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GMR Infrastructure Ltd. — Challenging times
ahead, Downgrade to Underperform
Country Overview
Cut rating and PO
While the stock has underperformed the market by 19% YTD, we see limited
upside potential of 10% – amongst the lowest in our coverage and are cutting our
rating to Underperform with a revised PO of Rs29 (from Rs42). This is due to: (a)
continual losses in FY12E / marginal profit in FY13E led by lower profitability from
airport/ power vertical, (b) deferment of real estate monetization at Delhi airport,
and (c) higher execution risks as capex going forward is largely in green-field
projects.
Shift turnaround to FY13E / Deferred realty monetization
Airport is estimated to have losses in FY12/13E (vs profit in FY13E earlier) due
to: lower revenue in Turkey / Male airport, higher operational expense, higher tax
at Hyderabad airport and losses at Delhi airport. On power, lower PLF and a
change in coal mix by blending linkage coal with e-auction / imported coal (at 1.5-
2.5x linkage price) led to lower earnings. The realty monetization (leasing) is
expected to be delayed by a year (from FY14) (largest component in our SoTP at
30%) as primary concern remains on obtaining capital cost / ADF approval + tariff
hike.
Higher execution risk, but on upside, has 60% upside pot.
The trailing five years had ~80% of capex on brown-field projects as GMR
completed 3 airports, 4 roads and 2 power plants. Going forward, this would
reverse as ~80% of the capex worth Rs567bn over next few years is on greenfield
projects (in power) entailing greater execution risk vs brown-field sites. Key
upside risk includes higher short-term tariffs, lower interest rates, faster realty
monetization at higher realization and lower fuel price. We estimate that the
valuation of GMR could be Rs42 under the following scenario: (a) lower usage of
imported coal (b) lower gas price by USD 1/mmbtu and e-auction price declined
by 25%, (c) ST realization up by Rs 0.5/unit, and (d) realty monetization
commences next year at 25% higher realization.
GMR Infrastructure Ltd. (GMRLF)
Our PO of Rs29 is based on Sum-of-the-parts valuation using DCF as the main
approach with varying cost of equity. SoTP comprises:
1) Airports - Rs25 (87% of SoTP), based on DCF for the 4 airports using CoE of
12-14% and Delhi realty at CoE of 18% - in line with other realty peers. The
estimated value of Delhi airport, including realty, is Rs16/sh, while both the
international airports at Male/Sabiha Gokcen are valued at Rs5/sh
2) Power - Rs4 (13% of SoTP), based on DCF for 3.6GW of operating/under
construction assets using CoE of 14-16%. Also, Indonesia coal mines is valued
on DCF at 18% CoE, and 800MW power plant in Singapore at book value
3) Roads - Rs2 (6% of SoTP), based on DCF using CoE of 14-16% for the 9
concession projects.
4) Others - Rs6 (20% share) include EPC division, valued on EV/EBITDA 6x
FY13E - in line with other mid-cap construction peers, SEZ, investments and
cash, liquid investments less parent debt at book value and NPV impact of private
equity investment.
Risks are: higher short-term tariffs, lower interest rates, faster realty monetization
at higher realization and lower fuel price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GMR Infrastructure Ltd. — Challenging times
ahead, Downgrade to Underperform
Country Overview
Cut rating and PO
While the stock has underperformed the market by 19% YTD, we see limited
upside potential of 10% – amongst the lowest in our coverage and are cutting our
rating to Underperform with a revised PO of Rs29 (from Rs42). This is due to: (a)
continual losses in FY12E / marginal profit in FY13E led by lower profitability from
airport/ power vertical, (b) deferment of real estate monetization at Delhi airport,
and (c) higher execution risks as capex going forward is largely in green-field
projects.
Shift turnaround to FY13E / Deferred realty monetization
Airport is estimated to have losses in FY12/13E (vs profit in FY13E earlier) due
to: lower revenue in Turkey / Male airport, higher operational expense, higher tax
at Hyderabad airport and losses at Delhi airport. On power, lower PLF and a
change in coal mix by blending linkage coal with e-auction / imported coal (at 1.5-
2.5x linkage price) led to lower earnings. The realty monetization (leasing) is
expected to be delayed by a year (from FY14) (largest component in our SoTP at
30%) as primary concern remains on obtaining capital cost / ADF approval + tariff
hike.
Higher execution risk, but on upside, has 60% upside pot.
The trailing five years had ~80% of capex on brown-field projects as GMR
completed 3 airports, 4 roads and 2 power plants. Going forward, this would
reverse as ~80% of the capex worth Rs567bn over next few years is on greenfield
projects (in power) entailing greater execution risk vs brown-field sites. Key
upside risk includes higher short-term tariffs, lower interest rates, faster realty
monetization at higher realization and lower fuel price. We estimate that the
valuation of GMR could be Rs42 under the following scenario: (a) lower usage of
imported coal (b) lower gas price by USD 1/mmbtu and e-auction price declined
by 25%, (c) ST realization up by Rs 0.5/unit, and (d) realty monetization
commences next year at 25% higher realization.
GMR Infrastructure Ltd. (GMRLF)
Our PO of Rs29 is based on Sum-of-the-parts valuation using DCF as the main
approach with varying cost of equity. SoTP comprises:
1) Airports - Rs25 (87% of SoTP), based on DCF for the 4 airports using CoE of
12-14% and Delhi realty at CoE of 18% - in line with other realty peers. The
estimated value of Delhi airport, including realty, is Rs16/sh, while both the
international airports at Male/Sabiha Gokcen are valued at Rs5/sh
2) Power - Rs4 (13% of SoTP), based on DCF for 3.6GW of operating/under
construction assets using CoE of 14-16%. Also, Indonesia coal mines is valued
on DCF at 18% CoE, and 800MW power plant in Singapore at book value
3) Roads - Rs2 (6% of SoTP), based on DCF using CoE of 14-16% for the 9
concession projects.
4) Others - Rs6 (20% share) include EPC division, valued on EV/EBITDA 6x
FY13E - in line with other mid-cap construction peers, SEZ, investments and
cash, liquid investments less parent debt at book value and NPV impact of private
equity investment.
Risks are: higher short-term tariffs, lower interest rates, faster realty monetization
at higher realization and lower fuel price.
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