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UBS Investment Research
India Industrials
GMR: Upgrade to Neutral on correction,
Reiterate Buy on GVK
�� GMR/GVK have underperformed the market by 25%/40% in last 6m
The key reasons for the underperformance in our view are, a) overhang on tariff
fixation for airports, b) low visibility on land monetization, c) lower utilisation of
gas-based power plants due to fuel shortage and d) lack of progress on the order for
merchant tariffs for recoupment of past losses. However, we believe the downside
is limited from here and upgrade GMR to Neutral and reiterate Buy on GVK.
�� GMR – Airport PE deal increases fund availability for expansion projects
The funds of US$200m will enable the parent entity to fund its expansion projects.
GMR would also have equity of about US$225m from Intergen stake sale (Please
refer our note Intergen stake sale is a positive dated 30 November 2010). Approval
of higher capex at the Delhi airport and land monetization at Delhi (though no
specific plans have been announced yet), would be key catalysts, in our view.
�� GVK – increased probability of land monetization moving forward
We understand that no major objections have been received by MMRDA for
GVK’s real estate plans. This increases the probability of the approval being
provided over next few months.
�� Lower gas output to impact near-term earnings for power business
Lower gas availability has impacted the PLFs of power plants of GMR and GVK.
Also, there is lack of progress on the order on merchant tariffs for recoupment of
past losses. We lower our earnings/valuation of power segment to factor the same.
Price correction reflects concerns
Uncertainty on tariff fixation in airports
The Airport Economic Regulatory Authority (AERA) is in favour of a single-till
model for tariff setting of major airports and reduction of real estate from the
regulated asset base (which is used for determining airport charges). AERA,
however, has stated that in the case of Delhi/Mumbai airports, it will follow the
OMDA/State Support Agreements and there would be a separate process for
determining the tariffs of these airports. The airport developers have already
appealed against the order to the appellate tribunal. The resolution of the issue is
likely to take time and remain an overhang. Also, there has been little progress
on the monetization of the real estate around the airports, which contributes a
significant proportion to value.
Lower gas availability to impact PLFs
Lower availability of gas has impacted the PLFs of the gas-based power plants
of GMR and GVK in 3Q and first two months of 4Q (though for the months of
March to May, we understand that the AP govt has allowed usage of PLNG).
We believe that the earnings are also likely to be impacted from FY12 onwards
due to lower gas availability. And there is lack of progress on the order for
merchant tariffs for recoupment of past losses.
GMR (Upgrade to Neutral, PT Rs46)
We upgrade our rating to Neutral post the correction in the stock price. Also,
fund availability is likely to improve for GMR with the recently announced PE
investments (US$200m) from Macquarie SBI in the airport holding company. It
seems to be a structured transaction, like their earlier PE deal in the power
segment, and is in the form of Compulsory Convertible Preference Shares. It is
difficult to ascertain the valuation impact as the exact stake sale is unknown.
GMR would also have equity of about US$225m from the Intergen stake sale
(please refer our note Intergen stake sale is a positive, 30 November 2010).
These transactions would enable the parent entity to fund its expansion projects,
primarily in the power business.
Key catalysts for the stock, in our view, would be the approval of the higher
capex for the Delhi airport, land monetization at Delhi (though near-term
visibility is low as no specific plans have been announced yet) and higher
availability of domestic gas or permission by Andhra Pradesh government to use
imported gas.
We reduce our SOTP-based PT from Rs50 to Rs46 primarily based on reduction
in our value of the Hyderabad airport (led by lower aero-nautical charges) and
lower value in the power segment (led by lower gas availability).
Key assumptions: Our key assumptions across the various assets of GMR are
as follows:
— Power: We assume PLFs of 75% in Vemagiri, Mangalore and Basin
Bridge. Our valuation of the under-construction projects of Chattisgarh,
Kamalanga, Vemagiri Expansion and Emco implies a valuation of 1.6x
P/B. We reduce the PE funding at an IRR of 18% after three years (this is
a structured transaction and the exact stake of the PE investors would be
determined only at a later stage).
— Real estate: Delhi – Pricing at similar levels as previous deals, with no
escalation and completion of the land monetization in FY20. Our
valuation implies a NPV of Rs389m/acre. Hyderabad – Initial price of
Rs50m/acre with 5% pa increase and monetization over FY14-FY25. Our
valuation for the Hyderabad land implies a NPV of Rs12m/acre
— Airports: Delhi – Pax traffic CAGR of 10/7/5/3/1% over FY11-14/
FY15-20/FY21-25/FY25-30/FY30-35 and a 5% CAGR in revenues per
pax. Hyderabad – Pax traffic CAGR of 13/9/6/4/3% over FY11-14/FY15-
20/FY21-25/FY25-30/FY30-35 and a 3% CAGR in revenues per pax
— Roads: 7% traffic growth, reducing by 1% in blocks of five years. We
have not valued the Hongud-Hospet road project
— Mines: Valued at book
— SEZs: Valued at book for Krishnagiri. Our value for the Hyderabad SEZ
implies a NPV of Rs1.8m/acre.
Changes in estimates: We revise our earnings estimates downwards to Rs
(0.1)/0.5/1.3 from Rs0.4/1.1/2.4 for FY11/12/13E, as we factor in lower PLFs in
the power segment, higher costs in the airport segment and lower traffic growth
in the road segment. There are upside risks to our estimates depending on the
tariff set by AERA for aeronautical revenues in the case of Delhi airport (we
currently assume a 5% increase).
Valuation
Our SOTP valuation for GMR is as follows (with individual assets being valued
on DCF).
GVK (Maintain Buy, PT Rs43)
Land monetization at the Mumbai airport is the key catalyst for the stock and
with no major objections being made to the real estate development plan (the
period for submitting comments on the real estate development plan is over and
we understand that MMRDA has not received any major objections), the
probability of the land monetization process commencing has increased, in our
view (once the approvals are received).
We reduce our SOTP-based PT from Rs50 to Rs43 based on exclusion of the
value of Bangalore airport (led by lower aero-nautical charges, which is offset
by the value of real estate), lower value in the power segment (led by lower gas
availability) and lower value in the road segment (led by lower traffic growth).
We reiterate our Buy rating on the stock.
Key assumptions: Our key assumptions across the various assets of GVK are as
follows:
— Power: We assume PLFs of 75% in Jegurupadu and Gautami. Our
valuation of the under-construction projects of Alaknanda and Goindwal
Sahib implies a valuation of 0.7x P/B. We have not included the value of
under-development expansion projects of Jegurupadu and Gautami due to
lack of clarity on gas availability and also the hydro-projects of
Goriganga and Ratle as they are at a very early stage.
— Real estate: Initial price of Rs900m/acre with 5% pa increase and
monetization over FY12-FY26. Our valuation implies a NPV of about
Rs2,650/sqft.
— Airport: 5% per annum increase in revenues per pax
— Road: 6% traffic growth, reducing by 1% in blocks of five years. We
have not valued the Deoli-Kota project
— SEZ: Valued at book.
Changes in estimates: We revise our earnings estimates downwards to
Rs 1.2/1.4/3.5 from Rs 1.5/2.0/4.2 for FY11/12/13E, as we factor in lower PLFs
in the power segment and lower traffic growth in the road segment. There are
upside risks to our estimates depending on the tariff set by AERA for
aeronautical revenues in the case of Mumbai airport (we currently assume a 5%
increase).
Valuation
Our SOTP valuation for GVK is as follows (with individual assets being valued
on DCF).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Industrials
GMR: Upgrade to Neutral on correction,
Reiterate Buy on GVK
�� GMR/GVK have underperformed the market by 25%/40% in last 6m
The key reasons for the underperformance in our view are, a) overhang on tariff
fixation for airports, b) low visibility on land monetization, c) lower utilisation of
gas-based power plants due to fuel shortage and d) lack of progress on the order for
merchant tariffs for recoupment of past losses. However, we believe the downside
is limited from here and upgrade GMR to Neutral and reiterate Buy on GVK.
�� GMR – Airport PE deal increases fund availability for expansion projects
The funds of US$200m will enable the parent entity to fund its expansion projects.
GMR would also have equity of about US$225m from Intergen stake sale (Please
refer our note Intergen stake sale is a positive dated 30 November 2010). Approval
of higher capex at the Delhi airport and land monetization at Delhi (though no
specific plans have been announced yet), would be key catalysts, in our view.
�� GVK – increased probability of land monetization moving forward
We understand that no major objections have been received by MMRDA for
GVK’s real estate plans. This increases the probability of the approval being
provided over next few months.
�� Lower gas output to impact near-term earnings for power business
Lower gas availability has impacted the PLFs of power plants of GMR and GVK.
Also, there is lack of progress on the order on merchant tariffs for recoupment of
past losses. We lower our earnings/valuation of power segment to factor the same.
Price correction reflects concerns
Uncertainty on tariff fixation in airports
The Airport Economic Regulatory Authority (AERA) is in favour of a single-till
model for tariff setting of major airports and reduction of real estate from the
regulated asset base (which is used for determining airport charges). AERA,
however, has stated that in the case of Delhi/Mumbai airports, it will follow the
OMDA/State Support Agreements and there would be a separate process for
determining the tariffs of these airports. The airport developers have already
appealed against the order to the appellate tribunal. The resolution of the issue is
likely to take time and remain an overhang. Also, there has been little progress
on the monetization of the real estate around the airports, which contributes a
significant proportion to value.
Lower gas availability to impact PLFs
Lower availability of gas has impacted the PLFs of the gas-based power plants
of GMR and GVK in 3Q and first two months of 4Q (though for the months of
March to May, we understand that the AP govt has allowed usage of PLNG).
We believe that the earnings are also likely to be impacted from FY12 onwards
due to lower gas availability. And there is lack of progress on the order for
merchant tariffs for recoupment of past losses.
GMR (Upgrade to Neutral, PT Rs46)
We upgrade our rating to Neutral post the correction in the stock price. Also,
fund availability is likely to improve for GMR with the recently announced PE
investments (US$200m) from Macquarie SBI in the airport holding company. It
seems to be a structured transaction, like their earlier PE deal in the power
segment, and is in the form of Compulsory Convertible Preference Shares. It is
difficult to ascertain the valuation impact as the exact stake sale is unknown.
GMR would also have equity of about US$225m from the Intergen stake sale
(please refer our note Intergen stake sale is a positive, 30 November 2010).
These transactions would enable the parent entity to fund its expansion projects,
primarily in the power business.
Key catalysts for the stock, in our view, would be the approval of the higher
capex for the Delhi airport, land monetization at Delhi (though near-term
visibility is low as no specific plans have been announced yet) and higher
availability of domestic gas or permission by Andhra Pradesh government to use
imported gas.
We reduce our SOTP-based PT from Rs50 to Rs46 primarily based on reduction
in our value of the Hyderabad airport (led by lower aero-nautical charges) and
lower value in the power segment (led by lower gas availability).
Key assumptions: Our key assumptions across the various assets of GMR are
as follows:
— Power: We assume PLFs of 75% in Vemagiri, Mangalore and Basin
Bridge. Our valuation of the under-construction projects of Chattisgarh,
Kamalanga, Vemagiri Expansion and Emco implies a valuation of 1.6x
P/B. We reduce the PE funding at an IRR of 18% after three years (this is
a structured transaction and the exact stake of the PE investors would be
determined only at a later stage).
— Real estate: Delhi – Pricing at similar levels as previous deals, with no
escalation and completion of the land monetization in FY20. Our
valuation implies a NPV of Rs389m/acre. Hyderabad – Initial price of
Rs50m/acre with 5% pa increase and monetization over FY14-FY25. Our
valuation for the Hyderabad land implies a NPV of Rs12m/acre
— Airports: Delhi – Pax traffic CAGR of 10/7/5/3/1% over FY11-14/
FY15-20/FY21-25/FY25-30/FY30-35 and a 5% CAGR in revenues per
pax. Hyderabad – Pax traffic CAGR of 13/9/6/4/3% over FY11-14/FY15-
20/FY21-25/FY25-30/FY30-35 and a 3% CAGR in revenues per pax
— Roads: 7% traffic growth, reducing by 1% in blocks of five years. We
have not valued the Hongud-Hospet road project
— Mines: Valued at book
— SEZs: Valued at book for Krishnagiri. Our value for the Hyderabad SEZ
implies a NPV of Rs1.8m/acre.
Changes in estimates: We revise our earnings estimates downwards to Rs
(0.1)/0.5/1.3 from Rs0.4/1.1/2.4 for FY11/12/13E, as we factor in lower PLFs in
the power segment, higher costs in the airport segment and lower traffic growth
in the road segment. There are upside risks to our estimates depending on the
tariff set by AERA for aeronautical revenues in the case of Delhi airport (we
currently assume a 5% increase).
Valuation
Our SOTP valuation for GMR is as follows (with individual assets being valued
on DCF).
GVK (Maintain Buy, PT Rs43)
Land monetization at the Mumbai airport is the key catalyst for the stock and
with no major objections being made to the real estate development plan (the
period for submitting comments on the real estate development plan is over and
we understand that MMRDA has not received any major objections), the
probability of the land monetization process commencing has increased, in our
view (once the approvals are received).
We reduce our SOTP-based PT from Rs50 to Rs43 based on exclusion of the
value of Bangalore airport (led by lower aero-nautical charges, which is offset
by the value of real estate), lower value in the power segment (led by lower gas
availability) and lower value in the road segment (led by lower traffic growth).
We reiterate our Buy rating on the stock.
Key assumptions: Our key assumptions across the various assets of GVK are as
follows:
— Power: We assume PLFs of 75% in Jegurupadu and Gautami. Our
valuation of the under-construction projects of Alaknanda and Goindwal
Sahib implies a valuation of 0.7x P/B. We have not included the value of
under-development expansion projects of Jegurupadu and Gautami due to
lack of clarity on gas availability and also the hydro-projects of
Goriganga and Ratle as they are at a very early stage.
— Real estate: Initial price of Rs900m/acre with 5% pa increase and
monetization over FY12-FY26. Our valuation implies a NPV of about
Rs2,650/sqft.
— Airport: 5% per annum increase in revenues per pax
— Road: 6% traffic growth, reducing by 1% in blocks of five years. We
have not valued the Deoli-Kota project
— SEZ: Valued at book.
Changes in estimates: We revise our earnings estimates downwards to
Rs 1.2/1.4/3.5 from Rs 1.5/2.0/4.2 for FY11/12/13E, as we factor in lower PLFs
in the power segment and lower traffic growth in the road segment. There are
upside risks to our estimates depending on the tariff set by AERA for
aeronautical revenues in the case of Mumbai airport (we currently assume a 5%
increase).
Valuation
Our SOTP valuation for GVK is as follows (with individual assets being valued
on DCF).
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