVK has completed a transaction to buy out 13.5% stake in Mumbai International Airport
Ltd (MIAL) from BSDM, a subsidiary of South African infrastructure company, Bidvest. The
stake purchase would be done though GVK Airport Holdings Private Ltd, a wholly owned
subsidiary which is the holding company for the airport assets of GVK. Post this deal the
total stake of GVK in MIAL would increase to 50.5% (from 37% earlier).
News flows indicate that GVK is likely to purchase the 13.5% stake for a value of US$287
mn (to be paid over three years) implying a value of US$1.7 bn (about Rs75-77 bn). This is at
a significant premium of about 23-24% to our valuation of MIAL of US$1.4 bn (Rs62.5 bn).
This deal also implies a high P/B of about 6.4X—MIAL total project equity requirement of
Rs12 bn. We believe that this valuation appears expensive in context of current regulatory
and real estate (monetization and slum rehabilitation) uncertainties
The stake purchase is in line with GVK’s philosophy to have a controlling influence over
assets under development through actual share ownership rather than just contracts
(increased stake in Gautami, BIAL). GVK also plans to increase its shareholding in BIAL as
well. Although we have a positive view on the philosophy of controlling ownership, we
believe buying out established assets may be suboptimal as the company would capture
bigger value creation upside in the projects conceptualized and created from the ground
rather than by buying stakes in established projects.
Would not raise equity to fund buyout
GVK management has cited that the company would not have to raise any funds for the
stake buyout in MIAL. As part of the agreement, the US$287 mn (about Rs13 bn) for the
13.5% stake in MIAL would be paid to Bidvest over three years. The management has
indicated that while the company is looking to divest some stake in its airports business
vertical (potentially via private equity), as far as the 13.5 percent is concerned there will be
no dilution for this purpose.
Private equity investment in airports vertical may impact cash flow fungibility
GVK has been evaluating the option of inducting private equity investors in the airport
vertical holding company (which would hold stakes in Bangalore and Mumbai international
airports).While private equity infusion in GVK’s airport vertical would help ease funding
requirements for projects it could lead to other issues such as (1) conflict of interest between
a private equity investor’s interests and an infrastructure developer’s and (2) reduce cash
flow fungibility between various business segments of GMR such as power, airports etc.
Reiterate BUY on GVK with a target price of Rs42/share
We maintain our estimates and reiterate BUY based on (1) relatively cheap valuations of
1.5X FY2011E book value and 1.4X FY2012E book value, and (2) current market price
provides upside of about 40% to our target price. Aggressive bids for coal mines in Australia,
airport project in Indonesia and high leverage on standalone balance sheet are key risks.
Our TP of Rs42 is comprised of (1) Rs14 for Mumbai airport (core + real estate), (2) Rs7.6
from road SPV, (3) Rs21 from the power assets (including cash from PE investment of Rs6),
(4) Rs4 for Bangalore airport valued at 0.5X invested value and (5) Re1 from SEZ project.
GMR Infra
Reduce valuation of GHIAL based on regulated returns valuation
We have cut our target value of GHIAL to Rs25 bn from Rs62 bn earlier—impact of about
Rs6/share to our target price. Based on our rough assessment of regulated returns in the
single till model, UDF for Hyderabad airport may be more than halved in FY2014-15E and
may be completely removed from FY2023-24E onwards. This has been broadly built into our
model as well. We have also removed the value of real estate from our target price as the
new regulatory regime mandates that real estate value needs to be adjusted out of the
regulated asset base.
The real estate value removed from the RAB be a notional value determined by the regulator.
The company may have an upside from potential arbitrage opportunity if it is able to
monetize the Hyderabad airport real estate at a value higher than that specified by AERA.
We have, however, not built this into our valuation.
DIAL real estate may be brought under regulatory purview; cut valuation
AERA believes that the benefits from land exploitation should be passed on to the
passengers and users of the cargo facilities at the airport. Excerpt from related AERA order
dated January 12, 2011 (pg. 43): “The Authority thus considers that the benefits of land
exploitation should go to the passengers and cargo facility users in terms of moderating the
aeronautical charges”.
The regulator is still debating between its sectoral stance of single till model and the
concession agreements that government seems to have signed with DIAL (hybrid till model).
Cut valuation on DIAL based on lower upfront deposit post FY2013E
We attempt to build in part of the risk related to DIAL being brought under the regulatory
purview by reducing the proportion of real estate value captures as upfront deposit. We
have reduced our valuation of the Delhi airport real estate development to Rs95 bn from
Rs124 bn earlier. This revision is based on a change in assumption related to proportion of
value captured upfront in the subsequent real estate tranches. We now assume only 20% of
value getting captured as upfront deposit (versus 60% earlier). This leads to a lower per
share value of Rs13.8 for DIAL real estate (impact of Rs8/share to our target price).
Unfavorable policies: Argue in favor of single till, including real estate; argue
against high RoE
The Airports Economic Regulatory Authority of India (AERA) has recently specified several
terms in the matter of regulation of airport operators. Several of these seem to be
unfavorable for developers such as (1) preference of single till model versus dual or hybrid till,
(2) real estate benefits to be passed on to passengers—value to be adjusted out of regulated
asset base and (3) argue against higher return on equity based on the fact that the
government has guaranteed and provided protection by way of UDF (may choose RoE of
18.33% as per State Support Agreement).
These policies would be applicable for Hyderabad airport project. The AERA report also
indicated that DIAL may also be brought under the regulatory purview leading to a potential
downside risk to our valuation.
Gas supply constraints may also mar Vemagiri extension plans
GMR is planning the extension of the Vemagiri power plant (operational capacity of 389
MW) by about 768 MW. GMR would need a gas supply of about 4-4.5 mcm/day for this
planned expansion.
Lower gas supply impacts performance of operational gas-based project
GMR’s Vemagiri gas-based power project operated at a lower PLF of 76% in 3QFY11 versus
PLF of 90% in the previous quarter and 87% in 3QFY10. The lower PLF during the quarter
was primarily attributed to lower fall back gas allocation from RIL.
As per an industry journal (Indian Petro, Jan 2011), RIL had informed DGH that it will not be
able to ramp up gas production from its KG D-6 block beyond 50 mcm/d until FY2014E. The
company has highlighted that there are some serious reservoir issues including water
ingression in wells, sand interference and pressure depletion.
Reiterate ADD with a revised target price of Rs45/share
We have cut our target price on GMR to Rs45/share from Rs60/share earlier based on lower
value for GHIAL and Delhi airport real estate (as discussed earlier). Our target price of
Rs45/share is comprised of (1) Rs15/share from the Delhi airport and associated real estate
development, (2) Rs4.3/share from Hyderabad airport, (3) Rs2.5/share from road projects, (4)
Rs15/share from power plants under development, (5) Rs1.4/share from Krishnagiri SEZ
development and coal mines (book value) and (7) Rs3.6/share of net cash.
We retain our ADD rating on the stock based on (1) market price implies relatively
reasonable valuations, (2) incremental visibility on identified projects, and (3) incremental
project wins. GMR faces several risks such as regulatory uncertainties related to the airport
business and merchant tariffs, and gas unavailability leading to lower PLF of operational
projects and delay in proposed gas-based projects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infrastructure
India
Regulator continues to bat on front foot. AERA report mandates operationalization
of strict single till model as well as imposes higher disclosure requirements and user
consultation process on capex. We cut our TP on GMR to Rs45 (from Rs60) on lower
value of GHIAL airport (on single till model), removal of Hyderabad real estate (adjusted
out of RAB) and lower DIAL real estate value. GVK’s MIAL stake purchase (13.5% for
US$287 mn) appears expensive versus current regulatory and real estate uncertainties.
AERA starts operationalizing strict single till model; mandates higher information disclosure norms
Key highlights from recent AERA report (28
th
Feb, 2011) include (1) operationalization of single till
model; entire regulated revenue to be brought under a single parameter of yield per passenger (no
categorization between various airport users), (2) mandates formation of an Airport Users
Consultative Committee (AUCC) for the purpose of consultation with the users of the airport
aimed at effective consultation between the airport operator and users on key elements of project
planning and implementation and (3) higher level of information documentations—airport
operator is required to submit quarterly reports to AERA on performance standards based on
several objective and subjective performance measures.
GVK’s MIAL stake purchase value appears expensive versus regulatory and real estate uncertainties
GVK has purchased 13.5% stake in Mumbai International Airport Ltd (MIAL) from BSDM for a
value of US$287 mn (to be paid over the next three years). This implies a value of about US$1.7 bn
(about Rs75-77 bn) for MIAL. This is at a significant premium of about 23-24% to our target
valuation of US$1.4 bn for MIAL. The stake purchase also implies a high P/B of about 6.4X for
MIAL (required equity investment of US$270 mn. Valuation appears expensive in context of
current regulatory and real estate (monetization and slum rehabilitation) uncertainties.
Looking for private equity investment in airports vertical; but may impact cash flow fungibility
The management has cited that GVK continues to look for potential private equity investment in
the airport vertical. While private equity investment would help meet funding requirements of
acquiring stakes in the airport projects it may have issues of (1) interest alignment between the
private equity investor and the airport developer over long-term, and (2) creation of holding
companies in individual business verticals of GVK which may lower cash flow fungibility.
GMR—cut target price to Rs45 (from Rs60) on lower Hyderabad airport and real estate valuation
We cut the target price of GMR to Rs45 from Rs60 based on (1) GHIAL—cut by Rs6/share under
regulated returns methodology; based on rough assessment of regulated returns, UDF for
Hyderabad airport may be more than halved in FY2014-15E and may be completely removed from
FY2023-24E onwards (built into model). We have also removed the value of real estate from our
target price as the new regulatory regime mandates real estate value to be adjusted out of the
regulated asset base, and (2) DIAL real estate—cut by Rs8/share; reduced our value for DIAL
real estate from Rs124 bn to Rs77 bn based on assumption of lower proportion of upfront deposit.
Retain ADD rating on GMR; however, note several risks related to regulations, gas availability
Retain ADD for now awaiting clarity on DIAL airport regulation and treatment of associated real
estate (Rs15/share) and gas availability issues in light of capital expenditure already incurred
(Rs4/share) in Vemagiri expansion project. Valuations are more reasonable now at about 2.3X P/B.
AERA mandates single till model; imposes strict disclosure requirement and user
consultation process on capex
Airports Economic Regulatory Authority of India (AERA) recently released a report detailing
key guidelines on the terms and conditions to be used for the determination of tariffs
(aeronautical charges) for the airport operators. The report highlights operationalization of
single till model with entire regulated revenue brought under a single parameter of yield per
passenger (no categorization between various airport users). The report also mandates
higher levels of information disclosures (quarterly performance measurement of airports) and
a user consultation process on airport capital expenditure (formation of Airport Users
Consultative Committee).
The document specifies various details such as (1) procedure for submission and review of
tariff proposals, (2) procedure for determination of Aggregate Revenue Requirement (ARR)
and tariffs for regulated service, (3) requirement of formation of Airport Users Consultative
Committee (AUCC), (4) quality of service measures and measurement mechanism and (5)
procedure for collecting data and information required.
Full non-aero revenues set off for determination of airport charges (single till model)
The methodology for determination of the aggregate revenue requirement from
aeronautical services is depicted in the exhibit below. The fair rate of return (as determined
by AERA) is applied on the regulated asset base to which the depreciation, operational costs
and tax expense are added back. This would be the total revenue requirement for all services
provided by the operator. From this we set off the total revenues from non-aeronautical
services to determine the aggregate revenue requirement from aeronautical services.
Dividing this by the total number of passengers would result in the aero yield per passenger
(aero charges).
AERA has used the single till methodology in determining regulated tariffs in which the
entire non-aero revenues are used towards subsidizing the aero charges. Furthermore, AERA
has included revenues from (1) ground handling services, (2) cargo handling facilities, and (3)
fuel supply in the scope of Aeronautical revenues versus non-aero earlier. However, this does
not make a significant difference in a single-till model.
Consultation protocol—formation of Airport Users Consultative Committee (AUCC)
AERA report also mandates the airport operator to form an Airport Users Consultative
Committee (AUCC) for the purpose of consultation with the users of the airport. The AUCC
is aimed towards effective consultation between the airport operator and user on key
elements of project planning and implementation. The AUCC would have representatives
from various stakeholders such as
` Airlines. Federation of Indian Airlines (FIA), International Airport Transport Association
(IATA), Board of Airline Representatives (BAR), the Indian registered scheduled airlines
` Passengers. FICCI, ASSOCHAM, CII and any local chamber; representative of the state
government; Voluntary Organization in Interest of Consumer Education (VOICE);
Consumer Education and Research Center (CERC); Consumer Unity & Trust Society
(CUTS); representatives each of AAI and APAO in case of concession or private airports
` Cargo facility users. Local associations of Freight Forwarders; Custom House Agents;
and apex chambers namely FIEO, FICCI, CII and ASSOCHAM, Express Industry Council of
India, express cargo operators operating at that airport and cargo airlines
` Representatives of independent service providers. Cargo facility at an airport; ground
handling services relating to aircraft, passengers and cargo at an airport; supplying fuel to
the aircraft at an airport
Any major capital projects to the tune of greater than 5% of the total RAB of Rs500 mn
(whichever lower) would be undertaken post consultation with the AUCC. The AUCC would
have to be consulted during several stages of the capex such as (1) needs identification stage,
(2) options development stage and (3) detail project design stage. In case of conflicts arising
between the operator and the users, AERA may choose to intervene in the consultation
process in order to facilitate the same.
While this committee would help ensure, to a certain extent, the interests of various users of
the airport, it may lead to delays in airport development projects. There could be various
conflicts of interests between the different airport users thereby jeopardizing the airport
operator’s ability to deliver its investment program.
Higher degree of information disclosures; periodic performance measurements
The airport operator is required to submit quarterly reports to AERA on the performance
standards based on several objective and subjective performance measures. These reported
(airport-wise) would be published by AERA on its website, on a quarterly basis. The airport
operator shall also maintain records of the actual quality of service and rebates made. In
addition to objective performance measures (detailed in the exhibit below) the airport would
also be measured for subjective parameters (based on a survey) to determine the overall
satisfaction with the airport.
GVKPIL
MIAL stake purchase appears expensive versus regulatory, real estate
uncertainties
GVK has completed a transaction to buy out 13.5% stake in Mumbai International Airport
Ltd (MIAL) from BSDM, a subsidiary of South African infrastructure company, Bidvest. The
stake purchase would be done though GVK Airport Holdings Private Ltd, a wholly owned
subsidiary which is the holding company for the airport assets of GVK. Post this deal the
total stake of GVK in MIAL would increase to 50.5% (from 37% earlier).
News flows indicate that GVK is likely to purchase the 13.5% stake for a value of US$287
mn (to be paid over three years) implying a value of US$1.7 bn (about Rs75-77 bn). This is at
a significant premium of about 23-24% to our valuation of MIAL of US$1.4 bn (Rs62.5 bn).
This deal also implies a high P/B of about 6.4X—MIAL total project equity requirement of
Rs12 bn. We believe that this valuation appears expensive in context of current regulatory
and real estate (monetization and slum rehabilitation) uncertainties
The stake purchase is in line with GVK’s philosophy to have a controlling influence over
assets under development through actual share ownership rather than just contracts
(increased stake in Gautami, BIAL). GVK also plans to increase its shareholding in BIAL as
well. Although we have a positive view on the philosophy of controlling ownership, we
believe buying out established assets may be suboptimal as the company would capture
bigger value creation upside in the projects conceptualized and created from the ground
rather than by buying stakes in established projects.
Would not raise equity to fund buyout
GVK management has cited that the company would not have to raise any funds for the
stake buyout in MIAL. As part of the agreement, the US$287 mn (about Rs13 bn) for the
13.5% stake in MIAL would be paid to Bidvest over three years. The management has
indicated that while the company is looking to divest some stake in its airports business
vertical (potentially via private equity), as far as the 13.5 percent is concerned there will be
no dilution for this purpose.
Private equity investment in airports vertical may impact cash flow fungibility
GVK has been evaluating the option of inducting private equity investors in the airport
vertical holding company (which would hold stakes in Bangalore and Mumbai international
airports).While private equity infusion in GVK’s airport vertical would help ease funding
requirements for projects it could lead to other issues such as (1) conflict of interest between
a private equity investor’s interests and an infrastructure developer’s and (2) reduce cash
flow fungibility between various business segments of GMR such as power, airports etc.
Reiterate BUY on GVK with a target price of Rs42/share
We maintain our estimates and reiterate BUY based on (1) relatively cheap valuations of
1.5X FY2011E book value and 1.4X FY2012E book value, and (2) current market price
provides upside of about 40% to our target price. Aggressive bids for coal mines in Australia,
airport project in Indonesia and high leverage on standalone balance sheet are key risks.
Our TP of Rs42 is comprised of (1) Rs14 for Mumbai airport (core + real estate), (2) Rs7.6
from road SPV, (3) Rs21 from the power assets (including cash from PE investment of Rs6),
(4) Rs4 for Bangalore airport valued at 0.5X invested value and (5) Re1 from SEZ project.
GMR Infra
Reduce valuation of GHIAL based on regulated returns valuation
We have cut our target value of GHIAL to Rs25 bn from Rs62 bn earlier—impact of about
Rs6/share to our target price. Based on our rough assessment of regulated returns in the
single till model, UDF for Hyderabad airport may be more than halved in FY2014-15E and
may be completely removed from FY2023-24E onwards. This has been broadly built into our
model as well. We have also removed the value of real estate from our target price as the
new regulatory regime mandates that real estate value needs to be adjusted out of the
regulated asset base.
The real estate value removed from the RAB be a notional value determined by the regulator.
The company may have an upside from potential arbitrage opportunity if it is able to
monetize the Hyderabad airport real estate at a value higher than that specified by AERA.
We have, however, not built this into our valuation.
DIAL real estate may be brought under regulatory purview; cut valuation
AERA believes that the benefits from land exploitation should be passed on to the
passengers and users of the cargo facilities at the airport. Excerpt from related AERA order
dated January 12, 2011 (pg. 43): “The Authority thus considers that the benefits of land
exploitation should go to the passengers and cargo facility users in terms of moderating the
aeronautical charges”.
The regulator is still debating between its sectoral stance of single till model and the
concession agreements that government seems to have signed with DIAL (hybrid till model).
Cut valuation on DIAL based on lower upfront deposit post FY2013E
We attempt to build in part of the risk related to DIAL being brought under the regulatory
purview by reducing the proportion of real estate value captures as upfront deposit. We
have reduced our valuation of the Delhi airport real estate development to Rs95 bn from
Rs124 bn earlier. This revision is based on a change in assumption related to proportion of
value captured upfront in the subsequent real estate tranches. We now assume only 20% of
value getting captured as upfront deposit (versus 60% earlier). This leads to a lower per
share value of Rs13.8 for DIAL real estate (impact of Rs8/share to our target price).
Unfavorable policies: Argue in favor of single till, including real estate; argue
against high RoE
The Airports Economic Regulatory Authority of India (AERA) has recently specified several
terms in the matter of regulation of airport operators. Several of these seem to be
unfavorable for developers such as (1) preference of single till model versus dual or hybrid till,
(2) real estate benefits to be passed on to passengers—value to be adjusted out of regulated
asset base and (3) argue against higher return on equity based on the fact that the
government has guaranteed and provided protection by way of UDF (may choose RoE of
18.33% as per State Support Agreement).
These policies would be applicable for Hyderabad airport project. The AERA report also
indicated that DIAL may also be brought under the regulatory purview leading to a potential
downside risk to our valuation.
Gas supply constraints may also mar Vemagiri extension plans
GMR is planning the extension of the Vemagiri power plant (operational capacity of 389
MW) by about 768 MW. GMR would need a gas supply of about 4-4.5 mcm/day for this
planned expansion.
Lower gas supply impacts performance of operational gas-based project
GMR’s Vemagiri gas-based power project operated at a lower PLF of 76% in 3QFY11 versus
PLF of 90% in the previous quarter and 87% in 3QFY10. The lower PLF during the quarter
was primarily attributed to lower fall back gas allocation from RIL.
As per an industry journal (Indian Petro, Jan 2011), RIL had informed DGH that it will not be
able to ramp up gas production from its KG D-6 block beyond 50 mcm/d until FY2014E. The
company has highlighted that there are some serious reservoir issues including water
ingression in wells, sand interference and pressure depletion.
Reiterate ADD with a revised target price of Rs45/share
We have cut our target price on GMR to Rs45/share from Rs60/share earlier based on lower
value for GHIAL and Delhi airport real estate (as discussed earlier). Our target price of
Rs45/share is comprised of (1) Rs15/share from the Delhi airport and associated real estate
development, (2) Rs4.3/share from Hyderabad airport, (3) Rs2.5/share from road projects, (4)
Rs15/share from power plants under development, (5) Rs1.4/share from Krishnagiri SEZ
development and coal mines (book value) and (7) Rs3.6/share of net cash.
We retain our ADD rating on the stock based on (1) market price implies relatively
reasonable valuations, (2) incremental visibility on identified projects, and (3) incremental
project wins. GMR faces several risks such as regulatory uncertainties related to the airport
business and merchant tariffs, and gas unavailability leading to lower PLF of operational
projects and delay in proposed gas-based projects.
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