India - Airport Infrastructure (research report by CitiGroup)

Asia Pacific | India Infrastructure (Citi) Industry Focus 10 April 2008  84 pages India Infrastructure – Airports Boarding Call  Initiating on GMR Infrastructure and GVK Power and Infrastructure – We are initiating coverage on GMR Infrastructure with a Buy / Medium Risk (1M) rating and a target price of Rs187, an upside of 32% from current levels. GMR's portfolio includes three airports (Hyderabad, Delhi and Sabiha Gokcen International Airport in Turkey). We are initiating coverage on GVK Power and Infrastructure with a Buy / Medium Risk (1M) rating and a target price of Rs56, an upside of 44% from current levels. GVK's owns a stake in the Mumbai airport.  Indian airports, an attractive asset class – India's booming economy and rapid industrialization has necessitated increased movement of people and goods both domestically and internationally. An unprecedented increase in the passenger and cargo traffic has stretched existing capacity and prompted India's government to undertake on an ambitious program of modernizing existing airports and building new greenfield airports.  The opportunity – The Indian government has invited private-sector participation in the Mumbai and Delhi airports. New greenfield airports have been built in Bangalore, Hyderabad and Cochin. The government is considering proposals for five new airports and development of 35 non-metro airports. US $13bn is being invested in the Indian airports sector.  Value proposition higher in GVK at the moment, but we prefer GMR franchise – While the expected return on GVK appears higher than GMR at the moment, we prefer GMR's franchise because of a 1) wider asset base, 2) quality of airport assets, 3) more airport-linked real estate, 4) lower leverage to airport financing structure. Deepal Delivala 1 +91-22-6631-9857 deepal.delivala@citi.com Initiation of coverage  Venkatesh Balasubramaniam1 +91-22-6631-9864 venkatesh.balasubramaniam@citi.com Atul Tiwari1 +91-22-6631-9866 atul.tiwari@citi.com See Appendix A-1 for Analyst Certification and important disclosures. Citi Investment Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Non-US research analysts who have prepared this report are not registered/qualified as research analysts with the NYSE and/or NASD. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 1 Citigroup Global Markets India Private Limited Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Contents Executive Summary Airports: Growth + Under-investment = Major Opportunity GMR Infrastructure (GMRI.BO) Executive Summary Valuations A Scalable Business Model Assets – A Birds-Eye View Business Strategy, Competitive Positioning Hyderabad Airport – A Profitable Asset Delhi Airport – "Capital" Location Sabiha Gokcen Airport Road and Power Projects Real Estate – Key Driver of Value Future Projects Financial Statements and Analysis Risks Quant View 4 5 14 16 18 20 21 22 23 29 34 35 37 40 41 44 47 GVK Power and Infrastructure (GVKP.BO) Executive Summary Valuation Company Background Business Analysis and Competitive Position Mumbai Airport – India's Busiest Real Estate – Key Value Creator Other Assets Financial Statements and Analysis Risks 49 51 53 55 56 57 64 67 69 72 Appendix I: Roads – Steady Build-Out Appendix II: Power – Industry Analysis Appendix A-1 76 78 80 2 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Boarding Call  Initiating on GMR Infrastructure and GVK Power and Infrastructure – We are initiating coverage on GMR Infrastructure with a Buy / Medium Risk (1M) rating and a target price of Rs187, an upside of 32% from current levels. GMR's portfolio includes three airports (Hyderabad, Delhi and Sabiha Gokcen International Airport in Turkey). We are initiating coverage on GVK Power and Infrastructure with a Buy / Medium Risk (1M) rating and a target price of Rs56, an upside of 44% from current levels. GVK's owns a stake in the Mumbai airport.  Indian airports, an attractive asset class – India's booming economy and rapid industrialization has necessitated increased movement of people and goods both domestically and internationally. An unprecedented increase in the passenger and cargo traffic has stretched existing capacity and prompted India's government to undertake on an ambitious program of modernizing existing airports and building new greenfield airports.  The opportunity – The Indian government has invited private-sector participation in the Mumbai and Delhi airports. New greenfield airports have been built in Bangalore, Hyderabad and Cochin. The government is considering proposals for five new airports and development of 35 nonmetro airports. US $13bn is being invested in the Indian airports sector.  Value proposition higher in GVK at the moment, but we prefer GMR franchise – While the expected return on GVK appears higher than GMR at the moment, we prefer GMR's franchise because of a 1) wider asset base, 2) quality of airport assets, 3) more airport-linked real estate, 4) lower leverage to airport financing structure. 3 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Executive Summary Indian Airports – an attractive asset class India's booming economy and rapid industrialization has necessitated increased movement of people and goods both domestically and internationally. An unprecedented increase in the passenger and cargo traffic has stretched existing capacity and prompted India's government to take on an ambitious program of modernizing existing airports and building new greenfield airports. The government has invited private-sector participation in the Mumbai and Delhi airports. New greenfield airports have been built in Bangalore, Hyderabad and Cochin. The government is considering proposals for five new airports and development of 35 non-metro airports. Initiating on GMR Infrastructure and GVK Power and Infrastructure We are initiating coverage on GMR Infrastructure with a Buy / Medium Risk (1M) rating and a target price of Rs187, an upside of 32% from current levels. GMR is a leading infrastructure developer in India – its portfolio includes three airports (Hyderabad, Delhi and Sabiha Gokcen International Airport in Turkey) which form an estimated 46% of GMR's value. We are also initiating coverage on GVK Power and Infrastructure with a Buy / Medium Risk (1M) rating and a target price of Rs56, an upside of 44% from current levels. GVK's portfolio of assets includes the Mumbai Airport, which forms an estimated 48% of GVKs value. Figure 1. GMR & GVK Target Prices GMR GVK Rating Target price BUY/Medium risk 187 BUY/Medium risk 56 Upside 32% 44% Value proposition higher in GVK at the moment, but we prefer GMR franchise While the expected return on GVK appears much higher than GMR at the moment, we prefer GMR's franchise because:  Wider asset base – GMR has a much wider asset base which includes three airports, 11 power plants, six roads and three SEZ's compared to GVK which has one airport, one road, six power plants, one coal mine and one SEZ. This diversifies risk and provides stability of cashflows.  Quality of airport assets – Hyderabad Airport, which has just been launched by GMR, is a very profitable asset with only a 4% revenue share to the government, whereas both Delhi (GMR) and Mumbai airports (GVK) are based on much higher revenue shares (Delhi 46%, Mumbai 38.7%) which lowers return profiles.  Airport-linked real estate – GMR has a higher quantum of land. GMR can develop 250 acres of land near the Delhi Airport and 1,000 acres of land near the Hyderabad Airport as a part of its concession. GVK can only develop 197 acres of land at the Mumbai Airport.  Leverage to airport financing structure – Both GMR and GVK intend to upfront portion rental values of airport land in the form of deposits. This has been debated and the final structure is not clear. We assume 25% for both the Delhi and Mumbai airports. However, the sensitivity to a no-deposit structure at GVK is much higher (16% downside to target price) versus GMR (6% downside to target price). This is because Mumbai Airport is a much higher proportion of GVK target price (48%) than Delhi Airport is of GMR's target price (16%). Source: Citi Investment Research 4 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Airports: Growth + Under-investment = Major Opportunity India's booming economy and rapid industrialization has necessitated increased movement of people and goods both domestically and internationally. Growth of tourism in India spawned a host of low-cost carriers which has led to a surge in the airborne passenger traffic as they compete with other options like the railways. This has led to an unprecedented increase in passenger and cargo traffic across all airports in India, stretching capacities which were not equipped to handle such traffic. Figure 2. India Passengers Growth YoY 90 80 70 60 50 40 30 20 10 2002 2003 2004 2005 Domestic 2006 Growth 2007 International 5% 0% 10% 22% 19% 33% 35% 30% 26% 25% 20% Figure 3. India – Freight Growth YoY 1,200 1,000 800 0.15 600 15% 10% 400 200 2002 2003 2004 International 2005 Domestic 2006 2007 8% 0.05 11% 10% 11% 0.1 20% 0.25 0.2 0 Source: AAI, Citi Investment Research Source: AAI, Citi Investment Research Figure 4. Indian Airports – Capacity Crunch Source: AAI, CAPA , Citi Investment Research 5 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 India: potentially the fastest-growing air market over next 20 years ACI’s forecasts for the next 20 years show India as the single fastestgrowing air market, with projected growth of 10.4% per year. China comes second with forecast growth of 8% per year. Having realized the need for rapid development of infrastructure across India, the government has started an ambitious program of modernization of existing airports and setting up of greenfield airports. US$10bn of investments over next 4-5 years in Indian Airports Figure 5. Indian Aviation – Proposed Investment Delhi Mumbai Bangalore Hyderabad Chennai Kolkata 35 non-metro airports Other non-metro airports Other greenfield airports CNS-ATM and other equipment Rs Bn 92 90 25 24 23 18 62 14 120 27 494.7 USD bn 2.3 2.3 0.6 0.6 0.6 0.5 1.6 0.4 3.0 0.7 13 Source: Presentation by Ministry of Civil Aviation, Conference of Chief Secretaries, July 2007, Citi Investment Research Initiatives taken so far  Modernization of existing metro airports – Private-sector participation has been invited for the Delhi and Mumbai Airport via the joint venture route. Kolkata and Chennai airports will be modernized by AAI. – Delhi airport – JV consists of GMR Group, Fraport AG, MAPL, IDF which together hold 74% and AAI holds 26%. Delhi Airport has an annual revenue share of 45.9% of Gross Revenue to AAI. – Mumbai Airport – JV consists of: GVK, ACSA, BSD which holds 74% and AAI holds 26%. The annual Revenue Share to AAI in the Mumbai airport is 38.7% of Gross Revenue. – Chennai Airport – Will be modernized by AAI – Kolkatta Airport – Will be modernized by AAI  Greenfield airports through PPP route – New airports are being constructed at Bangalore and Hyderabad. – Hyderabad airport has been completed in March 2008. A consortium of GMR Infrastructure Ltd. and Malaysian Airport Holding Berhard (MAHB) hold 74% and the Govt. of Andhra Pradesh and AAI hold 26%. – Bangalore Airport is likely to be completed by April 2008. A consortium of Siemens, Germany, Unique Zurich, Switzerland and L&T hold 74% and the Karnataka State Industrial Investment Development Corporation (KSIIDC) and AAI hold the remaining 26%. The estimated investment in the airport is ~$470mn. 6 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 6. Status on Non Metro Airports Terminal Building 15 Airports 20 Airports Airside 24 Airports 11 Airports Works Awarded Tenders invited/planned  New Greenfield Airport proposals – Government is considering proposals for setting up new airports at Kannur (Kerala), Mopa (Goa) , Halwara (Punjab) , Chakan (Pune, Maharashtra), Navi Mumbai (Maharashtra). The Navi Mumbai airport has received in-principle approval from the central government.  Development of 35 non-metro airports – AAI has undertaken an ambitious program of developing select 35 non-metro airports to develop regional connectivity which would pave way for development of regional hubs. Places of tourist interests and business hubs would be covered. This development is planned over the next three years. The AAI is adopting a two-pronged approach for modernization of non-metro airports. AAI will develop the air side infrastructure including the Terminal Building and would invite privatesector participation for the city side development. Source: Conference of Chief Secretaries, July 2007 Citi Investment Research Figure 7. Development of Non-Metro Airports No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Source: Committee on Infrastructure Airport Agra Agartala Agatti Ahmedabad Amritsar Aurangabad Bhopal Bhubhaneshwar Chandigarh Coimbatore Dehradun Dimapur Goa Guwahati Indore Imphal Jammu Jaipur Khajuraho Lucknow Madurai Mangalore Nagpur Patna Port Blair Pune Raipur Ranchi Rajkot Trivandrum Trichy Udaipur Vadodra Vizag Varanasi Total USD mn 4 18 6 94 20 33 26 30 30 28 28 20 95 48 41 13 18 32 33 41 41 61 21 33 12 12 33 28 38 87 35 30 42 55 27 1,214 Probable date of completion completed March, 2010 September , 2007 International Feb 2009 Domestic Oct 2007 December, 2007 July , 2008 March , 2009 March , 2009 March , 2009 March , 2010 December, 2008 December, 2009 September, 2009 December, 2009 December, 2008 December, 2009 December, 2008 October, 2007 December, 2008 December, 2008 December, 2008 December, 2008 December, 2007 March , 2010 December, 2009 March , 2009 December, 2009 December, 2008 December, 2009 International Dec 2008 Domestic Dec 2009 September , 2007 July , 2007 March, 2010 December, 2007 December, 2008 7 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 772 acres of potential commercial development in nonmetros Approximately 772 acres of land would be available for commercial development through the modernization of 29 out of the 35 airports mentioned above. This would translate to ~33mn sqft of potential commercial development near the airports. Figure 8. Land Available for Commercial Development Airport Ahmedabad Agartala Amritsar Aurangabad Bhopal Bhubhaneshwar Coimbatore Dimapur Goa Guwahati Indore Imphal Jaipur Khajuraho Lucknow Madurai Mangalore Nagpur Patna Port Blair Raipur Ranchi Rajkot Trivandrum Trichy Udaipur Vadodra Vizag Varanasi Total Source: Committee on Infrastructure Total land area in acres 929 517 735 248 634 814 410 316 26 509 634 505 655 566 1,186 502 345 1,460 259 45 592 546 248 539 655 328 722 194 579 15,696 Land Available for commercial development 40.38 10 11.24 33.47 35.51 2.79 6.99 5 4.63 25.52 96.25 5 36.62 39.05 158.93 24.95 13.85 79.47 5 2.4 3 10 7.02 23.34 25.49 1.67 45.53 12.45 6.63 772 % of total land 4% 2% 2% 13% 6% 0% 2% 2% 18% 5% 15% 1% 6% 7% 13% 5% 4% 5% 2% 5% 1% 2% 3% 4% 4% 1% 6% 6% 1% 5% Airports – Attractive infrastructure assets Airports can be attractive infrastructure assets because of:  High barriers to entry – This asset class has high barriers to entry since airports require major capital investments which limit the number of players in this market.  Limited competition – Airports usually have limited competition for passengers in their "catchment" areas, which results in steady growth and low volatility of revenue streams.  Significant opportunities from commercial development – Significant upside exists from unexploited commercial opportunities across the retail, car parking and property activities of airports. 8 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008  Air traffic growth looks sustainable – World air traffic is expected to sustain a growth rate of 4-5% over 2005-2025E according to ACI (Airports Council International). Asia is expected to grow at a higher rate of 6%-7% over the same period. Figure 9. Passenger Growth Forecast 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2007 2008 2009 Asia 2010 World 2015 2025 2005-25 6% 5% 5% 5% 4% 9% 8% 8% 7% 6% 5% 4% 4% 4% 3% 2% 1% 0% 2007 2008 2009 2010 2015 2025 2005-25 Figure 10. Freight Growth Forecast Freight Growth Forecast 8% 7% 6% 7% 6% 7% 6% 7% 7% 6% 6% 6% 5% 5% 5% 6% 7% 5% Passenger Growth forecast 6% Asia World Source: Citi Investment Research estimates Source: Citi Investment Research estimates Defensive characteristics Airports exhibit a fair amount of defensive characteristics:  Traffic – Airports that have natural competitiveness characteristics have a high degree of traffic growth resilience. For example, gateway airports, origin and destination airports, etc. The emergence of low-cost airlines has also added resilience to overall traffic growth.  Revenues – Revenues like property rentals and duty-free concessions are not dependent on passenger growth and hence provide a buffer from traffic risk.  Returns – In regulated airports, returns are guaranteed on capital invested. Air traffic growth drivers  Growing economy – Higher trade leads to higher passenger and cargo traffic.  Increased tourism – Higher levels of income driven by higher economic growth has fueled a surge in domestic and international travel by Indian nationals. Also, development of India as a tourist destination is attracting a larger number of international travelers to India.  Penetration of low-cost carriers – The emergence of low-cost carriers in recent years have led to increase in air traffic with their fares priced competitively against traditional modes of transport like railways. 9 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 11. Rising Share of LCCs in India 90% 80% 70% 60% 50% 40% 30% 20% Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Air Deccan, Spicejet, Go Air, Indigo 29% 21% 22% 25% 26% 31% 30% 28% 31% 32% 34% 37% Figure 12. International Tourist Arrivals in India 5 4.5 YTD arrivals are up 13% YoY 30% 25% 20% 15% 10% 5% 0% -5% -10% 1991 1994 1997 2000 2003 2006 % Growth YoY Jet Airways,Sahara, Indian Airlines, Kingfisher, Paramount 79% 78% 75% 74% 71% 70% 72% 69% 69% 68% 66% 4 63% Arrivals 3.5 3 2.5 2 1.5 1 0.5 0 Source: AAI Source: Ministry of tourism Revenues breakdown The revenues of an airport can be classified into aeronautical revenues and non-aeronautical revenues:  Aeronautical revenues are charges that are imposed on airlines for the use of airport infrastructure like runway, terminal facilities. These include landing and parking charges, X-ray charges, passenger service fees etc.  Non-aeronautical revenues are revenues which are not directly linked to aeronautical activities of the airport but are related to it. Revenues from duty-free shops, real estate development, car parking are examples of the same. 10 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 13. Airports – Revenue Streams Passenger related Landing charges Parking charges Passenger Service fees Cargo related Terminal Charges X-Ray Charges Demurrage Airport Revenues Property Land Rent Trading Concessions Non Aeronautical Revenues Retail Duty Free Charges Royalty Others Car Parking X Ray charges Aeronautical Revenues Source: Citi Investment Research Aeronautical revenues Aeronautical revenues comprise charges levied by the airport to the airlines which make use of the airport infrastructure. This includes landing charges, landing and parking charges, X-ray charges, passenger service fees etc. Aeronautical charges are typically regulated Aeronautical charges that are levied are usually regulated. This is because as airports tend to operate natural monopolies, in the absence of regulation they have the power to charge excess profits by overcharging the user of the airport – i.e. the airlines and ultimately the passenger. Absence of competition could also lead to economic inefficiencies. In such a situation, economic regulation is concerned with mimicking the outcome had competition existed. Worldwide, airlines and their passengers pay at least US$43.5bn a year to airports and air navigation service providers (ANSPs) or 11% of airline revenues. These infrastructure charges form the second-largest external cost to airlines after fuel. Approaches to pricing of aeronautical charges The single-till system is used for airport pricing in the United Kingdom and for most airports in the United States Single till – Under the single-till approach to pricing, airport revenues are determined by setting an appropriate rate of return on all assets that are used for the provision of services at the airport, irrespective of whether those services could be defined as aeronautical or non-aeronautical. The single-till system is used for airport pricing in the United Kingdom and for most airports in the United States. 11 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Dual till – Under the dual-till approach, aeronautical and non-aeronautical services are treated as distinct. For aeronautical services, the dual-till approach requires that revenues cover the directly attributable costs of providing these services, including an appropriate return on assets that are solely used for these services, as well as a contribution to costs that are common to both aeronautical and non-aeronautical services. Other things being equal, airport charges derived using a single-till approach are likely to be lower than they would be under a dual-till, because of the higher profits generated by commercial activities. Figure 14. Single-Till Approach Aeronautical Revenues Non - Aeronautical Revenues Figure 15. Dual-Till Approach Aeronautical Revenues Non - Aeronautical Revenues Single Till Target Rate of Return Estimation of Aeronautical Charges CPI -X Target Rate of Return Aeronautical Till Non - Aeronautical Till Traffic Forecast Traffic Forecast Estimation of Aeronautical Charges CPI -X Asset Base Asset Base Source: Source: Airport User Charges and Financing, Amedeo R. Odoni, Citi Investment Research. Source: Source: Airport User Charges and Financing, Amedeo R. Odoni, Citi Investment Research. Non-aeronautical revenues: ~50% of total revenues of airports worldwide Traffic growth leads to higher aeronautical revenues through an increase in aircraft movements and also drives non-aeronautical income higher with more passengers spending on airport products and services. Airports have been very successful in growing non-aeronautical income streams. Data from ICAO in 1990 indicate that only about 30% of airport revenues were from nonaeronautical sources. In recent years, ACI surveys have confirmed that the global figure is now closer to 50%, with a number of large airports deriving over 60% of gross revenues from non-aeronautical sources, including retail concessions, auto parking, rental car concessions and property income from leasing of airport land. 12 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 16. Aeronautical vs. Non-Aeronautical Revenues Total 51% 49% Figure 17. Revenue Split of Major Airports Beijing Capital Zurich 73% 60% 40% 40% 26% 41% 59% 58% 0% 20% 40% 60% 60% 60% 74% 59% 41% 42% 80% 100% 27% 40% North America1 Latin America/Caribbean Europe 42% 58% Aeroports de Paris 59% 41% Changi, Singapore Houston Sydney 57% 43% Asia/Pacific 48% 52% BAA Africa/Middle East 0% 54% 20% 40% 60% 46% 80% 100% Toronto Aeronautical Non-aeronautical Aeronautical Non Aeronatutical Source: Dutyfree World Council, Citi Investment Research Source: Airport Websites, Citi Investment Research The increase in non-aeronautical revenue during recent years has been one of the most important trends in airport economics The increase in non-aeronautical revenue during recent years has been one of the most important trends in airport economics. Airports are no longer only providers of aero-related services, but are also shopping hubs and provide entertainment opportunities. The size of the airport is a key factor in determining the potential of developing the non-aeronautical revenues of the airport. A small-sized airport reduces the opportunities for lucrative landside activities such as parking and retail concessions. Non-aero revenues only 30% of revenues in India – significant potential From non-traffic revenue of 10-15% of total AAI revenue in early 90s, the AAI has moved to a regime of non-traffic revenue in the range of 20-30% of total revenue in recent years 1. The current revenue pattern of airports in India shows that 70% of the revenues are derived from the aeronautical activities and 30% from non-aeronautical activities (Source: KPMG, Indian Airports 2006). This shows the significant potential to develop the non-aeronautical revenues of the airports and increase profitability and returns. Since commercial revenues are largely unregulated and its development is under airport management control, this revenue stream can be easily developed. 1 Airports Authority of India, 13 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 GMR Infrastructure (GMRI.BO) 1M Rs142.20 Rs187.00 31.5% 0.0% 31.5% Rs264,321M US$6,619M Buy/Medium Risk Price (09 Apr 08) Target price Expected share price return Expected dividend yield Expected total return Market Cap Initiating at Buy – Time to Fly Again  Initiating at Buy (1M), TP of Rs187 – GMR is one of the leading infrastructure developers in India with a portfolio of assets including three airports (Hyderabad, Delhi and Sabiha Gokcen International Airport in Turkey), 11 power plants, and six roads. We initiate coverage with a Buy / Medium Risk (1M) rating and an NPV-based target price of Rs187.  Airports and real estate dominate value pie – We estimate airports and related real estate comprise 47% of GMR's value, other real estate 19%, power plants 18%, and roads 5%. GMR also has ~$1bn cash. We expect GMR's earnings to grow at 51% CAGR over FY08E-11E on the back of a 37% growth in revenues.  Aggressive buildup of the asset portfolio; future projects – In India, GMR has plans to bid for road, hydropower and power transmission projects. GMR is looking to emerge as an infrastructure developer across geographies. GMRled consortium is undertaking the upgrading of Sabiha Gokcen airport in Turkey.  Airport financing; value creator, but final structure still uncertain – GMR intends to sublease 250 acres of land at the Delhi airport and upfront a major portion of rental revenues as interest-free deposit. This has come under some debate, as AAI would lose ~46% revenue share on the deposits. While the final structure is still uncertain, we assume GMR upfronts 25% in the form of deposits. A no-deposit structure would imply a 6% lower target price.  Risks – 1) Airport financing structure, 2) Softening of real estate prices, 3) delay in achieving financial closure, 4) Rising interest rates. Figure 1. GMR – Statistical Abstract Year to 31-Mar FY06A FY07A FY08E FY09E FY10E Net Profit Rs mn 706 1,744 2,110 4,168 7,053 Diluted EPS Rs 0.39 0.96 1.16 2.29 3.87 EPS growth (%) Na 147% 21% 98% 69% P/E (x) 365 148 122 62 37 P/B (x) 45 13 4 3 3 ROE (%) Na 9% 5% 6% 8% Yield (%) 0 0 0 0 0 Price Performance (RIC: GMRI.BO, BB: GMRI IN) Source: Citi Investment Research estimates 14 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Fiscal year end 31-Mar Valuation Ratios P/E adjusted (x) EV/EBITDA adjusted (x) P/BV (x) Dividend yield (%) Per Share Data (Rs) EPS adjusted EPS reported BVPS DPS Profit & Loss (RsM) Net sales Operating expenses EBIT Net interest expense Non-operating/exceptionals Pre-tax profit Tax Extraord./Min.Int./Pref.div. Reported net income Adjusted earnings Adjusted EBITDA Growth Rates (%) Sales EBIT adjusted EBITDA adjusted EPS adjusted Cash Flow (RsM) Operating cash flow Depreciation/amortization Net working capital Investing cash flow Capital expenditure Acquisitions/disposals Financing cash flow Borrowings Dividends paid Change in cash Balance Sheet (RsM) Total assets Cash & cash equivalent Accounts receivable Net fixed assets Total liabilities Accounts payable Total Debt Shareholders' funds Profitability/Solvency Ratios (%) EBITDA margin adjusted ROE adjusted ROIC adjusted Net debt to equity Total debt to capital 2006 na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na 2007 148.4 na 13.0 0.0 0.96 0.96 10.94 0.00 17,151 -12,876 4,275 -1,441 0 2,833 -415 -673 1,744 1,744 5,620 na na na na 5,044 1,346 1,811 -19,647 -19,579 0 20,846 7,354 -23 6,243 63,685 13,000 0 48,059 38,501 0 37,057 25,184 32.8 na na 95.5 59.5 2008E 122.7 37.5 4.1 0.0 1.16 1.16 35.11 0.00 20,916 -16,072 4,844 -1,408 0 3,436 -659 -668 2,110 2,110 7,144 22.0 13.3 27.1 20.9 3,816 2,299 -449 1,075 -15,527 16,602 62,606 19,359 0 67,496 127,806 80,497 0 44,527 57,267 0 56,416 70,540 34.2 5.0 9.3 -34.1 44.4 2009E 62.1 18.3 3.3 0.0 2.29 2.29 43.53 0.00 30,843 -20,991 9,853 -3,216 560 7,196 -1,349 -1,679 4,168 4,168 14,235 47.5 103.4 99.3 97.6 8,094 4,382 -457 -73,029 -72,567 0 97,596 59,754 0 32,661 229,674 113,158 0 112,712 138,194 0 116,170 91,480 46.2 5.8 10.9 3.3 55.9 2010E 36.7 12.4 2.9 0.0 3.87 3.87 49.00 0.00 42,858 -25,718 17,140 -4,558 841 13,424 -2,717 -3,654 7,053 7,053 23,455 39.0 74.0 64.8 69.2 12,328 6,315 -1,039 -71,863 -71,873 0 46,105 10,648 0 -13,430 282,634 99,728 0 178,270 177,519 0 126,819 105,115 54.7 8.4 9.9 25.8 54.7 For further data queries on Citi's full coverage universe please contact CIR Data Services Asia Pacific at CIRDataServicesAsiaPacific@citi.com or +852-25012791 15 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Executive Summary Leading infrastructure developer The GMR group is one of the leading infrastructure developers in India with interests in airports, roads, and power plants. The Government of India has been steadily opening up the infrastructure sector to private participation over the last decade or so. An early mover in the infrastructure space, GMR has captured attractive project opportunities. A prime example is the Hyderabad International Airport which was among the first to be handed out to the private sector for development. GMR won this project on attractive terms i.e. only 4% revenue share to the government vs. the Delhi Airport project which has ~46%. According to Plan Documents, the government is aiming for infrastructure investments of US$494bn in the 11th Plan (FY07-FY12), representing 130% growth over that under the 10th Plan (FY02-FY07). Currently owns / is developing/ has won the bid for: 3 airports – Delhi, Hyderabad, Istanbul 11 power plants – gas, naphtha, LSHS, coal-fired plants, hydropower plants 6 roads – 3 annuities and 3 toll road projects Figure 2. GMR – Value pie Real estate , 19% Initiating with Buy (1M), target price of Rs187 We initiate coverage on GMR Infrastructure shares with a Buy / Medium Risk (1M) rating and an NPV-based target price of Rs187. The stock, having corrected ~47% from its peak, trades at a discount to our target price and offers an expected total return of ~32% from current levels. We estimate airports and airport-related real estate form 47% of GMR's value, followed by real estate at 19%, power plants at 18%, and roads at 5%. GMR also has ~$1bn cash on its books. We expect GMR's earnings to grow at 51% CAGR over the next three years on the back of a 37% growth in revenues. Airports + Airport linked real estate, 47% Power plants, 18% Roads, 5% Cash on books, 12% Source: Citi Investment Research Airports form ~47% of GMR's value; Delhi and Hyderabad handle 26% of India's passenger traffic GMR holds a 50.1% stake in the Delhi Airport and is currently undertaking the refurbishment and expansion of this airport. Delhi, capital of India, accounts for ~19% of India's passenger traffic. GMR has also built a greenfield airport in Hyderabad which was inaugurated in March 2008 and is fully operational. Hyderabad Airport handles ~7% of India's passenger traffic. Airport returns driven by a) real estate, b) airport financing 1250 acres of airport linked real estate – The Delhi airport's aero-related returns are regulated by a price cap formula which limits its leverage to traffic growth. The key driver of valuations is the right to develop 250 acres of land near the Delhi Airport. While Hyderabad has traffic-linked returns, the right to develop ~1,000 acres of land boosts the value of the project. We estimate that the real estate linked to the airport contributes 23% to the total value. Airport financing structure – GMR intends to sublease the land available at the Delhi and Hyderabad airports for commercial development. It intends to upfront a significant portion of rental values as interest-free refundable deposit. This has come under some debate, as AAI would lose 45.99% revenue share on the deposits. While it is still unclear as to what structure will be adopted, we assume that GMR would take 25% in the form of upfront deposits as we believe that the government will not totally disallow deposits since they would be used to fund the capex and reduce borrowing costs. 16 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 User fee at Hyderabad airport; an issue but largely value neutral - The Hyderabad airport is allowed to charge Rs725 per departing passenger as a User Development Fee. Many domestic airlines have opposed this charge as they say it makes airfares unviable. HIAL has started charging international passengers Rs,1000 and has deferred the charge on the domestic passengers as it tries to explore alternative options. We assume that Rs250 will be charged to domestic passengers and no fees will be charged to the low-cost airlines. In case HIAL is not allowed to charge the domestic passengers at all, our target price would be negatively impacted by less than 1%. Real estate: plans to develop 3,800 acres of land Apart from the 1,250 acres of airport-linked real estate development, GMR intends to build Special Economic Zones on another 3,800 acres of land. Real estate development on these 3,800 acres of land contributes 19% of our estimated value. This value is sensitive to the pricing environment in the property markets. Power plants: ~5,100MW capacity, 84% under development GMR has a portfolio of 11 power plants of which three are operational and eight are under development. We estimate power plants contribute ~18% of the value with majority of the value coming from the Chattisgarh merchant power project. Power plants currently form more than 65% of revenues and profits of GMR, but we expect the revenue and profit mix to skew towards airports going forward as Hyderabad has commenced operations and Delhi Airport is set to ramp up capacity. Aggressive buildup of the asset portfolio; future projects GMR is aggressively building up its asset portfolio. The company has expanded into international markets and is looking to emerge as an infrastructure developer across geographies. GMR led consortium is undertaking the upgrading of the Sabiha Gokcen Airport, Istanbul, Turkey. In India, GMR has plans to bid for road, hydropower and power transmission projects. Key risks – airport financing, real estate prices, interest rates, execution delays Delhi Airport valuations could be adversely impacted if the government does not allow any deposits to be upfronted, as this would entail funding the capex with interest-bearing debt. Softening of real estate prices could also impact the valuations. Any delay in achieving financial closure given the current tight liquidity conditions/high interest rate scenario could delay the project and affect IRRs of the project as returns become backended. Also, many projects could have reset clauses where the lenders have the option of aligning the interest rates to the market determined rate and this would impact IRRs in a rising interest rate scenario. 17 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Valuations DCF-based SOTP target price of Rs187 We have valued each individual project separately based on its equity cash flows discounted using the cost of equity and have arrived at a sum-of-the-parts target price of Rs187. Given the nature of the concession agreement and cashflows of the airports and associated real estate, comparison with global airports on valuation multiples may be misleading, and hence we prefer a DCF approach to value the same. Figure 3. GMR Valuations Operational Assets Airports Hyderabad Airport Delhi Airport Sabiha Gokcen Airport * Power projects GEL Mangalore GPCL Chennai Vemagiri Power Road Projects Tamba-Tindivanam Tuni-Anakapalli Total Assets Under development Power Projects * Alaknanda Holi-Bajoli Talong Orissa Coal Chhatisgarh Coal Orissa Coal - 2 Karnali Marsyangdi Roads Ambala Chandigarh Jadcheria Pochanapalli Ulundurpet SEZ TIDCO Sez Aviation + Multi product Sez Total - Assets under development Grand Total Cash on Books Total Value Source: Citi Investment Research estimates Total Value 137,808 110,885 39,160 4,383 3,691 3,105 850 597 GMR stake 63% 50% 40% 100% 51% 100% 74% 74% Value of GMR stake 86,819 55,553 15,664 4,383 1,883 3,105 629 442 168,478 Value per share 48 31 9 2 1 2 0 0 93 % of Total Value 26% 16% 5% 1% 1% 1% 0% 0% 50% 2.8 1.49 1.13 1.49 1.33 Price to initial Equity 8,033 146 1,138 7,724 22,477 6,211 1,971 5,661 1,487 2,947 2,198 7,917 40,466 40,089 100% 100% 88% 100% 100% 100% 51% 95% 100% 100% 100% 100% 98% 63% 8,033 146 1,001 7,724 22,477 6,211 1,000 5,378 1,487 2,947 2,198 7,917 39,657 25,256 131,433 299,910 39,657 339,568 4 0 1 4 12 3 1 3 1 2 1 4 22 14 72 165 22 187 2% 0% 0% 2% 7% 2% 0% 2% 0% 1% 1% 2% 12% 7% 39% 1.73 0.07 0.69 1.97 6.12 1.58 0.54 1.74 1.60 0.78 1.59 1.20 12% Valuations sensitive to deposit structure, real estate prices a) Deposit structure We assume 25% deposits and 75% in the form of rentals for the Delhi and Hyderabad airports. We do not expect the government to totally disallow the deposit structure, as deposits would reduce borrowing costs. We have run sensitivity on the target price assuming different deposit rates. Assuming no deposit structure, we would derive a 6% lower target price. 18 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 B) Real estate prices The valuation of GMR's portfolio is sensitive to the real estate prices assumed at the Delhi and Hyderabad airports and at Krishnagiri. We assume a price of Rs1bn per acre of land at the Delhi Airport, Rs100mn per acre of land at the Hyderabad Airport, and Rs20mn per acre of land at the Krishnagiri SEZ. Figure 4. GMR – Valuation Sensitivity to Real Estate Prices in Delhi and Hyderabad Land prices (Rs mn per acre) Delhi 500 750 1000 1250 1500 Hyderabad 50 156 162 168 174 180 75 165 171 177 183 189 100 175 181 187 192 198 125 184 190 196 202 208 150 193 199 205 211 217 Source: Citi Investment Research estimates Non levy of UDF on domestic passengers – marginal impact on valuations We assume a UDF of Rs1,000 per departing international passenger and Rs250 per domestic passenger and no charge for low-cost airline passengers. If the government were to disallow any charge on the domestic passengers, the negative impact to our target price would be less than 1%. Figure 5. GMR – Valuation Sensitivity to UDF in Hyderabad International Passengers 500 725 1000 1250 1500 Domestic Passengers 0 180 182 185 187 190 250 182 184 187 189 191 500 183 185 188 190 193 725 185 187 189 192 194 Source: Citi Investment Research estimates If no deposit rates, no UDF... If we were to assume no deposit rates for the Delhi and Hyderabad airports and no UDF for domestic passengers, we would get a target price of Rs176. 19 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 A Scalable Business Model 1991 – An early entrant in infrastructure development Established in 1978, the GMR Group had interests in jute, sugar, ferro-alloys and breweries. The Indian economy was opened up in early 1990s, and the group was quick to seize the opportunity and expanded into infrastructure development. It has set up three power plants, ventured into road projects in 2004, and then subsequently into airport development projects. Figure 6. GMR – Shareholding Structure FIIs, 12% MF/Banks, 7% Promoters, 73% Others, 8% 2007 – Owns three airports, 11 power plants and six roads GMR's portfolio includes three airports: the greenfield Hyderabad Airport (currently under development), the brownfield Delhi Airport (currently being expanded), and the Sabiha Gokcen International Airport in Turkey. The company’s portfolio also includes 11 power plants (three completed, eight under development), including a gas-based plant, a naptha-based plant, and an LSHS-based plant. The portfolio also includes six roads with two annuitybased roads under operation, and one annuity-based and three toll roads under development. Source: Company Figure 7. GMR Group Source: Company, Citi Investment Research 20 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Assets – A Birds-Eye View Comments Key Risk Figure 8. GMR Portfolio of Assets – A Birds-Eye View Name of Project Airports Delhi Airport GMR Stake Current Status 50.1% Operational, Expansion under development Delhi, India's capital - handles 20% of India's Lease deposit Structure of real estate traffic 2 development Aero revenues are regulated, upside from non aero revenues Phase I to be operational by 2010 in time for commonwealth games Right to develop 250 acres of land 45.99% revenue share to be paid to the Government Existing airport has been shut post commencement of operations Only 4% revenue share to be paid to the Government No other airport to be operational within 150km Right to develop 1000 acres of land Consortium to pay Euro 1.932bn as a concession fee Current passenger traffic of 4mn, growing at 40% YoY Annuity Project Already operational Annuity Project Already operational Annuity Project Toll Road Project Toll Road Project Toll Road Project International Regulatory risk Hyderabad Airport 63% Operational Sabiha Gokcen (Istanbul) 40% Operational, Expansion under development Roads Tambavanam - Tindivanam 74% Operational NHAI receivable risk Tuni-Anakapalli 74% Operational NHAI receivable risk Pochanpalli Ambala- Chandigarh Farukhnagar- Jadcherla Tindivanam - Ulunderpet Power Projects GEL Mangalore GPCL Chennai Vemagiri Power Alaknanda Holi-Bajoli Talong Orissa I Orissa II Upper Karnali Marsyangdi Chattisgarh SEZ TIDCO SEZ Aviation SEZ Hyderabad Multi-product SEZ 100% 100% 100% 100% Under Development Under Development Under Development Under Development NHAI receivable risk, construction risk Traffic Risk, construction risk Traffic Risk, construction risk Traffic Risk, construction risk 100% 51% 100% 100% 100% 88% 100% 100% 50.75% 95% 100% Operational Operational Operational Under Development Under Development Under Development Under Development Under Development Under Development Under Development Under Development 220 MW Naphtha Based project 200 MW LSHS based project 387.625 MW gas based project 300 MW Hydropower project. Concession - 45 years 180 MW Hydropower project. Concession - 40 years 160 MW Hydropower project. Concession - 40 years 1050 MW Coal based power project. Concession 25 years 1050 MW Coal based power project. Concession 25 years 300 MW Hydropower project. Concession - 40 years 250 MW Hydropower project. Concession - 40 years 1000 MW Coal based power project. Concession 25 years 3300 acres SEZ targetting Bio-Technology, IT& ITes sector 250 acres SEZ targetting aviation sector. Located in Hyderabad Airport 250 acres SEZ targetting Bio-Technology, IT& ITes sector. Located in Hyderabad Airport Lack of fuel Construction Risk Construction Risk Construction Risk Construction Risk, Fuel linkage risk Construction Risk Construction Risk Construction Risk Construction Risk, Fuel linkage risk 98% 63% 63% Under Development Under Development Under Development Construction Risk, Real Estate prices risk Construction Risk, Real Estate prices risk Construction Risk, Real Estate prices risk Source: Company, Citi Investment Research 2 AAI, DGCA 21 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Business Strategy, Competitive Positioning Early mover into the infrastructure development space The Government of India has been steadily opening up the infrastructure sector to private participation over the last decade or so. While other infrastructure companies have been cautious, GMR has been more aggressive and captured attractive opportunities. A prime case is the Hyderabad International Airport, which was among the first ones to be handed out to the private sector for development. GMR won this project on attractive terms i.e. 4% revenue share to the government whereas Delhi Airport has ~46% revenue share to the government. Spread by asset class, revenue mix and geography GMR follows a deliberate strategy of diversification across asset classes to moderate risk from a slowdown in activity in any particular sector. It also strives to have a balance of revenue streams between fixed versus variable streams. A good mix of fixed-revenue projects (i.e. annuity roads) and variable streams (toll road projects) results in reasonably stable revenues and cash flows. Regulated-returns projects like the power plants help provide stability to the profitability of the company. GMR has bid for projects across India which would help lower the risk of any geographical/regional slowdown or hurdle. Financial engineering and risk management skills GMR has demonstrated significant financial engineering skills in bidding for projects, structuring financing for projects as well as churning capital by securitizing cash flows and reinvesting those in newer projects. Broadening horizons; going to international skies GMR is expanding into international markets and is looking to emerge as an infrastructure developer across geographies. It has bid for and won the Sabiha Gokcen Airport in Turkey. It is looking to develop airports as its core business and intends to bid for more international airports. Forging alliances to bid for projects GMR has entered into joint ventures / tie-ups with many international companies to enable it to bid for projects in new areas. It has tied up with Malaysia Airports Holding Berhad, United Engineers (Malaysia) Berhad, Fraport AG, Limak Insaat Sanayi San Ve Tic A.S. to be able to bid for the airport projects. Execution capabilities – best in class GMR has a good execution track record with experience in every asset class. The company already commissioned the Hyderabad Airport before time. The frenetic pace of work at the Delhi Airport and the progress with their projects demonstrates strong execution capabilities and project management skills, in our view. 22 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Hyderabad Airport – A Profitable Asset 63% 11% 13% 13% Figure 9. HIAL Shareholding Structure GMR Infrastructure Malaysia Airports Holdings BHD Airports Authority of India Govt. of Andhra Pradesh Source: Company GMR won the right to develop a new greenfield airport at Hyderabad in 2004. The new airport has been recently inaugurated and has commenced operations. The erstwhile airport has been shut with immediate effect. The new airport is located at Shamshabad, which is~ 25 Kms from Hyderabad City center. GMR currently holds a 63% stake in GMR Hyderabad International Airport Ltd (GHIAL), an SPV formed for this purpose. An 11% stake is held by Malaysia Airports Holdings Berhard (MAHB) which will provide expertise for operation of the airport. The Airport Authority of India and Government of Andhra Pradesh hold 13% each. GMR has awarded the construction contract of airside and landside development to L&T and the passenger terminal building to China State Construction Engineering (HK) Ltd. Airport capacity Phase I expected to have a capacity to handle 12mn passengers p.a. and 100,000 tonnes of cargo p.a. Ultimate capacity is expected to be 40mn passengers p.a. The Hyderabad Airport (Phase I) has a capacity to handle 12mn passengers p.a. and 100,000 tonnes of cargo p.a. The development of the airport beyond Phase I will be triggered by actual traffic volume. The master plan envisages a modular development of the facilities based on this traffic trigger principle. The plan also includes a low-cost terminal to cater to the demand from low-cost airlines. Key features:  Deferred revenue share of 4% – The airport will have to pay 4% revenue share to AAI. However, the revenue share is deferred for the first 10 years of operations, and the accrued amount is payable in the subsequent next 10 years in 20 equal half-yearly installments without the payment of interest.  No competing airport within 150kms – Current airport has been shut down after the commissioning of the new airport. No airport would be allowed to function within 150kms of GHIAL for 25 years from the commissioning of Airport.  Concession period – The concession period is 30 years from airport opening date and the same is extendable by another 30 years at the option of the airport.  State government support – The Hyderabad airport has been given to the private sector on the viability gap funding principle. The government is helping GHIAL with the land acquisition. The government has also given a grant of Rs1.07bn and an interest free loan of Rs3.15bn.  Land lease agreement – 1,000 acres of land has been provided to GHIAL on lease for commercial development. GHIAL has right to sub-lease and collect lease rents from third parties and to create a mortgage or charge over the leased portion of the land. The lease term shall be the same as the airport concession term. No lease rental shall be payable by GHIAL for initial seven years of commercial operations. Lease rentals to be payable on an annual basis from the eighth year of commissioning @ 2% of the base land cost of Rs1.55bn, which shall be escalated (from the 8th year of COD) @ 5% p.a. Regulated stream of aeronautical revenues  Aeronautical revenues – Airport charges include landing charges, housing charges, parking fees, passenger service fee, and user development fees (UDF). Aeronautical revenues would be determined and regulated by MoCA. 23 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008  Landing, housing and parking charges – These charges would be higher of AAI tariff effective 2001 duly increased with inflation index up to the Airport Opening Date (AOD), or prevalent tariffs at AAI airports. These are based on aircraft weight category up to 100 MT and above 100 MT and are different for domestic and international flights.  Passenger Service Fee (PSF) – The existing PSF of Rs200 per outgoing passenger is currently charged at the Indian airports. For foreign currency tickets, the charge is US$5 per outgoing passenger. Of the Rs200 collected, 65% or Rs130 is a pass-through amount payable to the CISF for providing security services, while the balance 35% (Rs70) is retained by the airport.  User Development Fee (UDF) – The new greenfield airport policy allows the airports to levy a User Development Fee (UDF) at the new airport to encourage private sector participation in greenfield airports. GHIAL is allowed to levy an UDF of Rs725 from all outgoing passengers for providing passenger amenities, services and facilities. However, there has been some pushback on this charge from domestic airlines as this would lead to increase in domestic fares – especially low-cost fares going up substantially – even by a third. Hyderabad Airport has decided to charge Rs1,000 per departing international passengers and have deferred decision on the charge for domestic passengers as they try and explore other options like charging on a graded basis depending on distance travelled, or charging a lower amount to low cost airlines We assume that Rs1,000 will be charged per international passenger and Rs250 will be charged to domestic passengers and no fees will be charged to the low-cost airlines. Non-aero revenues – significant upside potential Private sector participation in the airport development has led to the unlocking of the potential of the non-aeronautical revenues in the airport – an area hitherto not focused on by the Airports Authority of India (AAI). GHIAL has already tendered concessions for these revenue streams and they are listed below. 24 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 10. Hyderabad Airport – Non-Aeronautical Revenues Revenue Stream Cargo Handling Operations In-flight Kitchen Fuel Farm Business Hotel (308 Room) Duty Free Retail F&B Airport Advertising Lounge Management Ground Handling Car Parking MRO Contract JV with Menzies Aviation Plc. Concessions for build, operate & maintain to LSG Sky Chefs & Sky Gourmet for 20 years Concession for operation and maintenance to Reliance Industries Ltd for 7 years Accor Hotels and Resorts, Singapore, to operate under the name "Novotel Hyderabad Airport" Concession awarded to JV of Nuance Group & Shoppers Stop to set up, operate & maintain for seven years F&B concession awarded to FMS Host, Blue Foods and Gelato Agreement for advertising services was signed with Laqshya Tied up with Plaza Premium Lounge of KL to operate lounges at airport for seven years Concession awarded to two consortiums, namely, Menzies -Bobba and Air India-SATS for seven years Awarded management contract to Tenaga Parking (India) Pvt. Ltd. Land leased to Indian Airlines for shifting of existing facilities, Term sheet signed for setting up a base maintenance MRO Source of Revenue 51% Revenue Share to GMR Revenue share + lease rentals from space leased Royalty from sale of ATF Revenues to accrue to GHIAL - 4% of Gross revenue to be paid as operator fee to Accor Revenue share + lease rentals from space leased Revenue Share 50% Revenue Share + Rs145mn Deposit from Laqshya 15% Revenue Share + 10% of spend per pax as lease rentals 25 % Revenue Share Revenues to accrue to GHIAL - 4% of Gross revenue to be paid as operator fee to Tenaga Source: Company, Citi Investment Research Development rights for 1,000 acres of land GHIAL has been given property development rights for 1,000 acres of land located near the airport. GHIAL can develop hotels, resorts, recreational and entertainment facilities etc. GHIAL has appointed CPG of Singapore to develop the Master Plan for property development. The draft report has submitted by CPG in September 2007. GHIAL has also received in-principle approval from the Government of India for setting up the two SEZ's (250 acres each) within the airport site. GHIAL would develop a multi-product SEZ targeting IT & IT enabled services, biotechnology, textiles and electronics industries. It would also develop aviation sector specific SEZ targeting aircraft maintenance, manufacturing, assembling or repair of avionics components. The Andhra Pradesh State has recommended the Notification of aviation SEZ to Government of India. The final approval from Government of India is awaited. Project development plans and progress Initial phase completed in March 2008 – The Phase I of the project involved expanding the capacity to 12mn passengers. In this phase, a 105,300 sq. m terminal has been constructed. Other buildings, including the Air Traffic Control Tower, Technical Building, Cargo (100,000 tonnes capacity) have also been built. According to the master plan, the airport would ultimately cater to 40mn passengers per annum. To achieve this, the present master plan allows freedom of expansion to both airside and landside facilities within the airport site. 25 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Hyderabad airport under construction Figure 11. Hyderabad Airport – Under Construction Pictures Figure 12. Hyderabad Airport – Under Construction Pictures Source: Company Source: Company Hyderabad airport – Actual pictures post completion Figure 13. Hyderabad – Airport Village – Actual Pictures Figure 14. Airside View with Boarding Bridges & ATC Tower Source: Company Source: Company 26 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 15. Departure Level Figure 16. Domestic Departure Level Source: Company Source: Company Figure 17. Duty Free Area at Departure Level F Figure 18. Car Park Source: Company Source: Company Hyderabad – a growing city Hyderabad has been one of the fastest-growing cities in India. Growth in the IT/ITeS sector, biotechnology sector has spurred development in this city and it is becoming an important center of economic activity in southern India. We expect this to support passenger and cargo traffic growth in the future. 27 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 19. Hyderabad ATM Growth 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 2002 2003 2004 2005 2006 2007 8% 24% 28% ATM Growth 39% 37% 0.45 0.4 0.35 0.3 0.25 Figure 20. Hyderabad Passenger Growth 8 7 6 5 4 0.2 0.15 0.1 0.05 0 2002 2003 2004 2005 2006 2007 3 2 1 13% 10% 0% 27% 36% 40% 30% 26% 20% 49% 60% 50% Source: AAI, DGCA, Citi Investment Research Source: AAI, DGCA, Citi Investment Research Figure 21. Hyderabad - Expected Passenger Growth & Capacity 45 40 35 30 25 20 15 10 5 0 FY09E 0% FY15E FY21E FY27E FY33E Capacity Passengers Growth % 20mn 30mn 40mn Figure 22. Hyderabad – Expected Cargo Growth & Capacity 25% 250,000 200000 MT 14% 12% 10% 20% 200,000 150000 MT 15% 150,000 100000 MT 8% 6% 4% 10% 12mn 100,000 5% 50,000 2% FY09E FY15E FY21E Capacity Cargo FY27E FY33E Growth % 0% Source: Citi Investment Research estimates Source: Citi Investment Research estimates Figure 23. Hyderabad – Expected Aero Revenues Growth (Rsmn) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 FY09E FY14E FY19E FY24E FY29E FY34E 0% 10% 20% 25% Figure 24. Hyderabad – Expected Non-Aero Revenues growth (Rsmn) 35,000 30,000 25,000 15% 20,000 15,000 10,000 5% 5,000 FY09E FY14E FY19E FY24E FY29E FY34E Increase in advertising and car park revenues due to increased capacity 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: Citi Investment Research estimates Source: Citi Investment Research estimates 28 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Delhi Airport – "Capital" Location The Delhi Airport is the second-busiest airport in India, accounting for over 23mn passengers and 420,000MT of cargo in 2007. The airport handles between 20%-21% of total passenger traffic in India. The Delhi airport has a strong "catchment" area as it is located in the capital of the country. Delhi is a hub for economic activities around the northern India and is a popular transit point and destination for tourist traffic. The growing pressure on the existing airport infrastructure propelled the government to undertake its upgrade and modernization, and it invited private participation in this regard. A GMR-led consortium won the Delhi airport in January 2006. The GMR consortium bid for a 45.99% revenue share to the Government of India. Delhi International Airport (P) Ltd (DIAL) was formed, which was mandated to finance, design, build, operate and maintain the airport for a period of 30 years till 2036 with a further option of 30 years. GMR Group holds 50.1%; Airports Authority of India holds 26%; Fraport & Eraman Malaysia hold 10% each; and IDF holds a 3.9% stake. Figure 25. DIAL Shareholding Structure GMR AAI Fraport AG Eraman Malaysia IDF Total Source: Company 50.10% 26% 10% 10% 3.90% 100.00% Airport capacity The first phase is expected to take the capacity of the airport to 37mn passengers per annum (mppa). This phase is expected to be completed by March 2010 in time for the Commonwealth Games. In addition to a new passenger terminal, new runways would also be built to cater to the additional air traffic. Going further, the project aims to achieve an ultimate design capacity of 100mn passengers per annum. Key features  Revenue Share of 45.99% – DIAL will have to pay 45.99% revenue share to AAI and an upfront fee of Rs1.5bn to AAI for the right to develop the airport.  Concession period – The concession period is for 30 years, extendable by another 30 years at the option of the airport.  First right of refusal for any airport within 150kms – During the concession period, GMR will have first right of refusal to develop any new airport being set up in 150kms radius catchments area as long as its bid is within 10% range of the highest bidder.  Tariff structure & regulation – Existing aeronautical charges will continue for two years starting from May 2006. After the two years, a nominal 10% increase would be permitted. After the same, the AERA or GOI shall decide the charge to be permitted as per regulated tariff formula. The formula is a price cap formula, where the target revenue is determined by applying the weighted average cost of capital to the regulatory base for Aero and Reserved Activities and then adding to it (a) the efficient operation and maintenance cost pertaining to Aero services (b) depreciation, (c) corporate tax and subtracting there from 30% of the gross revenue generated from Revenue Share Assets i.e. non-aeronautical revenue excluding property development. Figure 26. Regulated Tariff Formula Regulatory Asset Base Multiply: WACC of 11.66% Regulated returns Add: Efficient operating cost Add: Depreciation Add: Tax Less:30% of Non Aero revenues Aeronautical Revenues Source: Company 29 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008  Land lease – The land of about 5,123 acres and existing airport assets, other than existing leases and carved out assets measuring 100 hectares, are subject to a Lease Deed for the same term as the OMDA (30 + 30 years). Lease Rent of Rs.100/- is payable in advance on April 1st every year. On expiry of lease, all transfer assets will be revert to AAI free of cost on an as is basis. Project development plan and progress Phase I – Involves the rebuilding and refurbishment of existing domestic (T-1) and International Terminal Buildings (T-2). The Phase I is expected to be completed by 2010 in time for the Commonwealth Games. Figure 27. Delhi – Airport Phase I First Parcel of 45 acres – bids invited 250 Acres of Land New Terminal T3 by 2010 New Runway (3) by June 2008 Source: Company Figure 28. Perspective View of the New Terminal Figure 29. Perspective View of the New Terminal Source: Company Source: Company 30 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 30. Existing Terminal Facility – Development Photos Figure 31. Existing Terminal Facility – Development Photos Source: Company Source: Company Figure 32. International Departure Terminal – Area I Commissioned Figure 33. International Departure Terminal – Area I Commissioned Source: Company Source: Company Non–aero revenues to drive growth Since the aeronautical revenues are capped by a fixed-return formula, the nonaeronautical revenues would drive growth for the Delhi Airport. While most of the contracts are being worked upon and tenders are being invited, DIAL has already awarded the advertising contract and the duty-free retail contract to the Times group and the Alpha and Future groups respectively. Figure 34. DIAL – Non-Aero Revenue Streams Revenue Stream In-flight Kitchen Fuel Farm Duty Free Retail F&B Airport Advertising Ground Handling Car Parking Source: Company Contract Revising commercial terms of existing contracts and RFP being issued for additional capacity Response on EOI received. Negotiation of through- put charges in progress Awarded contract to Alpha Airport and Future Group Consortium for 3.25 years Exploring options and devising strategy Awarded contract to Times Innovative Media Pvt. Ltd. for three years RFP initiated RFP being finalized 31 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 35. Delhi Airport – Project Completion Status as of February 2008 Particulars Terminal 1 (Existing Domestic) Construction Activity Arrival Terminal “Expansion “ New Departure Terminal Revamp of Arrival Level Revamp of Departure Level New Runway & Taxiways New Integrated Passenger Terminal Target Mar-08 Aug-08 May-08 May-08 Aug-08 Mar-10 Contract Pratibha Build Sons B.L.Kashyap L&T – Design & Execution Overall Progress 25% 46% 69% Terminal 2 Terminal 3 (New Terminal) L&T – Design & Execution 81% 26% Source: Company Right to develop 250 acres of land The Delhi Airport is spread over 5,123 acres of land. Out of this, DIAL can develop 250 acres of land. The lease period of this land would run contiguous with the lease period of the airport. DIAL plans to sub-lease this land and invite bids for the same in the near future. DIAL has set up Delhi Aerotropolis Pvt Ltd for Property development. DAPL will provide basic infrastructure facilities and supervise the development. DIAL plans to structure the bids in such a way that a portion of the lease rentals would be in the form of upfront interest free deposits. The first parcel of 45 acres would be built as a hospitality district and would include luxury hotels and hotel apartments. It has invited bids for these 45 acres and expects to finalize the bid in the near future. Meanwhile, DIAL is evaluating undertaking land development on its own. 32 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 36. Delhi Airport – ATM Growth 250,000 ATM Growth 24% 21% 20% 150,000 17% 18% 15% 100,000 9% 50,000 10% 5% 0% 2002 2003 2004 2005 2006 2007 30% 25% Figure 37. Delhi Airport – Passenger Growth (Mn) 25 24% 28% 23% 30% 25% 21% 20% 15 13% 10 10% 5 5% 0% 2002 2003 2004 2005 2006 2007 15% 200,000 20 - - Source: AAI, DGCA Citi Investment Research Source: AAI, DGCA Citi Investment Research Figure 38. Delhi Airport – Expected Passenger Growth 120 100 80 60 40 20 FY08E FY14E Capacity FY20E FY26E Growth % FY32E Passengers 37mn 10% 80mn 15% 100mn 20% 25% Figure 39. Delhi Airport – Expected Cargo Growth 700,000 600,000 500,000 400,000 300,000 200,000 5% 100,000 0% FY08E FY14E FY20E Cargo FY26E Growth % FY32E 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: Citi Investment Research estimates Source: Citi Investment Research estimates Figure 40. Delhi Airport – Expected Aero Revenues Growth 40,000 35,000 30,000 25,000 20,000 20% 15,000 10,000 5,000 FY08E FY13E FY18E FY23E FY28E FY33E 10% 0% -10% -20% Aero tariff adjusted in 5 year buckets 70% 60% 50% 40% 30% Figure 41. Delhi Airport – Expected Non - Aero Revenues Growth 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 FY08E FY13E FY18E FY23E FY28E FY33E 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Citi Investment Research estimates Source: Citi Investment Research estimates 33 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Sabiha Gokcen Airport In July 2007, GMR was declared the winning bidder for the Sabiha Gokcen International Airport (SGIA) in Istanbul along with Limak Insaat Sanayi San Ve Tic A.S (Limak) and Malaysia Airports Holdings Berhad (MAHB), through international competitive bidding. The other bidders included major airport operators like Fraport, Venice Airport, TAV, Chicago airports. GMR, Limak and MAHB have 40%, 40% and 20% stake in consortium respectively.  Concession fee: Consortium will pay a concession fee of Euro 1.932bn (approx. Rs110bn) to the Turkey government authority over the duration of concession agreement of 20 years, with no payment due in first three years.  Project cost and funding: The project cost is ~Euro 400mn and the development work is to be completed within 30 months from the award of contract. The project cost is to be funded at debt:equity ratio of 80:20. The financial closure of project is expected to be complete by second quarter of 2008.  Capacity and Development: SGIA has current passenger traffic of 4mn which is growing at 40% yoy. Concession provides for operation of existing facilities (which will be transferred within two months after signing concession agreement) and construction of new international terminal building. Figure 42. Sabiha Gokcen Airport Source: Company 34 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Road and Power Projects Road assets GMR is currently operating two roads and is developing four roads via the BOT route. The portfolio is a balanced mix of annuity and toll roads which provided stable revenues and cash flows. Details of the portfolio are given below: Figure 43. GMR – Portfolio of Road Projects Name of Project Type of Project Status Completion Status Length (Kms) Concession Period (yrs) Concession Start Concession End Commercial Operations Annuity Amount Annuity Payment Type Negative Grant Project Cost GMR Equity Stake Source: Company Tuni-Anakpalli Tandavanam-Tindivanam Annuity Annuity Operational Operational 59 20 May-02 Nov-19 24-Dec-04 Rs.294.8 mn Semi Annual Rs.3040mn 74% 93 20 May-02 Nov-19 11-Oct-04 Rs.418.6 mn Semi Annual Rs.3901mn 74% Pochanpalli Annuity Under Development 20% 86+17 sweetener 20 Sep-06 Sep-26 End of 2008 Rs.541.8 mn Semi Annual Rs.6900mn 100% Ambala- Chandigarh Jadcherla-Faruknagar Tindivanam-Ulunderpet Toll Road Toll Road Toll Road Under Development Under Development Under Development 45% 25% 19% 35 46+12 sweetener 73 20 20 20 May-06 Aug-06 Oct-06 May-26 Aug-26 Oct-26 Mid-08 Mid-08 End-08 Rs1747.5mn Rs.3911mn 100% Rs.827mn Rs.4713mn 100% Rs2505mn Rs.7950mn 100% Power assets The GMR Group entered into the power sector in the mid-1990s. It currently has three power plants and is developing five more power projects.  GMR Power Corporation Ltd: Chennai Power plant – The 200MW low sulphur heavy stock fired plant commenced operations at Chennai, Tamil Nadu in February 1999.  GMR Energy Limited – The 220MW naphtha fired combined-cycle plant commenced operations at Mangalore, Karnataka in June 2001. The plant sells all the electricity generated by the Mangalore power plant to two distribution companies under to a long-term power purchase agreement entered into with KPTCL. This power purchase agreement expires in 2008. The PPA can be extended by mutual agreement. GMR is currently evaluating options for the PPA.  Vemagiri – GMR has also set up a 387.625MW gas-fired combined cycle power plant in Vemagiri in Andhra Pradesh in September 2006. GMR has entered in to PPA with AP Transco, for a period of 15 years from the commencement of commercial operations. This plant was lying idle for want of gas. Under the PPA, while the company could recover fixed costs, they waived that right and chose for the extension of the PPA and the right to sell surplus power not exceeding 17.265 MW to the third parties. Vemagiri has resumed commercial operations from December 2007. Projects under development  Alaknanda Power project (300 MW) – GMR Energy Limited (in consortium with GMR Infrastructure Limited) has bagged the 300MW Alaknanda Hydro electric power project in Uttaranchal. This is the group’s maiden venture into the hydropower sector and also marks its strategic entry into North India. The Project Development Agreement was signed with the Government of Uttaranchal on October 22, 2005. The concession period is 45 years from the implementation agreement. 35 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008  Bajoli Holi Hydro Power Project (180 MW) – GMR has the right to develop a 180MW hydroelectric project in the Chambal district of Himachal Pradesh, or the Bajoli Holi power project, pursuant to a concession that it won on July 28, 2007 through a competitive bidding process. It is a run-of-the-river project with concession period of 40 years. The consortium would provide 12% of the power free of cost to the government of Himachal Pradesh for years 1-12, 18% for years 13-30 and 30% for more than 30 years. Upfront premium of Rs820mn was paid to the Government of Himachal Pradesh.  Talong Hydro Power Project (160 MW) – GMR has won the right to develop a 160MW hydroelectric power project in the Talong district of Arunachal Pradesh. It is a run-of-river project on BOOT basis for a concession period of 40 years. The consortium has offered 14% free power, 1 paisa per KwH additional benefit towards welfare funds of the state and 12% equity in the SPV Project Development.  Orissa Coal-Based Power Project I (1,050 MW (350x3)) – GMR is developing a 1,050MW coal-fired power plant at Kamalanga in the Dhenkanal district of Orissa. The concession period is 25 years from Plant. The Ministry of Coal has recommended linkage for the plant. The consortium has already submitted the application for allotment of coal blocks. The power purchase agreement has been signed with GRIDCO for the purchase of up to 25% of installed capacity. For balance power, the PPA has been signed with Power Trading Corporation (PTC).  Orissa Coal-Based Power Project II (1,050 MW) – GMR is developing another 1,050MW coal-fired power plant at Kamalanga in the Dhenkanal district of Orissa. The concession period is 25 years from Plant. Coal Allocation has been obtained in the Rampia & Dip Rampia obtained for 1,000MW capacity.  Chhattisgarh 1,000 MW coal-based power plant – GMR Energy Ltd has signed an MoU with the Government of Chhattisgarh (GoC) on June 4, 2007, for setting up a 1,000MW coal based thermal power plant in the state. As per the terms of the MoU, the State is entitled to avail 5% of net energy annually at variable cost as determined by the appropriate regulatory commission and has the right to purchase up to 30% of power from the project for a period of 20 years. The detailed project report is being prepared. The state government shall provide all necessary assistance for development of the project and extend all incentives which other industrial projects avail. The state government has also recommended to Ministry of Coal for the coal linkage to the plant.  Upper Karnali (300MW) Hydropower Project - GMR led consortium has bagged the 300MW Upper Karnali Hydro electric power project in Nepal through the International Competitive Bidding route. A consortium comprising GMR Energy Limited, GMR Infrastructure Limited (GIL) and Italian-Thai Development Project Co. has signed a Memorandum of Understanding (MoU) with the Goverment of Nepal, for developing the 300 MW Upper Karnali Hydro electric project, in Nepal.  Marsyangdi Hydro Electric power plant (250MW) – GMR recently acquired 95% stake in the Marsyangdi hydro power plant in Nepal. 36 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Real Estate – Key Driver of Value Right to develop 5,050 acres of land GMR currently has rights to develop 5,050 acres of land. It can develop 250 acres of land in the Delhi airport, 1,000 acres of land in the Hyderabad Airport and also has rights to develop three Special Economic Zones. Figure 44. GMR – Property Development Rights Location Delhi Airport Hyderabad Airport Hyderabad Airport SEZ (2 nos) TIDCO SEZ Total Source: Company, Citi Investment Research Acres 250 1,000 500 3,300 5,050 Delhi Airport – 250 acres of prime property DIAL has entered in to a lease agreement with the Government of India wherein it can develop 250 acres of land within the Delhi Airport. DIAL planned to sub-lease this land and invite bids for the development rights for the same in the near future. DIAL had identified the first parcel of 45 acres would be built as a hospitality district and would include luxury hotels and hotel apartments. It had invited bids for these 45 acres. DIAL planned to structure the bids in such a way that a large component would be in the form of interest-free deposits. AAI had sought legal opinion on the deposit structure as it entailed that AAI would lose revenue share on the value of the real estate development rights as it would be in the form of a capital receipt. The Solicitor General of India had given his opinion that the deposit structure should be allowed under certain conditions. Given this uncertainty, it is not clear what route DIAL would take to monetize the real estate. The company is also considering options of developing the entire land parcel on their own. Our assumptions:  Bid for development rights to be invited – we assume that DIAL would invite bids for the development rights.  25% deposits + 75% rentals structure – We have assumed that the bids would be structured in a way that 25% would be in the form of interest-free deposit and 75% in the form of rental revenues. The AAI would be entitled to 45.99% revenue share on the 75% rentals structure.  NPV per acre assumed to be Rs1bn – We have assumed that the bid for these parcels would be start with Rs1bn and go up to Rs1.2bn. NPV of Rs1 bn translates to Rs66 per sq ft per month as rental value in line with the prevailing rates of the commercial values in Delhi and Gurgaon area (assuming an FSI of 3). We assume parcel of 45 acres to be tendered in FY09E, 105 acres in FY10E, and balance 100 acres in FY12E. 37 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 45. Delhi Commercial Property Rental and Capital Values Central Business District Prime Central Business District Others South Delhi Prime South Delhi Micromarkets Gurgaon - Prime Noida Office Rental Values 330 230 218 164 113 49 Office Capital Values 46851 30699 29095 22514 14378 6518 Outlook Market rising Market rising Market rising Market rising Market rising Market rising Source: "Cushman and Wakefield, Office Snapshot – December 2007" Figure 46. Delhi Real Estate Assumptions Assumptions Available area (acres) Price per acre FSI Sq ft Super built up Price per sqft Land cost Construction cost Development Margin % Selling price per sq ft Lease Rentals for commercial Property Effective lease rentals per month per sqft Source: Citi Investment Research FY09E 45 1,000 3 5.88 7.64 5,886 5,886 1,500 1,477 8,864 798 66 FY10E 105 1,100 3 13.72 17.84 6,475 6,475 1,665 1,628 9,768 879 73 FY11E 100 1,271 3 13.07 16.99 7,483 7,483 1,848 1,866 11,197 1,008 84 3 30% 1500 20% 9% 12 Hyderabad 1,000 acres + two SEZs of 250 acres each Airport site – 1,000 acres Under the concession agreement, GHIAL has the right to develop 1,000 acres of property within the airport site. The lease period would be the same as the concession period i.e. 30+30 years, and permitted development includes commercial as well as residential development. GHIAL has still not finalized the property development plan. We have assumed:  GHIAL would invite bids for sub-leases for the 1,000 acres. It would invite bids for 350 acres in FY09E, 350 acres in FY11E, and the balance 300 acres in FY13E. All development would be commercial. We have assumed 25% of real estate proceeds would be in the form of interest free deposits.  Price per acre to be Rs110mn in FY09E, Rs120mn in FY11E and Rs144mn in FY13E. This would translate to lease rentals between Rs19-25 per sqft per month (assuming an FSI of 2). This is in line with the current prevailing rates for commercial property in peripheral regions like Gachbowli and Madhapur in Hyderabad. 38 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 47. Hyderabad – Commercial Property Values Central Business District Prime Prime Suburban Surburban Madhapur/Gachibowli Office Rental Values 52 60 35 42 Office Capital Values 6250 7200 4200 5040 Outlook Market rising Market rising Market rising Market rising Source: "Cushman and Wakefield, Office Snapshot – December 2007" Figure 48. Hyderabad Real Estate Assumptions Assumptions Total land for commercial development (acres) Selling price Floor Space Index (FSI) (#) Available sqft Loading factor Effective Square feet Land cost per sqft Construction cost per sqft Development Margin % Selling price per sq ft Lease Rentals for commercial Property Effective lease rentals per mth per sqft Source: Citi Investment Research Rs mn per acre 2 20% FY09E 350 100 2 30.5 20% 37 957 1,200 431 2,588 233 19 FY11E 350 120 2 30.5 20% 37 1,148 1,320 494 2,961 267 22 FY13E 300 144 2 26.1 20% 31 1,377 1,452 566 3,395 306 25 1200 20% 9% Aviation and multi-product SEZ of 250 acres each GMR has received in-principle approval from Government of India for setting up the two SEZs (250 acres each). It plans to build an Airport Multi-Product SEZ targeting IT & ITeS, bio-technology, textile and electronics industries and an aviation Sector Specific SEZ targeting: aircraft maintenance; manufacturing, assembling or repair of avionics components. The state government has recommended the notification of Aviation Sector Specific SEZ to GOI. We have assumed selling price of Rs100mn per acre. 3,300 acres SEZ in Krishnagiri Tamil Nadu GMR has signed an MOU with Tamil Nadu Industrial Development Corporation (TIDCO) for Development of Multiproduct SEZ at Krishnagiri District in Tamil Nadu. The SEZ will be spread over 3,300 acres and will be developed through an SPV which will be a JV with TIDC0. The SPV will have active support from the state government & TIDCO for land acquisition and timely implementation of the project. The SEZ will house Bio Technology, IT & ITES, Traditional electronics & engineering companies. We have assumed selling price of Rs20mn per acre. 39 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Future Projects Airports GMR is looking to expand its airports business by bidding for more airports. The company is looking at a balanced mix of brownfield and greenfield projects. It is also considering opportunities for the operation, management and development of airports outside India. Power GMR is focusing on projects with a diversified fuel mix, including thermal and hydroelectric projects. The company also intends to bid for Ultra Mega Power Projects, which are projects that have an expected capacity in excess of 4,000MW each. GMR is exploring a number of international opportunities, including in Eastern Europe and Nepal. Urban infrastructure and highways GMR is pre-qualified to bid for five new road projects, each of which would involve the widening of an existing four-lane toll road project to six lanes. The company is looking to bid for railway infrastructure projects including projects related to India’s Dedicated Freight Corridor and projects sponsored by Rail Vikas Nigam Ltd. GMR is also pursuing a number of international opportunities for road projects. 40 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Financial Statements and Analysis Revenues to grow at 37% CAGR over FY08E-11E, airports to dominate revenue mix going forward. Contribution from power projects dominate the revenue mix and currently contribute 60-70% to GMR's total revenues. We expect that from FY08E onwards, airports would start contributing significantly to the top line as the new Hyderabad Airport has started operations and there would be a ramp-up in the Delhi Airport operations. Figure 49. GMR Revenue Mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY07A FY08E Airport FY09E Roads FY10E Power FY11E 8% 8% 30% 23% 44% 53% 61% 69% 12% 6% 62% 36% 50% 10% 29% Figure 50. GMR Revenue Growth Percentage 60,000 50,000 40,000 30,000 25% 20,000 10,000 6% 0 FY07A FY08E FY09E FY10E FY11E 0% 20% 10% Sharp jump due to commencement of Hyderabad airport 60% 50% 47% 39% 40% 30% Source: Citi Investment Research estimates Source: Citi Investment Research estimates EBITDA margins to expand sharply We expect GMR's EBITDA margins to expand sharply on the back of contribution from the Delhi and Hyderbad airports. These airports have high EBITDA margins as they are profitable and key costs are capital costs. Figure 51. Delhi and Hyderabad Airports 70% 60% 51% 50% 42% 40% 30% 20% 28% 26% 43% 47% 57% 58% 55% Figure 52. GMR EBITDA Margins EBITDA margins 70% 60% 50% 40% 30% 20% 34% 46% 55% 57% 59% 10% 0% FY08E FY09E FY10E FY11E FY12E Delhi airport EBITDA Margins Hyderabad airport EBITDA Margins 10% 0% FY08E FY09E FY10E EBITDA margins FY11E FY12E Source: Citi Investment Research estimates Source: Citi Investment Research estimates 41 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Profits to grow at 51% CAGR over the next three years We expect GMR's profitability to grow at a CAGR of 51% over FY08E-11E. This would be driven largely by the contribution of the Hyderabad, Delhi and the Sabiha Gokcen airports as these are high-margin assets with real estate rental values also boosting profitability. Figure 53. Airports as a Percentage of Total PAT 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 FY08E Airport profits FY09E Total PAT FY10E FY11E Airport profits as a % of total PAT 16% 58% 75% 80% 68% 70% 60% 50% 40% 30% 20% 10% 0% Source: Citi Investment Research estimates Well capitalized for planned projects GMRs has $1bn of cash on books, and we believe it is well capitalized for funding requirements of the projects on hand. The wide base of assets, each at a different stage of execution, gives GMR the bandwidth to churn capital, reducing the need to raise funds from the capital markets. 42 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 54. Consolidated Financials Profit and loss account Income from Electrical Energy Income from Airport Operations Income from Roads Net Revenue EBITDA EBITDA margin Depreciation Interest PBT Tax PAT Minority PAT after Minority Balance Sheet Net Block Net working capital Cash Total Assets Shareholder's fund Minority Interest Loans Interest Free deposit Current liabilities Total Liabilities Cash Flow Reported PAT Change in Net Working Capital Cash Flow from Operations Cash Flow from Investing Activities Cash Flow from Financing Activities Increase/(Decrease) in Cash Source: Citi Investment Research estimates FY07A 11,949 5,880 1,653 17151 5,620 32.8% (1,346) (1,441) 2,833 (415) 2,418 (673) 1,744 FY07A 29,000 (1,300) 13,000 62,385 19,923 5,261 37,057 0 0 62,385 FY07A 1,744 1,811 5,044 (19,647) 20,846 6,243 FY08E 14,525 4,812 1,578 20,916 7,144 34.2% (2,299) (1,408) 3,436 (659) 2,777 (668) 2,110 FY08E 44,527 (851) 80,497 126,956 63,923 6,616 56,416 0 0 126,956 FY08E 2,110 (449) 3,816 1,075 62,606 67,496 FY09E 15,378 13,634 1,831 30,843 14,235 46.2% (4,382) (3,216) 6,637 (1,349) 5,287 (1,119) 4,168 FY09E 112,712 (709) 113,158 228,965 79,262 12,218 116,170 21,070 245 228,965 FY09E 4,168 (457) 8,094 (73,029) 97,596 32,661 FY10E 15,418 22,506 4,934 42,858 23,455 54.7% (6,315) (4,558) 12,583 (2,717) 9,866 (2,813) 7,053 FY10E 178,270 (118) 99,728 282,516 89,209 15,906 126,819 49,945 637 282,516 FY10E 7,053 (1,039) 12,328 (71,863) 46,105 (13,430) FY11E 15,309 33,151 5,221 53,681 30,609 57.0% (7,178) (9,935) 13,496 (2,648) 10,849 (3,546) 7,303 FY11E 200,587 (270) 123,933 329,110 100,083 20,035 147,471 60,445 1,076 329,110 FY11E 7,303 357 14,837 (29,485) 38,853 24,205 43 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Risks We rate GMR shares Medium Risk. The rating differs from the High Risk rating suggested by our quantitative risk rating system, which tracks 260-day historical share price volatility. This is primarily because GMR has an existing asset base which has strong, recurring and stable cashflows. It also has assets under various stages of development which would contribute to revenues and profits once they come onstream which provides with good visibility. Key risks that could prevent the shares from reaching our target price include: Airport-related risks Real estate development GMR intends to sublease the land available at the Delhi and Hyderabad airports for commercial development. It intends to structure the transaction by which a significant portion of the value would be in the form of an upfront interest-free refundable deposit and the remaining portion in the form of rental revenues over the life of the concession. Under the concession agreement, AAI3 is entitled to 45.99% of revenue share on the rental revenues. In case of the Delhi airport, AAI had sought legal opinion on the deposit structure as it entailed that AAI would lose revenue share on the value of the real estate development rights as it would be in the form of a capital receipt. The Solicitor General of India had given his opinion that the deposit structure should be allowed under certain conditions. However, it is not clear what route GMR would take to monetize the real estate. While it is still unclear as to what structure will be adopted, we believe that the government will not totally disallow deposits and they would be used to fund the capex and reduce borrowing costs. We assume that GMR would take 25% of the rental values in the form of upfront deposits and the remainder in the form of annual rentals. Impact if no deposits allowed - Our estimates indicate that there is a downside of 6% to our target price if the government does not allow any portion of the real estate development to be upfronted. In-principle approval for Jewar airport in Noida; a threat to Delhi airport The proposed greenfield airport at Jewar near Greater Noida has received inprinciple approval of the Cabinet late last year. While the Delhi airport (DIAL) has a right of first refusal on this airport, i.e. it can match the highest bid if it bids within 10% of the highest bidder, we believe that there is a risk if DIAL loses the bid for this airport as it will pose a threat to traffic estimate projections of the Delhi airport. UDF Hyderabad – contentious, but marginal impact on value The Hyderabad Airport is allowed to charge Rs725 per departing passenger as a User Development Fee. Many domestic airlines have opposed this charge as they say it makes airfares unviable – especially in the case of low-cost airlines as it raises ticket prices by at least a third. HIAL for now has started charging international passengers Rs1,000 and has agreed to defer the charge on the 3 Airports Authority of India. 44 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 domestic passengers as they try and explore other options like charging on a graded basis depending on distance travelled, or charging a lower amount to low-cost airlines. We assume that Rs1,000 will be charged per international passenger and Rs250 will be charged to domestic passengers, and no fees will be charged to the low-cost airlines. Regulatory risk India does not have an airport regulator yet. The bill for setting up an Airport Economic Regulatory Authority (AERA) has been tabled only recently in Parliament. AERA will regulate tariff and other charges for aeronautical services rendered at airports and monitor performance standards of airports. It would be a new regulator regulating an evolving sector in India. This could lead to some amount of regulatory uncertainty in the future (though given the country's dire need of infrastructure, we expect the regulatory regime to be conducive to investments in the sector. Other sectors where returns are regulated suggest that there may be delays in the approval process from the regulator which can hurt profitability. Traffic Risk Any slowdown in passenger traffic will hurt financial performance of the airports. We have assumed passenger traffic to grow at 13% over next five years at Delhi, and Hyderabad Airport to increase by 16% over the same period. Other Risks Real estate prices The valuation of GMR is sensitive to real estate prices in Delhi, Hyderabad and SEZs. While currently the outlook for the commercial rental values in these areas is strong, any slowdown in the near future could impact the lease rates and hence the valuation of the company. Financial closure risks Several of GMR's projects are in the initial planning stages. GMR has signed the MoU's/ agreements with respective authorities and has been granted rights to develop these projects. However, since financial closure has not been achieved, delays/failure could cause increase in interest rates and hence the cost of the project. Project execution risks The construction business is fraught with project risks. Any delays in project execution could lead to cost overruns and invocation of performance guarantees by the client which could affect the financial performance of GMR. For example, there could be strict penalties if the airports do not come up on time as per the concession agreement. BOT projects BOT projects have commercial risks. Errors in traffic estimates, which are a source of revenue for toll-based projects, would have an adverse impact on the overall profitability of projects. An increase in material costs and interest costs could also affect IRRs. 45 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Interest rates Rising interest rates would hurt the profitability of the projects as it would impact the IRRs of the projects. Most projects have reset clauses where the lenders have the option of aligning the interest rates to the market determined rate and this would impact IRRs in a rising interest rate scenario. Increasing competition There are a number of companies who are growing from being a pure contractor to being the developer of the project. Increasing competition is forcing companies to bid for projects with lower returns. Power project risks The Chhattisgarh power plant is a merchant power plant hence recovery of fixed charges is not guaranteed by power purchase agreement unlike the other power plants. Failure to operate the plant at desired PLF or failure to sell power at assumed tariff rates will result in value erosion. Any delays in implementing the hydroprojects could affect NPV's of the project. 46 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Quant View GMR Infrastructure (GMRI.BO) – Glamor GMR Infra lies in the extreme corner of our glamour quadrant of our valuemomentum map with weak relative valuation and strong momentum scores. In spite of a trend earnings growth of 34%, a trailing PE of 130x gives it a weak valuation score relative to the region. On both the momentum and valuation front, GMR Infra lags behind its peers in the Indian market and the Industrials sector. From a systematic macro exposure analysis, GMR Infra favors a rise in commodity prices (except oil); falling Asian interest rates; falling yields in the emerging markets and a stronger Yen against the US dollar. Rader Screen Quadrant Definitions Glamor Poor relative value but superior relative momentum Unattractive Attractive Superior relative value and superior relative momentum Contrarian Figure 55. Radar Quadrant Chart History 1.0 0.8 31-Jan-08 4-Apr-08 31-Oct-07 31-Jul-07 Figure 56. Radar Valuation Momentum Ranks 1.0 0.8 0.6 0.4 0.2 0.0 May'06 Aug'06 May'07 Aug'07 Feb'06 Feb'07 Nov'06 0.6 0.4 0.2 - - 0.2 India 0.4 0.6 0.8 1.0 Industrials Comp Momentum Source: Citi Investment Research Source: Citi Investment Research Figure 57. Radar Model Inputs IBES EPS (Actual and Estimates) FY(-2) FY(-1) FY0 FY1 FY2 Source: Worldscope, I/B/E/S na 0.40 1.11 1.04 1.39 Implied Trend Growth % Trailing PE (x) Implied Cost of Debt (%) StdMktCap 34.4 130.1 4.68 (0.05) Figure 58. Macro Sensitivity Region Local Market Sector Growth Outperforms Value SmallCaps Outperform LargeCaps Widening US Credit Spreads Source: Citi Investment Research 0.98 0.96 (1.79) (0.33) 1.15 (0.04) Commodity ex Oil Rising Oil Prices Rising Asian IR's Rising EM Yields Weaker US$ (vs Asia) Weaker ¥ (vs US$) 0.36 0.00 (0.50) (0.80) 0.11 (0.69) 47 Citigroup Global Markets  Equity Research Nov'07 Value Feb'08 Poor relative value and Superior relative value poor relative momentum but poor relative momentum 30-Apr-07 India Infrastructure – Airports 10 April 2008 GMR Infrastructure Company description The GMR Group is one of the leading infrastructure developers in India with interests in airports, roads, and power plants. The Government of India has been steadily opening up the infrastructure sector to private participation over the last decade or so. An early mover in the infrastructure space, it has captured attractive project opportunities. A prime example is the Hyderabad International Airport, which was among the first to be handed out to the private sector for development. GMR won this project on attractive terms i.e. only 4% revenue share to Government versus the Delhi airport project which has ~46%. According to Plan Documents, the government is aiming for infrastructure investments of US$494bn in the 11th Plan (FY07-FY12), representing 130% growth over that under the 10th Plan (FY02-FY07). Investment strategy We initiate coverage on GMR shares with a Buy / Medium Risk (1M) rating and an NPV-based target price of Rs187. GMR is a leading infrastructure developer in India – its portfolio includes three airports (Hyderabad, Delhi and Sabiha Gokcen International Airport in Turkey), 11 power plants, and six roads. We estimate airports and related real estate comprise 47% of GMR's value, other real estate 19%, power plants 18%, and roads 5%. GMR also has ~$1bn cash on books. We expect GMR's earnings to grow at 51% CAGR over FY08E-11E on the back of a 37% growth in revenues. In India, GMR has plans to bid for road, hydropower and power transmission projects. GMR is looking to emerge as an infrastructure developer across geographies. A GMR-led consortium is undertaking the upgradation of Sabiha Gokcen airport in Turkey. Valuation We have valued each individual project separately based on its equity cash flows discounted using the cost of equity and have arrived at a sum-of-theparts target price of Rs187. Given the nature of the concession agreement and cashflows of the airports and associated real estate, comparison with global airports on valuation multiples may be misleading, and hence we prefer a DCF approach to value the same. Airports and related real estate comprise 47% of GMR's value, other real estate 19%, power plants 18%, and roads 5%. GMR also has ~$1bn cash on books. Risks We rate GMR shares Medium Risk. The rating differs from the High Risk rating suggested by our quantitative risk rating system, which tracks 260-day historical share price volatility. This is primarily because GMR has an existing asset base which has strong, recurring and stable cashflows. It also has assets under various stages of development which would contribute to revenues and profits once they come onstream which provides with good visibility. Key risks that could prevent the shares from reaching our target price include: 1) Airport financing structure issues, 2) competition from rival greenfield airport plans, or from other project developers, 3) UDF pricing risks, 4) regulatory risks, 5) traffic growth risks, 6) Softening of real estate prices 7) delay in achieving financial closure, 8) Rising interest rates, 9) project execution risks. 48 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 GVK Power and Infrastructure (GVKP.BO) 1M Rs38.90 Rs56.00 44.0% 0.0% 44.0% Rs54,688M US$1,367M Buy/Medium Risk Price (09 Apr 08) Target price Expected share price return Expected dividend yield Expected total return Market Cap Initiating at Buy – Geared to Fly  Initiating at Buy (1M), TP of Rs56 – GVKPIL is one of the leading infrastructure developers in India with a portfolio of assets including the Mumbai Airport, Jaipur-Kishengarh Expressway, six power plants, one coal mine and one SEZ. We initiate coverage with a Buy / Medium Risk (1M) rating and a target price of Rs56. Post the ~54% correction from the peak, the stock offers an upside of 44% from current levels to our target price. We estimate Mumbai Airport forms 48% of value, power plants 23%, roads 14% and others 16%.  Mumbai airport; 48% of value with real estate development biggest value driver – Mumbai Airport is the busiest in India, handling over 22% of India's air traffic. With upside from aero revenues limited, non-aero revenues and real estate development of 20mn sqft are key value drivers for the airport.  Airport financing: uncertain structure – GVK intends to upfront a portion of the real estate rentals on airport land in the form of deposits to fund airport capex. A similar structure at the Delhi Airport has come under some debate as AAI would lose revenue share on deposits. While it is still unclear as to what structure will be adopted, we assume that GVK would take 25% in the form of upfront deposits in line with our assumption for GMR. No deposit structure would yield a target price of Rs47, 16% lower than our current target price.  Risks – Airport financing, risk of competition from new airport, delay in financial closure, high interest rates, execution delays. Figure 1. GVKPIL – Statistical Abstract Year to 31-Mar FY06A FY07A FY08E FY09E FY10E Net Profit Rs mn 109 580 1,279 1,565 2,267 Diluted EPS Rs 1.00 0.62 0.91 1.11 1.61 EPS growth (%) Na -38% 47% 22% 45% P/E (x) 39 64 43 35 24 P/B (x) 10 7 2 2 2 ROE (%) Na 9% 8% 6% 7% Yield (%) 0 0 0 0 0 Price Performance (RIC: GVKP.BO, BB: GVKP IN) Source: Citi Investment Research estimates 49 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Fiscal year end 31-Mar Valuation Ratios P/E adjusted (x) EV/EBITDA adjusted (x) P/BV (x) Dividend yield (%) Per Share Data (Rs) EPS adjusted EPS reported BVPS DPS Profit & Loss (RsM) Net sales Operating expenses EBIT Net interest expense Non-operating/exceptionals Pre-tax profit Tax Extraord./Min.Int./Pref.div. Reported net income Adjusted earnings Adjusted EBITDA Growth Rates (%) Sales EBIT adjusted EBITDA adjusted EPS adjusted Cash Flow (RsM) Operating cash flow Depreciation/amortization Net working capital Investing cash flow Capital expenditure Acquisitions/disposals Financing cash flow Borrowings Dividends paid Change in cash Balance Sheet (RsM) Total assets Cash & cash equivalent Accounts receivable Net fixed assets Total liabilities Accounts payable Total Debt Shareholders' funds Profitability/Solvency Ratios (%) EBITDA margin adjusted ROE adjusted ROIC adjusted Net debt to equity Total debt to capital 2006 na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na na 2007 63.0 na 4.7 0.6 0.62 0.62 8.33 0.25 3,806 -2,640 1,167 -631 621 1,157 -250 -328 580 580 1,972 na na na na 1,963 806 552 -11,083 -9,432 0 9,172 7,479 0 52 27,595 631 0 21,227 17,035 0 15,446 10,561 51.8 na na 140.3 59.4 2008E 42.7 32.7 2.2 0.0 0.91 0.91 17.49 0.00 4,282 -2,880 1,402 -307 309 1,405 -126 0 1,279 1,279 2,195 12.5 20.2 11.3 47.3 2,676 793 1,224 -21,598 -23,097 0 20,811 5,371 0 1,888 48,366 2,519 0 43,532 21,086 0 20,816 27,280 51.3 7.9 3.8 67.1 43.3 2009E 34.9 13.8 1.9 0.0 1.11 1.11 20.31 0.00 12,679 -8,812 3,867 -2,365 400 1,901 -224 -112 1,565 1,565 5,838 196.1 175.8 166.0 22.3 3,585 1,971 -62 -19,441 -19,027 0 20,451 18,046 0 4,595 71,356 7,115 0 60,588 39,994 0 38,862 31,362 46.0 5.9 6.9 101.2 55.3 2010E 24.1 13.0 1.6 0.0 1.61 1.61 24.36 0.00 15,965 -11,500 4,465 -2,379 865 2,950 -252 -432 2,267 2,267 7,142 25.9 15.5 22.3 44.8 5,312 2,677 -64 -19,492 -18,690 0 18,881 15,450 0 4,702 92,616 11,816 0 76,601 55,124 0 54,312 37,492 44.7 7.2 6.1 113.3 59.2 For further data queries on Citi's full coverage universe please contact CIR Data Services Asia Pacific at CIRDataServicesAsiaPacific@citi.com or +852-25012791 50 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Executive Summary Leading infrastructure developer GVKPIL is one of the leading infrastructure developers in India. GVK's portfolio of assets includes the Mumbai International Airport, a toll road, six power plants, one coal mine and one Special Economic Zone. With an increasing proportion of India's infrastructure capex now happening via the Public/Private Sector Participation route, we expect that the opportunity landscape for the infrastructure developers is expanding. GVK looks well placed to capitalize on this opportunity. Initiating at Buy (1M), target price of Rs56, upside of 44% We are initiating coverage on GVKPIL shares with a Buy / Medium Risk (1M) rating and an NPV-based target price of Rs56. Post the 55% correction from the peak, the stock offers an expected total return of 44% from current levels. Figure 2. GVK – Value Pie Road , 14% Mumbai Airport – 48% of value, key asset in portfolio Mumbai Airport is a marquee asset in GVK's portfolio; we estimate it forms 48% of the value. Mumbai Airport is India's busiest, handling over 22% of India's air traffic. GVK holds 37% in the Mumbai Airport. The airport is now being upgraded to handle 40mn passengers and 1mn tonnes of cargo. Mumbai Airport , 48% Power plants, 23% Upside from aero revenues limited, so non-aero and real estate at Mumbai are key value drivers Mumbai Airport will have a capacity of 40mn passengers p.a. With the current passengers totaling to ~25mn, the upside from incremental passengers is limited. Moreover, the aero revenues of the airport are regulated by a price cap formula. Non-aero revenues comprising duty free, advertising and retail revenues are value drivers for the airport. The biggest contributor to the value of the airport is the proposed nearby real estate development of 20mn sqft, which is allowed as a part of the concession. Others , 16% Source: Citi Investment Research estimates Airport financing – uncertain structure GVK intends to upfront a portion of the real estate rentals on the 20mn sqft in the form of deposits to fund airport capex. A similar structure at the Delhi Airport has come under some debate as the Airports Authority of India (AAI) would lose revenue share on the value of the real estate development rights since it would be in the form of a capital receipt. While it is still unclear as to what structure will be adopted, we assume that GMR would take 25% in the form of upfront deposits, as we believe that the government will not totally disallow deposits because they would be used to fund the capex and reduce borrowing costs. We expect GVK to adopt the same level of deposits as the basic structure of the concession is the same. A no-deposit structure at the Mumbai Airport would yield a target price of Rs47, 16% lower than our current target price. 51 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Slum rehabilitation – execution risk, but reasonably alleviated Around 276 acres of land inside the Mumbai Airport is slum encroached, which hampers expansion and efficient operations of the airport. Slum rehabilitation in India is a difficult and politically sensitive issue. GVK has given the slum rehabilitation contract to HDIL, who has a track record of successful slum rehabilitation projects. This we believe reasonably alleviates the risk of execution of slum rehabilitation. Moreover, our discussion with the management suggests that the new integrated terminal and the real estate development has been designed to minimize the dependency on any slum rehabilitation. Right of refusal on Navi Mumbai Airport GVK has a right of first refusal over the proposed Navi Mumbai Airport. GVK has the right to match the highest bidder, provided it bids within a 10% range of the highest bid. We believe that the bid for Navi Mumbai Airport would be keenly contested and hence do not impute any value to this option. Winning the Navi Mumbai Airport would be vital for GVK since it would remove any threat of competition for the Mumbai traffic. Power plants – 24% of est. value, gas to flow by July 2008 Jegurupadu II and Gautami Power Plant are ready for commissioning and are awaiting gas availability. The supply of natural gas available in the State of Andhra Pradesh is less than the actual demand. As new power projects are being set up in the State of Andhra Pradesh, the existing quantities of fuel that are currently being supplied are not sufficient to meet the demand of all the power generating companies. Consequently, GAIL has reduced the supply of natural gas to JP-I power project resulting in sub-optimal allocations. GVK has still not received natural gas from GAIL to commission the Jegurupadu-II and GPL power projects. GVK expects gas to start flowing in from July 2008. Delays in gas availability could impact financial performance. Scaling up business in new verticals GVK has been expanding into newer verticals and is bidding for projects in newer areas. GVK has tied up with TIDCO so set up a multi-purpose SEZ in Tamil Nadu. In addition to roads, GVK is also expanding into other areas of transportation such as Mass Rapid Transit System (MRTS), ports, etc. It has been shortlisted for the Hyderabad MRTS Project. Recently, GVKPIL has emerged as the highest bidder for developing a greenfield port at Dahej in Gujarat on a BOOT basis. Risks – airport financing, competition, real estate prices, interest rates, execution delays We believe that GVK valuations would be adversely impacted if the Mumbai Airport financing structure does not allow deposits. There could be a risk to traffic growth at Mumbai Airport if GVK loses the bid for the Navi Mumbai Airport. Delays in gas supply could hurt financial performance. Other risks include delays in financial closure, high interest rates and execution delays. 52 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Valuation DCF-based SOTP target price of Rs56 We have valued GVKPIL on a DCF basis as most of its projects would generate predictable cashflow streams. We have used FCFE approach as each individual project is highly geared and gearing changes rapidly as debt is paid off. Given the nature of the concession agreement and cashflows of the airport and associated real estate, comparison with global airports on valuation multiples may be misleading and hence we prefer a DCF approach to value the same. Figure 3. GVK Valuations Equity Value Operational assets Mumbai Airport JKEL Jegurupadu I Total Assets under development Jegurupadu II GPL Alaknanda Goindwal Sahib Gori Ganga Coal Mine Perambadur Total Total Value Add: Cash on books Net Value 102,816 10,710 2,571 GVK stake 38,042 10,710 2,571 Value % of Total Value 27 8 2 37 48% 14% 3% 65% Price to initial equity invested 0.98 2,044 7,626 4,373 (496) 5,405 2,423 5,488 2,044 3,889 4,373 (496) 5,405 2,423 4,884 1 3 3 (0) 4 2 3 16 53 4 56 3% 5% 6% -1% 7% 3% 6% 29% 94% 6% 100% NA 1.39 1.06 NA 1.19 142,960 73,845 5,000 78,845 Source: Citi Investment Research estimates a) Mumbai Airport: 48% of the total value The Mumbai Airport forms 48% of the total value of GVK. The aero-related returns on the Mumbai Airport are regulated by a price cap formula. The key driver of valuations in the Mumbai Airport is the upside from the value of 20mn sqft of real estate that GVK intends to develop at the airport. Our valuation is sensitive to:  Deposit rates assumed for the real estate development: GVK intends to upfront a portion of the real estate rentals on the 20mn sqft in the form of deposits to fund airport capex. In case of the Delhi Airport (being undertaken by GMR Infrastructure), AAI had sought legal opinion on a similar deposit structure as it would lose revenue share on the value of the real estate development rights upfronted in the form of a capital receipt. While it is still unclear as to what structure will be adopted, we assume that GMR would take 25% in the form of upfront deposits as we do not expect the government to totally disallow deposits since they would be used to fund the capex and reduce borrowing costs. We expect GVK to adopt the same level of deposits as the basic structure of the concession is the same. A no-deposit structure would yield a target price of Rs47, 16% lower than our current target price. 53 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 4. GVK - Sensitivity to Rental Rates Rental Yields 100 130 160 190 220 250 GVK Stock price 47 52 56 61 65 70  Rental values assumed for the 20mn of property development. We have assumed commercial rental yields of Rs160 per sft per month. There could be upside to our estimates if these yields were to go up. 2) Jaipur –Kishengarh Expressway: 14% of the value – a profitable asset. GVK's road project is a profitable project with equity IRRs close to 26%. JaipurKishengarh is a busy traffic corridor and this was one of the first road BOT projects that were given out. Since this is a toll road projects valuations are sensitive to traffic growth. A 1% increase in traffic growth would increase our target price by 4% and a 1% decrease would reduce our target price by 3% Source: Citi Investment Research estimates 3) Power projects: 23% of value Power projects contribute 23% of the value of GVK. GVK has one operational plant (Jegurupadu I ) and the rest are under various stages of development. GVK's gas-based plants (Gautami and Jegurupadu II) have been lying idle for want of gas, but GVK expects gas to flow in by July 2008. Stock down ~54% from peak, upside of 44% to our target price Post the 55% correction from the peak, the stock offers an expected total return o f 44% from current levels to our SOTP-based target price of Rs56. Figure 5. GVK Stock Price Performance 90 80 70 60 50 40 30 20 10 0 Dec-06 Aug-06 Dec-07 Apr-07 Aug-07 Apr-06 Jun-06 Jun-07 Feb-06 Feb-07 Feb-08 Oct-06 Oct-07 Figure 6. Performance vs. Sensex and GMR Stock down ~54% from the peak 200% Outperformance vs the Sensex 150% 100% 50% 0% -50% Underperformance vs GMR -100% Source: Datacentral Source: Datacentral 54 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Company Background GVK Group The GVK group was founded by Mr. G.V. Krishna Reddy, a first-generation industrialist. GVK is a diversified business group with interests in a range of businesses that include power, roads, airports, urban infrastructure, biosciences, hotels and manufacturing. GVK group has equity investments in TAJGVK Hotels and Resorts Limited, GVKPIL, Novopan Industries Limited, GVK Biosciences Private Limited etc. Figure 7. GVK Shareholding Structure FIIs, 26% Promoters, 61% MFs/FIs etc, 5% Others, 8% GVK Power and Infrastructure Source: BSE GVK Power and Infrastructure Ltd (GVKPIL) is an infrastructure development company having assets spanning power, airports and transportation sectors. Figure 8. GVKPIL - Overview GVK Power & Infrastructure Power Jegurupadu I (217MW-mixed fuel) Jegurupadu II (220MW –dual fuel) Gautami Power (464 MW-gas based) Alaknanda (330MW-Hydropower) Goriganga (370MW- hydropower) Goindwal Sahib (540MW, coal based) Tokisud coal mine Airports Transportation Jaipur-Kishengarh Highway (90kms) SEZ Mumbai Airport Perambalur Source: Company 55 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Business Analysis and Competitive Position Leading infrastructure developer GVKPIL is one of the leading infrastructure developers in India. With an increasing proportion of India's infrastructure capex now happening via the Public / Private Sector Participation route, we expect that the opportunity landscape for the infrastructure developers is expanding. GVK seems well placed to capitalize on this opportunity. Early mover in the BOT space GVK group has been an early mover in the BOT space. GVKPIL was awarded one of the first “build, operate and transfer” road projects in India, the JaipurKishengarh Expressway. GVK has capitalized on the early opportunities in the power sector – Jegurupadu I was among the first independent power projects in India to commence operations. Diversified assets, revenues and cashflows GVK's portfolio of assets includes infrastructure projects like the JaipurKishengarh Expressway, Mumbai Airport, coal, gas and hydro power plants. The Mumbai Airport and the Jaipur-Kishengarh highway have traffic-linked revenues, whereas most of the power projects have fixed returns giving stability to revenues and cash flows. Expanding into newer verticals GVK has been expanding into newer verticals and is bidding for projects in newer areas. GVK has tied up with TIDCO to set up a multi-purpose SEZ in Tamil Nadu. In addition to roads, GVK is also expanding into other areas of transportation such as Mass Rapid Transit System (MRTS), ports, etc. It has been shortlisted for the Hyderabad MRTS Project. Recently, GVKPIL has emerged as the highest bidder for developing a greenfield port at Dahej in Gujarat on a BOOT basis. 56 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Mumbai Airport – India's Busiest 37% 10% 27% 26% 100.00% Figure 9. MIAL Shareholding Structure GVK Airports Company of South Africa Ltd Bidvest AAI Total Source: Company The top 7 airports in India handle more than 75% of passenger and freight traffic. Of these, Mumbai is the busiest, handling ~22% of India’s air passenger traffic. Mumbai is the commercial capital of India and serves as an important destination and transit point for both domestic and international passengers and freight traffic. In January 2006, a consortium led by GVK was awarded the mandate to modernize the Mumbai Airport. Mumbai International Airport Pvt. Ltd. (MIAL), a joint venture company owned by the GVK-led consortium (74%) and Airports Authority of India (26%) was formed in March 2006 to manage and develop the airport. Figure 11. Mumbai – Freight Growth 25% 600000 500000 400000 15% MT 300000 10% 200000 5% 100000 0 2002 2003 2004 2005 Domestic 2006 Growth 2007 International 5% 25% Figure 10. Mumbai – Pax Growth 30 25 20 Mn Pax 15% 15 10% 10 5 2002 2003 International 2004 2005 Domestic 2006 2007 Growth 20% 20% 0% 0% Source: AAI, DGCA Source: AAI, DGCA Key features of the concession agreement  Concession period: MIAL is structured on the build–own–operate (BOO) basis with an initial concession term of 30 years with an option of an extension of 30 years at the option of MIAL.  Upfront fee: MIAL has paid Rs1.5bn to AAI as upfront concession fee.  Revenue share: MIAL will share 38.7% of its gross revenues with AAI.  Right of first refusal: The GVK consortium has the right of first refusal of a second airport within 150km radius following a competitive bidding process. If the GVK consortium bids within 10% of the winning bid for a new airport, they have the right to match the bid. This right would be provided for a period of 30 years to the consortium.  Land lease: The Mumbai Airport is located on land measuring ~1,976 acres Mumbai airport can use 10% of this land for commercial development. The land has been taken on a long-term lease of 30 years extendable by another 30 years, contiguous with the concession agreement. 57 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 12. Aero Tariff Increases Aero Assets (Airports Capex) X WACC (11.6%) Add: Operation and Maintenance Expenses Add: Depreciation Add: Tax Less: 30% of Non-Aero Revenues Total Revenues (A) Aircraft Movement (B) Landing Charges = A / B Source: Company  Aeronautical Tariff Structure: The Airports Economic Authority (AERA) will determine the aeronautical charges from FY10 onwards. The approach to economic regulation will be a price cap approach expressed as inflation plus or minus "X", where "X" takes account of both efficiency improvement and the requirement for a return on new investment. The price cap will be set for an initial term of five years and thereafter be reset each five years. The indicative revenue calculations are shown in the side table. Mumbai Airport development plan At present, the Mumbai Airport caters to 25mn passengers and handles around 520,000 tonnes of cargo annually. The master plan has been designed to expand and upgrade the infrastructure at CSIA to cater to traffic of 40mn passengers per year and 1mn metric tonnes of cargo per year. Figure 13. Mumbai Airport – Current Cargo facilities Figure 14. Mumbai Airport -- Planned Aircraft Parking Domestic Terminal International Terminal Cargo Complex (1million tonnes) Integrated Passenger Terminal (40mppa) Main Runway Cross Runway Source: Company Source: Company The master plan envisages  Creation of a brand new terminal building catering to both international and domestic passengers  Construction of a dedicated link from the Western Express Highway to the terminal  Enhancement of the airside facilities by shifting the Air Traffic Control tower and construction of a parallel taxiway  Development of infrastructure on the city-side  Building new cargo facilities  Upgrading of the airside runway facilities such as rapid exit taxiways to increase runway capacity to cater to traffic growth 58 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Cross runway system to be upgraded MIAL currently has a cross runway system. Developing a parallel runway system would be tedious and time consuming as it faces constraints such as slum encroachment, relocation of all existing Air India facilities etc. To improve operations, MIAL will substantially upgrade the existing cross runway operation to meet the increased demand. This cross runway operation would handle 40mn passengers, almost equal to a close parallel runway system. The upgrading of the cross runway would include construction of rapid exit taxi ways, full parallel taxi ways and additional lead-in taxiways. Further, air traffic control procedures and practices are being improved. Figure 15. Mumbai Airport – Perspective Plan Source: Company 59 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 16. Mumbai Airport – Perspective Plan Source: Company L&T appointed contractor to the airport MIAL has given the construction contract for the airport to Larsen & Toubro. The estimated contract value is Rs60bn. The contract covers the new integrated passenger terminal and various airside works. Capex outlay and financing According to the company, the estimated capex is likely to be Rs90bn. This is likely to be funded by equity and internal accruals of Rs17bn, debt of Rs42bn and balance via refundable real estate security deposits. Aero revenues regulated, Non-aero to drive growth Mumbai airport is currently structured under a Hybrid Dual till system. Under this structure, the aeronautical revenues of the airport (i.e. landing charges, parking charges, passenger fees, etc.) are regulated. The existing aeronautical charges defined by AAI would continue till FY10. Thereafter, Airports Economic Authority (AERA) will determine the aeronautical charges based on a price-cap formula. The price cap will be set for an initial term of five years and thereafter be reset each five years. 60 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 30% of non-aero revenues to subsidize landing charges – 30% of nonaeronautical revenues are considered for calculation of the aeronautical charges to be levied to the airlines. This is done on the premise that some of the upside from the non-aero revenues should be passed on to the customer. Duty free and advertising revenues = hidden value The Airports Authority of India which managed the Mumbai International Airport earlier did not focus on developing the non-aeronautical activities of the airport. Once the handover of the airport to MIAL was completed, MIAL has explored various means to increase the non-aeronautical revenues of the airport:  Duty free revenues – MIAL had earlier awarded a concession to a consortium of ITDC and Aldeasa, Spain, for setting up retail duty free outlets at the Mumbai Airport, with a minimum guarantee of Rs5.49bn in concession fees. However, the concession agreement was mutually terminated by both parties and MIAL has subsequently, in November 2007, awarded the duty free concession to DFS Ventures Singapore (Pte) Ltd., with a minimum guaranteed concession fee of Rs2.6bn over the three-year term of the concession.  Advertising revenues – MIAL awarded the contract for advertisement rights the airport to Times Innovative Media (P) Ltd (TIMPL) in March 2007. Times Innovative Media will design, develop and maintain all advertisement locations inside the terminals and in the outdoor premises of CSIA for the next three years. The contract, which covers static advertising sites, aerobridges, baggage trolleys, plasma and LCD screens, is expected to generate Rs.2.4bn for MIAL. Figure 17. Non-Aero Revenues – Upside Already Unlocked 1000 900 800 700 600 Rs mn 500 400 300 200 100 0 FY06 Contract 182 185 867 Contract to DFS for duty free will earn MIAL Rs867 bn p.a. over 3 years 800 Advertising Contract to Times Innovative Media will earn MIAL Rs800mn p.a. over 3 years Duty Free Source: Company Advertising 61 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 18. Mumbai – Pax Growth 50 45 40 35 30 25 20 15 10 5 FY07 FY12E FY17E FY22E FY27E FY32E Airport hits maximum capacity 35% 30% 25% 20% 15% 10% 5% 0% -5% FY37E Figure 19. Mumbai – Freight Growth 1,200 1,000 12% 800 600 6% 400 200 0% FY07 FY12E FY17E FY22E FY27E FY32E -2% FY37E 4% 2% 10% 8% Airport hits maximum capacity 16% 14% Source: Company, Citi Investment Research estimates Source: Company, Citi Investment Research estimates Figure 20. Mumbai – Aero Revenues & Growth % 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 FY07 FY12E FY17E FY22E FY27E FY32E -10% -20% FY37E 20% 10% 0% Aero Tariff adjusted in 5 year buckets 40% 30% Figure 21. Mumbai – Non-Aero Revenues & Growth % 60,000 50,000 140% 40,000 30,000 80% 20,000 10,000 20% FY07 FY12E FY17E FY22E FY27E FY32E 0% FY37E 60% 40% 120% 100% 180% 160% Source: Company, Citi Investment Research estimates Source: Company, Citi Investment Research estimates New airport at Navi Mumbai – implications for MIAL Quick Facts Capacity -55mn passengers per year Completion-2012 Costs – Rs90bn GVK – right of first refusal The proposed greenfield airport at Navi Mumbai would come up by 2012 and have a capacity to handle nearly 55mn passengers annually. It is proposed to be developed with 74% equity participation by the private sector. The Airports Authority of India, the Government of Maharashtra and CIDCO will hold the remainder. The central government has already given its in-principle approval to the project, which is expected to ease overcrowding at the existing Mumbai Airport, which handled over 22mn passengers last year. 62 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Nearly 1,140 hectares (~2817 acres) of land is needed to accommodate the proposed two parallel runways, with provision for full-length taxiways on either side of the runways. The airport will handle the largest general commercial aircraft presently in use and will be compatible with the International Civil Aviation Organisation’s (ICAO) Code 4E. The location of the Navi Mumbai Airport seems to be under debate. According to media reports, the Ministry of Environment and Forests have refused to give its nod for the Maharashtra government's proposal to clear the mangroves cover for the development of international airport. City & Industrial Development Corporation (Cidco), which is a nodal agency for the proposed airport, has selected Louis Berger for preparing masterplan for the Navi Mumbai Airport. The airport is estimated to cost Rs90bn. GVK has the right of first refusal for the Navi Mumbai Airport We believe that the bid for Navi Mumbai Airport would be a keenly contested one and hence do not impute any option value to the right of first refusal at this point GVK has a right of first refusal over the proposed Navi Mumbai Airport. GVK has the right to match the highest bidder, provided it bids within 10% range of the highest bid. We believe that the bid for Navi Mumbai Airport would be keenly contested and hence do not impute any value to this option. Winning the Navi Mumbai Airport would be vital for GVK since it would remove any threat of competition for the Mumbai traffic. 63 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Real Estate – Key Value Creator The Mumbai International Airport is located on land measuring 1,976 acres, of which land to the extent of 10%, i.e. 197 acres, can be utilized for commercial development. MIAL plans to build only 20mn square feet of commercial property on these 197 acres. The land has been given on a long-term lease of 30 years extendable by another 30 years contiguous to the concession agreement for the airport. 197 acres – can be developed Only 20mn sqft will be developed Slum rehabilitation contract given to HDIL 276 acres of land out of the total 1,976 acres of Mumbai Airport land is encroached by slums. This poses a significant obstacle to the upgrading of the airport as well as blocks of prime real estate. MIAL has recently awarded the slum rehabilitation contract to HDIL. This was a competitive bid and HDIL won on account of having successfully completed slum rehabilitation projects and having access to 50 acres of free land within 2-3 kms from the airport on which the slum dwellers can be relocated. An estimate of the hutments that need to be relocated ranges between 65,00085,000. This contract would entail no cash outflow for MIAL. On successful completion of the rehabilitation, HDIL would receive development rights on 65 acres of land. These rights are contingent on minimum rehabilitation requirements. MMRDA has been appointed as a nodal agency. Figure 22. Slum Rehabilitation Timeline Phase 1 Time frame (months) 6-36 months 6-18 months 18-24 months 24-36 months 36-48 months Upto 48 months Land freed(acres) 158 78 20 60 118 276 2 Total Source: Company 20mn sqft of commercial development over 10 years starting FY11 MIAL plans to develop around 20mn sqft at the airport over 10 years starting from FY11. Given the fact that Mumbai Airport is a land-constrained airport, it does raises questions as to whether the company will be able to build so much on the available land.  FSI applicable on all 1,976 acres of land and not only on free land. This means that the company can build 86mn sqft over the total airport land. Given that a large part of airport land will be open space, the company can undertake vertical development on the land not used for airport operations – effectively "loading" allowed development on smaller areas.  Commercial development NOT dependant on successful slum rehabilitation. MIAL has around 100 acres of land under its control that it can use immediately for commercial development. Further, it has around 52 acres of land which is leased out that can be brought under development. So to develop the 197 acres of land, MIAL only needs ~45.6 acres of land to be freed from slums out of a total of 65 acres that it will get post rehabilitation. 64 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 We have worked out a scenario analysis on the situation if the given land parcels do not become available for development. Worst-case scenario – We assume that MIAL doesn’t get any land from the slum rehabilitation and does not get even the leased land under control. This would lead to MIAL developing the entire 20mn square feet on the 100 acres of land currently under control. This would lead to an FSI of 4.5 which the management states they would be allowed to undertake. Accordingly we can see that the company can effectively "load" the development on available land parcels and still be under FSI guidelines. According to the company, it intends to develop the property over 135 acres of land. Figure 23. GVK Land Development – Possible Scenarios Scenario 1 Worst Case Available land Acres Sqft to be developed (mn) Effective FSI Source: Citi Investment Research 100 20 4.59 Scenario 2 Scenario 3 Slightly better Best Case Available land+ Available land+ Leased out land Leased out land+ Slum –freed land 152 197 20 20 3.02 2.33 Scenario 4 Possible According to company management 135 21 3.57 Rates assumed for calculation on Real Estate Value Since the property development plans of MIAL have not been crystallized, we make the following assumptions to value the real estate of the airport:  MIAL to bid out development rights to builders.  Development mix to be primarily commercial and hospitality in the ratio of 1:1. Under the concession agreement, MIAL cannot develop residential property on the airport land.  Rental Value of Rs160/- per sqft. This translates to effective cost of bare land at Rs15,067 per sqft. This is slightly below the rates that are prevailing for the commercial property. We have assumed lower rates due to following reasons: 1) Development to include hospitality – where the rental yields would be lower than pure commercial property. Absorption of 20mn sqft will be difficult - given that there are also other projects planned in the adjacent BKC area. Industry sources suggest that there is at least 4mn sqft of commercial property coming up in the adjacent Bandra Kurla Complex within the next three quarters. 2) 65 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 24. Real Estate Assumptions Rental Value Assumed (per sqft per month) Annual Rentals Capitalisation rate Capitalized Value (per sft) Construction cost Developers profit margin Cost of bare land ( per sft ) Source: Citi Investment Research Hospitality 120 1440 10% 14400 2000 25% 9520 Commercial 200 2400 9% 26,667 2000 25% 19,333 Our assumptions 160 1920 9% 21,333 2000 25% 15,067 Figure 25. Mumbai –Prime & Grade A Office Rental and Capital Values District Area Average Bare Shell Rent Rs/sqft/month CBD- Nariman Point 440 Worli 400 Lower Parel 310 Bandra Kurla 385 Andheri East 180 Powai - IT space 110 90 75 Average Capital Value 33000 30000 26000 28000 16000 10000 8500 6250 South Central Central Suburban Suburban Suburban Malad (W) Navi Mumbai (IT) Source: Cushman and Wakefield December 2007 Snapshot, Citi Investment Research Deposit structure – under a cloud, but we assume at 25% GVK proposes to fund the airport capex via equity, debt and upfront deposits on real estate. We assume that GVK will tender out the development rights to real estate developers and will raise 25% of the value of rights in the form of refundable security deposits and balance in the form of lease rental values on which it will share revenues with the government. In case of the Delhi airport (being undertaken by GMR Infrastructure), AAI had sought legal opinion on a similar deposit structure as it entailed that AAI would lose revenue share on the value of the real estate development rights as it would be in the form of a capital receipt. It is still not clear what route GMR would take to monetize the real estate but we believe that the structure that GMR will undertake will be largely replicated by the Mumbai airport, as the structure of the concession is basically the same. 66 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Other Assets Jaipur Kishangarh Expressway – a good operational asset The Jaipur-Kishangarh BOT road project, a 90km segment of the Golden Quadrilateral National Highways Development Project, was awarded to GVK in December 2001. The project involved conversion of existing two lanes to six lanes of the 90kms Jaipur-Kishangarh section of NH8 in Rajasthan, India. It’s a toll-based BOT project and GVK has a concession period of 20 years, including construction period, for operating and charging tolls. Figure 26. Jaipur–Kishangarh Highway Source: Company Jegurupadu Phase I – operational power plant Jegurupadu Phase I is a 217 MW mixed-fuel combined-cycle power plant at Jegurupadu, Andhra Pradesh. Jegurupadu Phase I commenced operations in the open cycle mode in August 1996 and in the combined cycle mode in June 1997. It was among the first independent power projects in India to commence operations. It has signed an 18-year PPA with APDISCOM which expires in June 2015. It has entered in to a long-term fuel supply agreement with GAIL for natural gas and another supplier for naphtha. Jegurupadu Phase II & Gautami Power – waiting for gas Jegurupadu Phase II – GVK further expanded the capacity at Jegurupadu plant. It has set up a dual-fuel combined-cycle power plant with a 220 MW capacity. The primary fuel used for this phase would be gas and secondary fuel would be fuel diesel oil. The plant has entered in to a PPA with AP Transco for 15 years. The plant is ready for commissioning subject to gas availability. Gautami Power Project – GVK holds 51% stake in Gautami Power Ltd. This is a 464 MW gas-based power plant ready for commissioning subject to gas availability. It has signed a PPA with APDISCOM for a period of 15 years. 67 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Assets under development  Alaknanda Hydro Power project (330 MW) – This is a 330 MW run-of-theriver project on the River Alaknanda. The construction of the plant is in progress. The PPA for this plant has been signed with UPPCL for 30 years. The estimated project cost is Rs20.5bn. The expected completion date is July 2011.  Goriganga Hydro Power project (370MW) – Goriganga Hydro is a run-of-theriver project located over river Goriganga in Uttaranchal. It has been awarded under a competitive bidding process on the basis of upfront payment of Rs125.5mn + 12% free power to the UPPCL. The construction work on this project is likely to start in April 2008 and expected to complete by March 2012. The estimated capital cost is Rs22.7bn.  Goindwal Sahib (540MW) – This is a thermal power plant based in Punjab. Coal requirements for this plant will be supplied by a captive coal mine in Jharkhand. The PPA is with Punjab SEB for a period of 25 years. The estimated project cost is Rs32bn.  Tokisud Coal Mine – GVK is licensed to operate a coal mine in Tokisud, Jharkhand. Expected reserves at the mine are to the tune of 51m tonnes as against the requirement of 2m tonnes per annum. The coal will only be required at the beginning of FY 2010 while the block has already been allotted and hence the company has an option to sell the coal to Punjab SEB for its other requirements.  Perambalur SEZ – GVK has entered into an MoU with Tamil Nadu Industrial Development Corporation Limited (TIDCO), an undertaking of the Government of Tamil Nadu to develop a multi-product Special Economic Zone (SEZ) in Perambalur district. The SEZ will spread over an area of 3,018 acres and will cater to industries such as Textiles / Garments, Leather, Engineering goods, Pharmaceuticals, Power, IT / ITES, Iron & Steel, Fertilizers, Chemicals, etc. The project has received an in-principle approval from the Board of Approvals (BOA) of the Union Ministry of Commerce. 68 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Financial Statements and Analysis Revenues to grow at a CAGR of 63% over next three years We expect GVKPIL's consolidated revenues to grow at a 63% CAGR over next three years as revenues from the Gautami and Jegurupadu Phase II plants would start contributing to the top line. On an ongoing basis, power plants will dominate the revenue mix. Revenues from the Mumbai Airport do not get consolidated in the top line as the holding is only 37%. Figure 27. Revenue Growth 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 FY07A FY08E FY09E FY10E FY11E 12% 26% 15% 0% 50% 100% 150% 196% 200% Commencement of operations of Gautami and Jegurupadu II 250% Figure 28. Revenue Mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY08E FY09E Roads 70% 89% 90% 90% 30% 11% 10% FY10E Power plants 10% FY11E Source: Citi Investment Research estimates Source: Citi Investment Research estimates EBITDA margins to be in the range of 45% going forward We expect GVKPIL consolidated margins to fall from 51% currently to about 45% over FY09E-11E as the revenue mix changes towards power plants. The margins should pick up again from FY12E due to the contribution coming from hydropower plants which have high margins due to no fuel costs. PAT growth to be at 28% CAGR over next three years We expect GVKPIL consolidated PAT to grow at 28% over FY08E-11E. The PAT growth would not be in line with revenue growth as due to high capital costs of these projects. 69 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 29. EBITDA Margins EBITDA margins would contract here due to the change in revenue mix towards power plants 52% 51% Figure 30. GVK PAT Growth PAT 3,000 2,500 2,000 48% 46% 45% 46% 44% 42% 40% 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - 54% 52% 50% PAT to grow at 28% CAGR over next 3 years 1,500 1,000 500 FY07A FY08E FY09E FY10E FY11E 45% FY07A FY08E FY09E FY10E FY11E Source: Citi Investment Research estimates Source: Citi Investment Research estimates Figure 31. GVK Return on Equity %ROE 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 9% 8% 6% 7% 7% ROE's to remain low at ~7-9% initially We expect GVK's ROE's to remain in the range of 7-9% initially as projects have back-ended returns. Funding needs We estimate that GVK would need additional Rs5bn for investments in to its planned projects over the next three years. FY07A FY08E FY09E FY10E FY11E Source: Company, Citi Investment Research estimates 70 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 32. Consolidated Financial Statements (Rs Mn) PROFIT AND LOSS ACCOUNT Operating Revenues Total Operating Expenses EBITDA Depreciation (net of amt withdrawn from grants) Interest Expense Other income / (Expenses) Share of profits from associate (MIAL) PBT Tax PAT Minority interest Recurring PAT BALANCE SHEET Networth Minority interest Secured funds Unsecured funds DTL Total Liabilities Net Block Capital WIP Total Fixed assets Investments (Inclusive of Mial) Deferred Tax assets Cash and Bank Balances Net Current Assets Total Assets Cash Flow PAT Depreciation Working Capital Deffered Tax Assets/Liabilities Operating Cash Flow Investments Capex Investing Cash Flow Debt Equity Reserves Finacing Cash Flow Net Change In Cash Source: Citi Investment Research estimates FY06A 1,529 876 653 269 143 18 259 10 249 140 109 FY06A 5,339 2,621 7,401 565 1,194 17,121 5,509 7,092 12,601 1,322 1 580 2,617 17,121 FY07A 3,806 1,834 1,972 806 631 285 336 1,157 250 908 328 580 FY07A 7,831 2,729 11,353 4,093 893 26,899 13,016 8,211 21,227 2,974 2 631 2,065 26,899 FY07A 580 1,271 552 (303) 2,101 (1,652) (9,897) (11,549) 7,479 849 1,171 9,500 52 FY08E 4,282 2,087 2,195 793 307 (13) 322 1,405 126 1,279 1,279 FY08E 24,583 2,697 20,816 270 48,366 32,631 10,901 43,532 1,475 2,519 840 48,366 FY08E 1,279 908 1,224 (621) 2,791 1,499 (23,212) (21,713) 5,371 (1,086) 16,526 20,811 1,888 FY09E 12,679 6,841 5,838 1,971 2,365 (14) 414 1,901 224 1,677 112 1,565 FY09E 28,553 2,809 38,862 270 70,494 41,330 19,259 60,588 1,889 7,115 903 70,494 FY09E 1,565 2,317 (62) 3,820 (414) (19,373) (19,787) 18,046 2,517 20,563 4,595 FY10E 15,965 8,822 7,142 2,677 2,379 63 802 2,950 252 2,699 432 2,267 FY10E 34,251 3,241 54,312 270 92,074 40,383 36,218 76,601 2,691 11,816 966 92,074 FY10E 2,267 3,023 (64) 5,227 (802) (19,036) (19,838) 15,450 3,863 19,313 4,702 FY11E 18,394 10,030 8,364 2,895 3,109 165 1,044 3,568 400 3,168 460 2,708 FY11E 41,038 3,701 75,966 270 120,975 51,253 50,843 102,096 3,735 13,506 1,638 120,975 FY11E 2,708 3,241 (671) 5,278 (1,044) (28,737) (29,781) 21,654 4,539 26,192 1,690 71 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Risks Airport-related risks Airport financing structure We believe that the structure that GMR will undertake will be largely replicated by the Mumbai Airport as the structure of the concession is basically the same GVK intends to sublease the land available at the Mumbai Airport for commercial development. It intends to structure the transaction by which a portion of the value would be in the form of an upfront interest-free refundable deposit and the remaining portion in the form of rental revenues over the life of the concession. Under the concession agreement, AAI is entitled to 38.7% of revenue share on the rental revenues In case of the Delhi Airport (being undertaken by GMR Infrastructure), AAI had sought legal opinion on a similar deposit structure as it entailed that AAI would lose revenue share on the value of the real estate development rights as it would be in the form of a capital receipt. It is not clear what route GMR would take to monetize the real estate, but we believe that the structure that GMR will undertake will be largely replicated by the Mumbai Airport as the structure of the concession is basically the same. We have assumed that 25% of rental revenues would be upfronted in the form of deposits We have assumed that 25% of rental revenues would be upfronted in the form of deposits. We do not expect the government to disallow the deposit structure completely as a higher amount of deposits can replace debt taken from financial institutions and reduce debt –servicing costs – benefiting the airport of which it holds 26% via the AAI. Slum rehabilitation Around 276 acres of land inside the Mumbai airport is slum encroached which hampers expansion and efficient operations of the airport. Slum rehabilitation in India is a difficult and a politically sensitive issue. GVK has given the slum rehabilitation contract to HDIL, which does have a track record of successful slum rehabilitation projects. Moreover, our discussion with the management suggests that the new integrated terminal and the real estate development has been designed so as to minimize the dependency on any slum rehabilitation. Regulatory risk India does not have an airport regulator yet. The bill for setting up Airport Economic Regulatory Authority (AERA) has been tabled only recently in Parliament. AERA will regulate tariff and other charges for aeronautical services rendered at airports and to monitor performance standards of airports. It would be a new regulator regulating an evolving sector in India. This could lead to some amount of regulatory uncertainty in the future (though given the country's dire need of infrastructure, we expect the regulatory regime to be generally conducive to investments in the sector). Other sectors where returns are regulated suggest that there maybe delays in the approval process from the regulator which can hurt profitability. Anecdotally, there have already been objections to the User Development Fee that was proposed to be charged by greenfield Hyderabad and Bangalore airport. The airport had to review its proposed fee and is considering alternate options. 72 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Navi Mumbai Airport – risk of competition The GVK consortium has the right of first refusal of a second airport within 150km radius following a competitive bidding process. If the GVK consortium bids within 10% of the winning bid for a new airport they have the right to match the bid. This right would be provided for a period of 30 years to the consortium if the consortium has not been in a material breach of any terms on the existing airport. We believe that the bid for Navi Mumbai Airport would be a keenly contested one and hence do not impute any option value to the right of first refusal at this point. But winning the Navi Mumbai Airport would be very valuable for GVK as it would reduce the risk of competition from a neighboring airport. Traffic risk Any slowdown in passenger traffic would hurt financial performance of the airport. We have assumed a traffic growth rate of 9% CAGR over next five years. Power projects related risks Gas shortage GVK's Jegurupadu phase II and Gautami plant are lying idle for the want of gas. The supply of natural gas available in the State of Andhra Pradesh is less than the actual demand. As newer projects are being set up in Andhra Pradesh, the existing quantities of fuel that are currently being supplied may not be sufficient to meet the demand of all the power generating companies. Consequently, GAIL has reduced the sup ply of natural gas to JP-I power project. The company expects plant to commence generation from July 2008. Any delay on gas availability would impact the profitability of the projects. Other risks  Real estate prices – The valuation of GVK is sensitive to real estate prices in Mumbai and the Perambalur SEZ. While currently the outlook for the commercial rental values in Mumbai is strong, any slowdown in the near future could impact the lease rates and hence the valuation of the company.  Financial closure risks - Several of GVK's projects are in the initial planning stages. Given current tight credit markets any delay in financial closure could cause increase in interest rates and hence the cost of the project.  Project execution risks – The construction business is fraught with project risks. Any delays in project execution could lead to cost overruns which could impact profitability of the project. For example, if there is a delay in the Mumbai Airport there could be financial penalties which in an extreme case could also trigger the revocation of concession.  BOT projects – BOT projects have commercial risks. Difference in actual traffic versus estimates would impact toll collections and have an adverse impact on the overall profitability of projects. 73 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008  Interest rates – Rising interest rates would hurt the profitability of the projects as it would impact the IRRs of the projects. Most projects have reset clauses where the lenders have the option of aligning the interest rates to the market determined rate and this would impact IRRs in a rising interest rate scenario.  Increasing competition – There are a number of companies who are growing from being a pure contractor to being the developer of the project. Increasing competition are forcing companies to bid for projects with lower returns. 74 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 GVK Power and Infrastructure Company description GVKPIL is one of the leading infrastructure developers in India. GVK's portfolio of assets includes the Mumbai International Airport, a toll road, six power plants, one coal mine and one Special Economic Zone. With an increasing proportion of India's infrastructure capex now happening via the Public / Private Sector Participation route, we expect that the opportunity landscape for the infrastructure developers is expanding. GVK looks well placed to capitalize on this opportunity. Investment strategy We are initiating coverage on GVKPIL with a Buy / Medium Risk (1M) rating and a NPV-based target price of Rs56. Post the 55% correction from the peak, we believe the stock offers significant upside from current levels. Mumbai Airport forms 48% of value, power plants 23%, roads 14% and others 16%. We expect GVKPIL's consolidated revenues to grow at a 63% CAGR over next three years and PAT to grow at 28% over FY08E-11E. Valuation We have valued GVKPIL shares on a sum-of-the-parts basis, with each part valued using DCF as most of its projects would generate predictable cashflow streams. We have used an FCFE approach as each individual project is highly geared and gearing changes rapidly as debt is paid off. Given the nature of the concession agreement and cashflows of the airport and associated real estate, comparison with global airports on valuation multiples may be misleading and hence we prefer a DCF approach. Mumbai Airport forms 48% of value, power plants 23%, roads 14% and others 16%. Risks We rate GVK shares Medium Risk. The rating differs from the High Risk rating assigned by our quantitative risk rating system, which tracks 260-day historical share price volatility. We prefer Medium Risk primarily because GVK has an existing asset base which has strong, recurring and stable cashflows. It also has assets under various stages of development which would contribute to revenues and profits once they come onstream which provides with good visibility. Key risks that could prevent the shares from reaching our target price include: airport financing structure issues, the complexities of slum rehabilitation, regulatory risks (including lack of a dedicated airport regulator), competition, traffic risk, real estate prices, interest rates, and project execution delays 75 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Appendix I: Roads – Steady Build-Out To modernize India's national highways and the network of trunk roads linking major economic centers, the National Highways Authority of India (NHAI) devised the National Highways Development Project (NHDP) in FY99 to undertake the NHDP Phase I and NHDP Phase II projects. Rs540bn of road spending was funded through a mix of taxes on petrol, multilateral assistance, as well as through market and private participation Quick Facts: India has second-largest road network (3.3mn km) in the world Roads now carry 85% of passenger traffic and 70% of freight traffic New plans announced to drive growth Highways make up just 2% of the overall road network by length, but account for around 40% of traffic The government has ambitious plans drawn up for NHDP Phases III to VII, with most of the projects likely to be undertaken through BOT model, where the central government would extend up to 40% of the project cost as a grant. In addition, there have been discussions about extending taxes on petrol and diesel beyond 2018 to meet the financing requirements.  NHDP Phase III (Investment – Rs652bn): Will provide connectivity to important places not covered under NHDP Phase-I&II. This includes connectivity of numbers of State Capitals with NHDP Phase-I&II, highdensity corridors, places of tourist and economic importance etc. The Phase III will be implemented on a Build-Operate-Transfer (BOT) basis and, depending on the project; the central government can extend up to 40% of the project cost as a grant. Figure 33. NHDP Phase III NHDP Phase-III NHDP Phase-III A NHDP Phase-III B Source: NHAI Length (In Km) 4000 6000 Target date of Completion Dec. 2009 Dec. 2012  NHDP Phase IV (Investment – Rs278bn): The largest highway project to be undertaken by NHAI, covering 20,000km, includes constructing and converting existing highways into two-lane highways with paved shoulders. This project would require an estimated investment of Rs278bn. The project would be executed from 2005-06 for completion by 2014-15.  NHDP Phase V (Investment – Rs412bn): Under NHDP-V, the Committee on Infrastructure has approved the six-laning of the four-lane highways comprising the Golden Quadrilateral and certain other high density stretches, through PPP's on BOT basis. These corridors have been fourlaned under the first phase of NHDP, and the programme for their six-laning will commence in 2006, to be completed by 2012. Of the 6,500 km proposed under NHDP-V, about 5,700 km shall be taken up in the GQ and the balance 800 km would be selected on the basis of approved eligibility criteria. The proposed investment is estimated at Rs412bn.  NHDP Phase VI (Investment – Rs167bn): Constructing 1,000km of expressways that would require Rs167bn in investment.  NHDP Phase VII (Investment – Rs167bn): Undertaking the task of building ring roads, bypasses, over-bridges, flyovers, etc, on certain stretches of highway. The estimated investment is Rs167bn. 76 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Figure 34. NHDP – Phases NHDP Phase NHDP Phase I&II NHDP Phase III NHDP Phase IV NHDP Phase V NHDP Phase VI NHDP Phase VII Total Particulars GQ, NSEW corridors, others 4- Laning 2-Laning 6- laning of selected stretches Development of expressways Ring roads, bypass, grade separators, Service roads etc Length 13,146 10,000 20,000 5,000 1,000 NA Estimated Cost(Rs bn) 540 652 278 412 167 167 2,216 Source: "Financing of NHDP ", Report of Core group – Committee on Infrastructure , Citi Investment Research estimates New projects through the BOT route Most of the new projects to be awarded under the NHDP are going to be through the Public/Private Partnership (PPP) route as highlighted below. While this has positive implications for the government in terms of reducing the burden on its finances, it significantly increases the risk profile of the projects as construction companies will now have to invest equity in the projects and assume commercial & financial risk. Figure 35. Future NHDP Phases and Mode of Implementation NHDP Phase NHDP Phase III NHDP Phase IV NHDP Phase V NHDP Phase VI NHDP Phase VII Particulars 4- Laning 2-Laning 6- laning of selected stretches Development of expressways Ring roads, bypass, grade separators, Service roads etc Cash Contracting BOT (Toll) 10,000 5,000 6,500 1,000 BOT (Annuity) 15,000** Length 10,000 20,000 6,500 1,000 To be determined Estimated Cost 652 278 412 167 167 Source: Report of Core Group, Committee on Infrastructure, Citi Investment Research estimates. Note :** To be determined based on budgetary resources and the tolling policy for two lane highways 77 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Appendix II: Power – Industry Analysis India has added 24GW of capacity in the 10 th Plan (51% achievement). India continues to have a peak load deficit of 8.7%, base demand deficit of 7.6% and per capita consumption of power of 824kwh in FY12E. Figure 36. India Capacity Addition by Plan Period Plan Period V (74-79) VI (80-85) VII (85-90) VII (92-97) IX (97-02) X (02-07) XI (07-12E) XII (12-17E) Target (GW) 12 20 22 31 40 41 79 82 Actual (GW) 10 14 21 16 19 21 na na Achievement 82% 72% 96% 54% 47% 51% Growth 39.4% 50.4% -23.3% 15.8% 10.9% Source: CEA and Ministry of Power and Citi Investment Research Figure 37. India Base Demand and Peak Load Deficits 16% 14% 12% 10% 8% 6% 4% 2% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Base Demand Deficit % Peak Shortage % 8.1% 5.9% 6.2% 7.8% 7.5% 8.8% 7.1% 7.3% 11.3% 9.6% 8.4% 13.9% 12.3% 12.3% 11.8% 12.2% 11.2% 11.7% 13.8% 12.3% Source: CEA and Ministry of Power and Citi Investment Research According to the latest figures available from Central Electricity Authority (CEA) in the “Requirement of Equipment & Material for Development of Power Sector” report India is likely to target addition of 86.5GW in the 12th Plan. Correcting the skewed thermal:hydel mix India’s thermal: hydel mix was 65:35 at the end of the 1st Plan and 54:46 at the end of 2nd Plan. The large upfront investment in hydel projects and the cheap availability of coal led to a glut of thermal projects, and skewed the thermal: hydel mix to 71:25 as it stands today. This has led to thermal generation being used for meeting peak loads when it should be used for just base load, thereby causing non-optimal utilization of economic and perishable resources. Hydel power is clean energy that is unaffected by fuel supply concerns and fuel price volatility risks. It enhances India’s security and is ideal for meeting 78 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 peak demand. India plans to correct the imbalance in generation mix from 71:25 in favor of coal/nuclear to 60:40 over the next decade, as this is considered the ideal mix, given the balance between base and peak load deficits. 79 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Appendix A-1 Analyst Certification Each research analyst(s) principally responsible for the preparation and content of all or any identified portion of this research report hereby certifies that, with respect to each issuer or security or any identified portion of the report with respect to an issuer or security that the research analyst covers in this research report, all of the views expressed in this research report accurately reflect their personal views about those issuer(s) or securities. Each research analyst(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this research report. IMPORTANT DISCLOSURES GMR Infrastructure (GMRI.BO) Ratings and Target Price History - Fundamental Research INR 250 200 150 100 50 0 M J J A S ON D J FM AM J J A S O N D J FM AM J J A SO N D J F MA 2006 2007 2008 Covered Rating/target price changes above reflect Eastern Standard Time Not covered # Date Rating *Indicates change. Target Price Closing Price Chart current as of 9 April 2008 GMR Infrastructure (GMRI.BO) Rating History - Global Quantitative Research - World Radar Screen Analyst: Manolis Liodakis, PhD (covered since January 22 2007) INR 250 8 200 6 7 45 3 50 0 M J J A S ON D J FM AM J J A S O N D J FM AM J J A SO N D J F MA 2006 2007 2008 Covered Rating/target price changes above reflect Eastern Standard Time Not covered 9 11 10 100 150 # Date Rating 1: 22 Jan 07 5 2: 7 Feb 07 *NR 3: 25 Apr 07 *9 4: 11 May 07 *10 5: 6 Jun 07 *9 6: 2 Oct 07 *7 7: 6 Nov 07 *8 8: 4 Dec 07 *6 9: 8 Jan 08 *8 10: 6 Mar 08 *10 11: 3 Apr 08 *8 *Indicates change. Target Price Closing Price 74.66 84.70 83.37 86.17 98.19 NA 196.50 258.85 245.10 NA 143.15 Chart current as of 5 April 2008 2 1 80 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 GVK Power and Infrastructure (GVKP.BO) Ratings and Target Price History - Fundamental Research INR # Date Rating *Indicates change. Target Price Closing Price Chart current as of 9 April 2008 80 60 40 20 0 M J J A S ON D J FM AM J J A S O N D J FM AM J J A SO N D J F MA 2006 2007 2008 Covered Rating/target price changes above reflect Eastern Standard Time Not covered Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of an offering of securities of GMR Infrastructure and GVK Power and Infrastructure. Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from GMR Infrastructure and GVK Power and Infrastructure. Citigroup Global Markets Inc. or an affiliate received compensation for products and services other than investment banking services from GMR Infrastructure and GVK Power and Infrastructure in the past 12 months. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following company(ies) as investment banking client(s): GMR Infrastructure and GVK Power and Infrastructure. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: GMR Infrastructure and GVK Power and Infrastructure. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, non-securities-related: GMR Infrastructure and GVK Power and Infrastructure. Citigroup Global Markets Inc. or an affiliate received compensation in the past 12 months from GMR Infrastructure and GVK Power and Infrastructure. Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the Private Client Division, Institutional Sales and Trading, and Investment Banking. For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research product ("the Product"), please contact Citi Investment Research, 388 Greenwich Street, 29th Floor, New York, NY, 10013, Attention: Legal/Compliance. In addition, the same important disclosures, with the exception of the Valuation and Risk assessments and historical disclosures, are contained on the Firm's disclosure website at www.citigroupgeo.com. Private Client Division clients should refer to www.smithbarney.com/research. Valuation and Risk assessments can be found in the text of the most recent research note/report regarding the subject company. Historical disclosures (for up to the past three years) will be provided upon request. Citi Investment Research Ratings Distribution Data current as of 31 March 2008 Citi Investment Research Global Fundamental Coverage (3204) % of companies in each rating category that are investment banking clients Citi Investment Research Quantitative World Radar Screen Model Coverage (9464) % of companies in each rating category that are investment banking clients Citi Investment Research Quantitative Decision Tree Model Coverage (333) % of companies in each rating category that are investment banking clients Citi Investment Research Quantitative European Value & Momentum Screen (598) % of companies in each rating category that are investment banking clients Citi Investment Research Asia Quantitative Radar Screen Model Coverage (2291) % of companies in each rating category that are investment banking clients Citi Investment Research Quant Multi-Factor Model Coverage (0) % of companies in each rating category that are investment banking clients Citi Investment Research Australia Quantitative Top 100 Model Coverage (96) % of companies in each rating category that are investment banking clients Citi Investment Research Australia Quantitative Bottom 200 Model Coverage (198) % of companies in each rating category that are investment banking clients Citi Investment Research Australia Quantitative Scoring Stocks Model Coverage (69) % of companies in each rating category that are investment banking clients Buy 51% 52% 29% 31% 51% 74% 30% 61% 20% 30% 0% 0% 29% 54% 30% 14% 49% 29% Hold 36% 51% 40% 26% 0% 0% 40% 53% 60% 24% 0% 0% 41% 67% 40% 9% 0% 0% Sell 13% 43% 31% 25% 49% 66% 30% 41% 20% 22% 0% 0% 30% 52% 30% 13% 51% 23% 81 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 Guide to Fundamental Research Investment Ratings: Citi Investment Research's stock recommendations include a risk rating and an investment rating. Risk ratings, which take into account both price volatility and fundamental criteria, are: Low (L), Medium (M), High (H), and Speculative (S). Investment ratings are a function of Citi Investment Research's expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating. For securities in emerging markets (Asia Pacific, Emerging Europe/Middle East/Africa, and Latin America), investment ratings are: Buy (1) (expected total return of 15% or more for Low-Risk stocks, 20% or more for Medium-Risk stocks, 30% or more for High-Risk stocks, and 40% or more for Speculative stocks); Hold (2) (5%-15% for Low-Risk stocks, 10%-20% for Medium-Risk stocks, 15%-30% for High-Risk stocks, and 20%-40% for Speculative stocks); and Sell (3) (5% or less for Low-Risk stocks, 10% or less for Medium-Risk stocks, 15% or less for High-Risk stocks, and 20% or less for Speculative stocks). Investment ratings are determined by the ranges described above at the time of initiation of coverage, a change in investment and/or risk rating, or a change in target price (subject to limited management discretion). At other times, the expected total returns may fall outside of these ranges because of market price movements and/or other short-term volatility or trading patterns. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock's expected performance and risk. Guide to Corporate Bond Research Credit Opinions and Investment Ratings: Citi Investment Research's corporate bond research issuer publications include a fundamental credit opinion of Improving, Stable or Deteriorating and a complementary risk rating of Low (L), Medium (M), High (H) or Speculative (S) regarding the credit risk of the company featured in the report. The fundamental credit opinion reflects the CIR analyst's opinion of the direction of credit fundamentals of the issuer without respect to securities market vagaries. The fundamental credit opinion is not geared to, but should be viewed in the context of, debt ratings issued by major public debt ratings companies such as Moody's Investors Service, Standard and Poor's, and Fitch Ratings. CBR risk ratings are approximately equivalent to the following matrix: Low Risk -Triple A to Low Double A; Low to Medium Risk -- High Single A through High Triple B; Medium to High Risk -- Mid Triple B through High Double B; High to Speculative Risk -Mid Double B and Below. The risk rating element illustrates the analyst's opinion of the relative likelihood of loss of principal when a fixed income security issued by a company is held to maturity, based upon both fundamental and market risk factors. Certain reports published by Citi Investment Research will also include investment ratings on specific issues of companies under coverage which have been assigned fundamental credit opinions and risk ratings. Investment ratings are a function of Citi Investment Research's expectations for total return, relative return (relative to the performance of relevant Citi bond indices), and risk rating. These investment ratings are: Buy/Overweight -- the bond is expected to outperform the relevant Citigroup bond market sector index (Broad Investment Grade, High Yield Market or Emerging Market); Hold/Neutral Weight -- the bond is expected to perform in line with the relevant Citigroup bond market sector index; or Sell/Underweight -- the bond is expected to underperform the relevant Citigroup bond market sector index. Performance data for Citi bond indices are updated monthly, are available upon request and can also be viewed at http://sd.ny.ssmb.com/ using the "Indexes" tab. Guide to Quantitative Research Investment Ratings: Citi Investment Research Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets. Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock. The scores are then ranked and put into deciles. A stock with a decile rating of 1 denotes an attractiveness score in the top 10% of the universe (most attractive). A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10% of the universe (least attractive). Citi Investment Research Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks. These factors are detailed in the text of the report. Each month, the Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications). Citi Investment Research Quantitative European Value & Momentum Screen recommendations are based on a European consistent framework to measure relative value and momentum for a large number of stocks across the European Market. Relative value and momentum rankings are equally weighted to produce a European attractiveness score for each stock. The scores are then ranked and put into deciles. A stock with a decile rating of 1 denotes an attractiveness score in the top 10% of the universe (most attractive). A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10% of the universe (least attractive). Citi Investment Research Asia Quantitative Radar Screen and Emerging Markets Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets. Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock. The scores are then ranked and put into quintiles. A stock with a quintile rating of 1 denotes an attractiveness score in the top 20% of the universe (most attractive). A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20% of the universe (least attractive). Citi Investment Research Quantitative Australian Stock Selection Screen rankings are based on a consistent framework to measure relative value and earnings momentum for a large number of stocks across the Australian market. Relative value and earnings momentum rankings are weighted to produce a rank within a relevant universe for each stock. The rankings are then put into deciles. A stock with a decile rating of 1 denotes an attractiveness score in the top 10% of the universe (most attractive). A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10% of the universe (least attractive). Citi Investment Research Quantitative Research Australian Scoring Stocks model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks. These factors are detailed in the text of the report. Each month, the Australian Scoring Stocks model calculates whether stocks are attractive or unattractive relative to other stocks in the same universe(the S&P/ASX 100) and records the 5 most attractive buys and 5 most attractive sells on the basis of the criteria described in the report. For purposes of NASD/NYSE ratings-distribution-disclosure rules, a Citi Investment Research Quantitative World Radar Screen and European Value & Momentum Screen recommendation of (1), (2) or (3) most closely corresponds to a buy recommendation; a recommendation from this product group of (4), (5), (6) or (7) most closely corresponds to a hold recommendation; and a recommendation of (8), (9) or (10) most closely corresponds to a sell recommendation. For purposes of NASD/NYSE ratings distribution disclosure rules, a Citi Investment Research Asia Quantitative Radar Screen or Quantitative Emerging Markets Radar Screen recommendation of (1) most closely corresponds to a buy recommendation; a Citi Investment Research Asia Quantitative Radar Screen or Quantitative Emerging Markets Radar Screen recommendation of (2), (3), (4) most closely corresponds to a hold recommendation; and a recommendation of (5) most closely corresponds to a sell recommendation. For purposes of NASD/NYSE ratings-distribution-disclosure rules, a Citi Investment Research Quantitative Research Decision Tree model recommendation of "attractive" most closely corresponds to a buy recommendation. All other stocks in the sector are considered to be "unattractive" which most closely corresponds to a sell recommendation. Recommendations are based on the relative attractiveness of a stock, they can not be directly equated to buy, hold and sell categories. Accordingly, your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stock's expected relative performance. 82 Citigroup Global Markets  Equity Research India Infrastructure – Airports 10 April 2008 For purposes of NASD/NYSE ratings-distribution-disclosure rules, a Citi Investment Research Quantitative Australian Stock Selection Screen model ranking in the top third of the universe most closely corresponds, subject to market conditions, to a buy recommendation. A ranking in the bottom third of the universe, subject to market conditions, most closely corresponds to a sell recommendation. All other stocks in the universe correspond to a hold recommendation. 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