Event update: GMR Infrastructure (Outperformer) - Airports monetization to unlock value and address debt concern

Event

GMR has monetised a significant minority stake in GMR Airports (GAL) to a group of investors for Rs80bn.

Details

• GMR has signed a binding agreement with Tata Group, GIC Singapore and SSG Capital Management, whereby these investors will bring in Rs80bn through a combination of Rs70bn stake purchase from GMR and Rs10bn primary infusion in GAL. As part of the transaction, GMR is also buying out the 5.86% held by existing PE investors in GAL (cash outflow of ~Rs10.5bn), giving them an exit. The transaction is likely to be completed in about 3 months.
• The post-money valuation for the deal works out to Rs225bn, which comprises base case valuation of Rs180bn and earn-outs of upto Rs44.8bn, linked to achievement of certain conditions and performance metrics over next ~5 years. The recent monetisation of ~10m sqft of land in DIAL to Bharti Realty was one of the key conditions apart from others like scale up in the duty-free business. In the base case, GMR will own 53.5% in GAL, with the share of incoming investors at 44.4% and Employee Welfare Trust at 2.1%. Assuming the valuation rises to Rs225bn, GMR’s stake will rise to 61.7%.
• GMR expects to use monetisation proceeds of Rs70bn for retiring its corporate debt of Rs64bn (net) and funding purchase of 5.86% stake of existing PE investors of GAL. GAL will use fresh proceeds of Rs10bn to partly retire the Rs20bn NCDs at parent level. As a result, GMR’s net debt (ex-FCCBs of Rs21bn) will reduce from Rs200bn to ~Rs130bn (including cash used for purchase of PE stake of 5.86%).
• GMR has proposed to consolidate its holdings in Energy, Highways, Urban Infrastructure and Transportation businesses in a separate entity and demerge the same, making GMR a pure play on Airports.

View

The transaction is positive for GMR, as it firmly establishes a valuation of up to Rs225bn for GAL and provides a large quantum of cash flow for virtually retiring its entire holding company debt. Post de-merger of other businesses, GMR will be attractively positioned as a pure play on Airports with strong growth potential. Maintain Outperformer with SOTP-based TP of Rs23 (at average of airports valuation range). Our target price increases to Rs27 at the upper end of the valuation range.