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COMPANY UPDATE
GMR INFRASTRUCTURE
In a tight spot
India Equity Research| Power
The recent consultation paper released by the Airport Economic and EDELWEISS 4D RATINGS
Regulatory Authority (AERA) has eliminated the regulatory overhang on Absolute Rating BUY
Delhi Airport (DIAL) tariff. While approval of capex at ~INR120bn and Rating Relative to Sector Outperformer
retention of real estate income are key positives, lack of clarity on O&M, Risk Rating Relative to Sector High
truing up and incentives are some issues. Based on the current Sector Relative to Market Underweight
framework, we believe it is marginally positive for GMR Infrastructure
(GMR). Maintain ‘BUY’ with target price of INR 46/share.
MARKET DATA (R: GMRI.BO, B: GMRI IN)
CMP : INR 23
Capex approved at ~INR120bn; WACC = 10.33%; Ke= 16% Target Price : INR 46
AERA has approved capex of ~INR120bn for the regulated aeronautical (aero) tariffs. It 52‐week range (INR) : 47 / 18
has arrived at a blended WACC of 10.33% after considering actual interest costs on Share in issue (mn) : 3,892.4
forex and domestic debt and refundable deposits and a 16% return on equity. M cap (INR bn/USD mn) : 88 / 1,665
Avg. Daily Vol.BSE/NSE(‘000) : 4,658.5
Real estate income not part of non‐aero income SHARE HOLDING PATTERN (%)
AERA has treated the 250 acres of real estate as non‐transfer asset and hence not part Others
of non‐aero income. While this ensures higher valuations for the airport asset 8.3%
(compared to current perception), lack of clarity on the treatment of future lease
FIIs
deposits could impact sentiment. MFs, FIs & 12.2%
Banks
8.1%
Tariff shock of 148% only in FY13 and FY14 Promoters*
71.4%
With three years having already passed in the current regulatory period (FY09‐14),
AERA has recommended a hike of 148% in aero charges in FY13 and FY14.
* Promoters pledged shares : 20.4
(% of share in issue)
Outlook & valuations: Regulatory overhang to ebb; maintain ‘BUY’
PRICE PERFORMANCE (%)
We believe clarity on regulations and exclusion of real estate are the key positives. EW Power
Stock Nifty
Rough cut calculations assuming use of lease deposits for future capex show that while Index
the value of the airport business will increase due to less equity needed, it will be 1 month (3.2) 0.9 (2.1)
negated by a reduction in the real estate value. Overall, there is no significant change 3 months (27.7) (4.4) (15.1)
in our valuation of DIAL asset (airport + land). Maintain ‘BUY’ with SOTP based target
12 months (57.2) (20.8) (26.8)
price of INR46/share.
Financials
Year to March FY10 FY11 FY12E FY13E
Revenue (INR mn) 45,665 57,738
72,149 74,355
Rev. growth (%) 13.6 26.4 25.0 3.1
EBITDA (INR mn)
13,643 15,555 20,877 25,019 Shankar.K
+91 22 4040 7412
Net profit (INR mn) 1,584 (9,296) (2,076) 2,569 shankar.k@edelcap.com
Shares outstanding (mn) 3,667 3,892 3,892 3,892
Parvez Akhtar Qazi
EPS (INR) 0.4 (0.3) (0.5) 0.7
+91 22 4063 5405
EPS growth (%) 12.6 (178.0) 58.4 (223.7) parvez.qazi@edelcap.com
P/E (x)
52.8 (67.7) (42.7) 34.5
EV/EBITDA (x) 18.1 18.5 17.2
18.7 January 6, 2012
ROAE (%) 2.3 (1.5) (2.2) 2.7
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Power
DIAL to be on hybrid till mechanism
AERA has stated that DIAL will be on hybrid till mechanism with 30% of total non‐aero
income being used for cross subsidizing aero charges. The regulatory period will be of five
year blocks with the first one from FY09 to FY14.
Capex approved at ~INR120bn
GMR had submitted a total capex of INR128bn for DIAL. It had considered this amount for
determining the regulated asset base (RAB) for DIAL while making appropriate adjustment
for removing upfront fee to AAI.
Against this, AERA has approved a capex of INR118bn in the recently released consultation
paper detailing the regulated aeronautical (aero) tariffs for DIAL. This was primarily due to:
• Disallowance of capex incurred of INR2bn.
• INR2bn of VRS being paid to AAI employees being considered as expense and not
capex.
• Disallowance of INR2.3bn of future capex and INR1.2bn of maintenance capex.
Table 1: RAB calculation for AERA (INR mn)
2006‐07 2007‐08 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14
Opening RAB ‐
610
1,080
23,940 28,130
89,660
79,180
76,260
Investment 620
510
18,660
5,400 82,310
5,500
790
‐
Deletion/Disallowance ‐
‐
‐
‐ ‐
‐
‐
‐
Depreciation and amortization 10
30
470
1,210 2,510
3,750
3,630
3,640
Assets funded out of DF ‐
‐
‐
‐ 18,270
12,230
80
80
Hypothetical asset base ‐
‐
4,670
‐ ‐
‐
‐
‐
Closing RAB 610
1,080
23,940
28,130 89,660
79,180
76,260
72,550
Average RAB for return 310
850
12,510
26,040 58,890
84,420
77,720
74,400
Source: AERA, Edelweiss research
WACC = 10.33% considering Ke= 16%
AERA has opined that the WACC of 11.6% detailed during the bidding was only a reference
rate to uniformly compare bids and not the benchmark rate. Hence, it has considered
applicable rates for each individual means of financing while determining DIAL’s WACC.
For calculation of WACC, DIAL had asked for a return of 24% on equity of INR25bn and quasi
equity (lease deposit) of INR14.7bn. With regards to the debt component, it had asked for a
12.17% interest cost on domestic debt of INR36.5bn (with an assumption of 50bps increase
next year) and 7.76% on ECB of INR16.2bn.
AERA has considered a return of 16% on equity. It has considered an interest rate of 12.17%
on domestic debt (no hike assumed next year) and of 7.76% only on outstanding ECB of
INR15.9bn. The authority has considered no return on lease deposits. Keeping these in
mind, it has arrived at a blended WACC of 10.33%.
2 Edelweiss Securities Limited
GMR Infrastructure
Real estate income not part of non‐aero income
AERA has individually computed each and every component of non‐aero income based on
its projections of future traffic growth and increase in the non‐aero yield (non‐aero income
per pax). Revenues from cargo, ground handling & fuel throughput operations have been
considered as part of non‐aero income.
The authority has treated the 250 acres of real estate as non‐transfer assets and hence not
being part of non‐aero income. While this is positive, it leads to a tricky situation—lease
rentals will attract a revenue share of 46%, which reduces its attractiveness; on the other
hand, DIAL will not get any returns on lease deposits as per AERA’s stand.
Thus, while non‐inclusion of real estate assets as part of RAB is positive and will ensure
higher valuations for the airport asset (compared to current perception), lack of clarity on
the treatment of future lease deposits could impact sentiment.
Truing up only in statutory costs and traffic volume
AERA has stated that it will true up statutory costs on annual basis only. Any deviation from
the traffic forecasts beyond 5% (and not 500bps) of the projected traffic growth rate would
be trued up in the five–year regulatory block periods. This means that all value risks (O&M
costs, spend/pax etc.,) will have to be borne by the developer. Similarly, while the benefit of
interest costs during regulatory period can be retained, any forex variations will have to be
incurred by the developer.
Tariff shock of 148% only in FY13 and FY14
The tariff order has been delayed by around three years and hence only 26 months are
remaining in the current regulatory period of 2009‐2014 to recover tariff for this period.
AERA has recommended recovery of the entire backlog and regulatory charges within the
next two years. While DIAL had asked for an upfront tariff hike of 774%, AERA has worked
out an upfront increase of 280% based on various adjustments mentioned above. For
smoothening out the increase, it is considering an annual increase of 148% in FY13 and
FY14. This would ensure there is no carry forward of past dues.
Outlook and valuations: Regulatory overhang to ebb; maintain ‘BUY’
We believe clarity on the regulation and exclusion of real estate with respect to DIAL are the
key positives. Rough cut calculations assuming use of lease deposits for future capex show
that while the value of the airport business will increase due to less equity needed and up
fronting of revenues over the next two years, it will be negated by a reduction in the real
estate value. Overall, there is no significant change in our valuation of DIAL asset (airport +
land). While we expect the norms to be keenly debated / contested by various stakeholders,
we believe a middle path can emerge in terms of various issues. We maintain ‘BUY’ with a
SOTP based target price of INR46/share.
3 Edelweiss Securities Limited
Power
Table 2: SOTP valuation
Division GMR Valuation (INR mn) Value/share (INR)
Airports 107,753
28
Roads (28,207) (7)
Power 52,595 14
Homeland Energy 1,414
0
Indonesian coal mine 4,713
1
Cash and liquid investments 39,866 10
Total SOTP valuation 179,133
46
Source: AERA, Edelweiss research
4 Edelweiss Securities Limited
GMR Infrastructure
Company Description
GMR is the flagship company of the GMR Group promoted by Mr. G. M. Rao. The group was
initially active in the agri business and banking sector through a controlling stake in Vysya
Bank, the largest private sector bank in India, before banking sector reforms and
subsequent sale to ING. GMR follows the developer model for infrastructure projects across
different verticals—power, roads, airports, and urban infrastructure. The promoter group is
closely involved with the management with each of the different verticals in the company.
Investment Theme
Further upsides from commercial development linked to airports
If GMR manages to sell remaining 205 acres of land at a price greater than the value at
which it has sold 45 acres presently, it could result in further upsides for the company.
Similarly, monetization of Hyderabad airport land and SEZ land at higher than expected
valuations could result in a positive surprise.
Power project expansion pipeline at nascent stage
The company has about 3,290 MW of generation units in various stages of development,
which include ~2,800 MW of thermal generation and 1,190 MW of hydro power units. The
company plans to have a reasonable blend of merchant and PPA sale for its expansion
projects. Timely financial closure for the hydro projects and execution without cost overrun
of projects could result in increased earnings for the company.
Increase in passenger traffic in airports and toll‐based roads
If the passenger traffic picks up in airports and the toll‐based road projects, the operating
leverage is expected to be higher which would expand valuations.
Traction in projects
Huge cash reserves and likely listing of power entity separately means that there is a
likelihood of more projects being added to the portfolio like the recent Male airport and
Vemagiri expansion projects. If the same trend of value accretion continues, then there can
be further upside to valuations.
Key Risks
Falling passenger traffic critical for airports’ valuations
Passenger traffic had been down due to slowdown in economic activities leading to lower
earnings at both Delhi and Hyderabad airports. This has been a drain on the valuation of
airports.
Failure to monetise airport land at attractive valuations on time
GMR has been successful in monetizing 45 acres out of 250 acres of land at Delhi airport.
However, if it does not succeed in monetizing the balance tranche at similar or higher
levels, it could drag valuations downwards.
Further equity dilution, unrelated diversification
The company has been raising equity money frequently in the recent past for enhancing its
project portfolio. One of the acquisition was stake in Intergen which was not value
accretive. If a similar trend continues going forward then the same could impact valuations.
5 Edelweiss Securities Limited
Power
Financial Statements
Income statement (INR mn)
Year to March FY09 FY10 FY11 FY12E FY13E
Income from operations 40,192 45,665 57,738 72,149 74,355
Direct costs 16,862 25,766 34,074 19,156 26,171
Employee costs 3,405 2,932 3,386 10,136 11,155
Other expenses 9,257 3,325 4,724 21,981 12,011
Total operating expenses 29,524 32,022 42,183 51,272 49,337
EBITDA 10,668 13,643 15,555 20,877 25,019
Depreciation & Amortization 3,898 6,122 8,609 10,964 11,168
EBIT 6,770 7,521 6,946 9,913 13,851
Other income 214 2,913 3,113 2,529 1,185
Interest expenses 3,682 8,503 12,301 14,887 11,118
Profit before tax 3,301 1,931 (2,242) (2,446) 3,918
Provision for tax 530 (322) 239 2,469 1,965
Core profit 2,771 2,253 (2,481) (4,915) 1,953
Extraordinary income/ (loss) ‐ ‐ (7,986) ‐ ‐
Profit after tax 2,771 2,253 (10,467) (4,915) 1,953
Minority interest (23) 454 (1,205) (3,548) (839)
Share in profit of associates ‐ (216) (35) (710) (222)
Profit after minority interest 2,795 1,584 (9,296) (2,076) 2,569
Basic shares outstanding (mn) 3,641 3,667 3,892 3,892 3,892
Basic EPS (INR) 0.4 0.4 (0.3) (0.5) 0.7
Diluted equity shares (mn) 3,641 3,667 3,892 3,892 3,892
Diluted EPS (INR) 0.8 0.4 (0.3) (0.5) 0.7
Dividend payout (%) ‐ ‐ ‐ ‐ 1.0
Common size metrics ‐ as % of net revenues
Year to March FY09 FY10 FY11 FY12E FY13E
Operating expenses 73.5 70.1 73.1 71.1 66.4
Depreciation 9.7 13.4 14.9 15.2 15.0
Interest expenditure 9.2 18.6 21.3 20.6 15.0
EBITDA margins 26.5 29.9 26.9 28.9 33.6
Net profit margins 6.9 4.9 (4.3) (6.8) 2.6
Growth ratios (%)
Year to March FY09 FY10 FY11 FY12E FY13E
Revenues 75.1 13.6 26.4 25.0 3.1
EBITDA 78.2 27.9 14.0 34.2 19.8
PBT ‐ (0.4) (2.2) 0.1 (2.6)
Net profit 5.5 (18.7) (110.1) 198.1 (39.7)
EPS 33.0 12.6 (178.0) 58.4 (223.7)
6 Edelweiss Securities Limited
GMR Infrastructure
Balance sheet (INR mn)
As on 31st March FY09 FY10 FY11 FY12E FY13E
Equity capital 3,641 3,667 3,892 3,892 3,892
Reserves & surplus 61,070 65,003 91,003 88,926 91,496
Shareholders’ funds 64,711 68,671 94,895 92,818 95,388
Minority interest (BS) 18,061 17,902 19,981 16,433 15,593
Secured loans 106,644 162,294 189,107 264,482 373,219
Unsecured loans 15,458 46,080 53,189 53,189 53,189
Borrowings 122,102 208,374 242,296 317,671 426,408
Others 68 (5) (74) (74) (74)
Sources of funds 204,942 294,940 357,098 426,849 537,315
Gross block 114,326 148,896 243,702 284,260 345,077
Depreciation 17,810 23,416 31,503 42,467 53,635
Net block 96,516 125,481 212,200 241,793 291,442
Capital work in progress 67,909 103,829 94,898 135,456 196,273
Total fixed assets 164,426 229,309 307,098 377,249 487,715
Investments 13,109 46,411 29,741 29,741 29,741
Inventories 1,319 1,159 1,846 1,846 1,846
Sundry debtors 6,609 8,649 13,199 13,199 13,199
Cash and equivalents 24,665 16,826 33,732 33,732 33,732
Loans and advances 12,840 14,773 26,144 26,144 26,144
Total current assets 45,433 41,408 74,921 74,921 74,921
Sundry creditors and others 14,099 15,775 51,617 51,617 51,617
Provisions 833 3,878 2,281 2,281 2,281
Total current liabilities & provisions 14,932 19,653 53,898 53,898 53,898
Net current assets 30,501 21,755 21,023 21,023 21,023
Net deferred tax (192) 805 1,514 1,114 1,114
Others (2,902) (3,339) (2,279) (2,279) (2,279)
Uses of funds 204,942 294,940 357,098 426,849 537,315
Book value per share (INR) 8.9 18.7 24.4 23.8 24.5
Free cash flow (INR mn)
Year to March FY09 FY10 FY11 FY12E FY13E
Net profit 2,795 1,584 (9,296) (2,076) 2,569
Depreciation 3,898 6,122 8,609 10,964 11,168
Others 3,401 (1,800) 3,424 (3,148) (839)
Gross cash flow 10,094 5,907 2,737 5,740 12,898
Less: Changes in WC 9,211 (907) (17,638) ‐ ‐
Operating cash flow 883 6,814 20,374 5,740 12,898
Less: Capex 62,322 68,725 73,254 81,115 121,635
Free cash flow (61,439) (61,911) (52,879) (75,376) (108,737)
Cash flow metrics
Year to March FY09 FY10 FY11 FY12E FY13E
Operating cash flow 883 6,814 20,374 5,740 12,898
Investing cash flow (27,953) (100,593) (64,390) (78,586) (120,450)
Financing cash flow 42,790 85,939 60,922 72,847 107,552
Net cash flow 15,720 (7,839) 16,906 ‐ ‐
Capex (62,322) (68,725) (73,254) (81,115) (121,635)
Dividends paid (3) (5) (87) ‐ ‐
7 Edelweiss Securities Limited
Power
Profitability & efficiency ratios
Year to March FY09 FY10 FY11 FY12E FY13E
ROAE (%) 4.3 2.3 (1.5) (2.2) 2.7
ROACE (%) 3.9 3.4 2.4 2.7 3.1
Debtors days 49 61 69 67 65
Current ratio 3.0 2.1 1.4 1.4 1.4
Debt/EBITDA 11.4 15.3 15.6 15.2 17.0
Fixed asset turnover (x) 0.5 0.4 0.3 0.3 0.3
Average working capital turnover 32.7 8.5 (14.8) (5.7) (5.9)
Average capital employed turnover (x) 0.2 0.2 0.2 0.2 0.2
Debt/Equity 1.9 3.0 2.6 3.4 4.5
Adjusted debt/equity 1.9 3.0 2.6 3.4 4.5
Operating ratios
Year to March FY09 FY10 FY11 FY12E FY13E
Total asset turnover 0.2 0.2 0.2 0.2 0.2
Fixed asset turnover 0.3 0.2 0.2 0.2 0.2
Equity turnover 0.6 0.7 0.7 0.8 0.8
Du pont analysis
Year to March FY09 FY10 FY11 FY12E FY13E
NP margin (%) 7.0 3.5 (2.3) (2.9) 3.5
Total assets turnover 0.2 0.2 0.2 0.2 0.2
Leverage multiplier 2.9 3.7 3.9 4.1 5.1
ROAE (%) 4.5 2.3 (1.6) (2.2) 2.7
Valuation parameters
Year to March FY09 FY10 FY11 FY12E FY13E
Diluted EPS (INR) 0.8 0.4 (0.3) (0.5) 0.7
Y‐o‐Y growth (%) 33.0 (43.7) (178.0) 58.4 (223.7)
CEPS (INR) 0.9 2.1 1.9 2.3 3.5
Diluted PE (x) 29.4 52.2 (67.0) (42.3) 34.2
Price/BV (x) 2.5 1.2 0.9 0.9 0.9
EV/Sales (x) 4.6 5.4 5.0 5.0 6.3
EV/EBITDA (x) 17.3 18.0 18.4 17.2 18.6
Dividend yield (%) ‐ ‐ 0.1 ‐ ‐
8 Edelweiss Securities Limited
RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative
reco reco risk reco reco Risk
Adani Enterprises BUY SP M Adani Power REDUCE SU M
CESC BUY SU H GMR Infrastructure BUY SO H
GVK Power and Infra HOLD SU H JSW Energy REDUCE SU H
Lanco Infratech BUY SU H Marg BUY None None
Mundra Port & SEZ BUY SO M Navabharat Ventures BUY None None
NTPC HOLD SU L Power Grid Corp of India BUY SO L
PTC India BUY None None Reliance Infrastructure BUY SU M
Tata Power Co BUY SO L
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
9 Edelweiss Securities Limited
Power
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91‐22) 4009 4400, Email: research@edelcap.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206
Nischal Maheshwari Co‐Head Institutional Equities & Head, Research nischal.maheshwari@edelcap.com +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Power
Adani Power, Adani Enterprises, CESC, GMR Infrastructure, GVK Power and Infra, JSW Energy, Lanco Infratech, Marg, Mundra Port & SEZ, Navabharat
Ventures, NTPC, PTC India, Power Grid Corp of India, Reliance Infrastructure, Tata Power Co
Recent Research
Date Company Title Price (INR) Recos
26‐Dec‐11 GVK Power & Stake sale in GVK 11 Hold
Infrastructure Airports; EdelFlash
09‐Dec‐11 GMR Maldives court rules 20 Buy
Infrastructure against airport levy;
EdelFlash
02‐Dec‐11 Adani In fine fettle; 339 Buy
Enterprises Company Update
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 119 47 15 184 Buy appreciate more than 15% over a 12‐month period
* 3 stocks under review
Hold appreciate up to 15% over a 12‐month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12‐month period
Market Cap (INR) 111 57 16
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