Event update: GMR Infrastructure (Outperformer) - Settlement with PE investors in Airports a big positive

Event

GMR Airports Limited (GAL) has settled disputes with PE investors in the airports business.

Details

• SBI Macquarie, Standard Chartered Private Equity, JM Financial Old Lane and others had invested Rs14.8bn in GAL in FY11 and FY12 through subscription of Compulsorily Convertible Preference Shares (CCCPS). GAL is the holding company for GMR’s investments in Delhi, Hyderabad and the upcoming Goa International airports, besides the company holding 17% stake in Delhi Duty Free Services (DDFS).
• GMR/GAL and the above-mentioned PE investors had been locked in arbitration regarding disputes related to conversion of the CCPS since April 2015. GMR/GAL and the PE investors have now reached a settlement and have received the consent award for the same from the arbitration tribunal.
• The total consideration for the settlement is ~Rs48bn, which will be paid as i) conversion of Rs12.3bn into 5.86% equity of GAL at a valuation of Rs210bn and ii) cash payment of the balance CCPS proceeds of Rs35.6bn.
• GMR will take over the balance CCPS liability of Rs35.6bn from GAL. The funding of cash outflow from GMR will be i) through transfer of the remaining airport assets (Cebu, Clark EPC project and Delhi Airport Parking services) to GAL, which will fetch GMR Rs20bn and ii) market borrowings of ~Rs16bn by GMR. GAL in turn will fund this consideration of Rs20bn through issue of NCDs of Rs20bn to the above PE investors and/or their affiliates. Post settlement, GMR Group (including subsidiaries of GMR) would hold 91.95% in GAL with 2.19% held by Employee Welfare Trust and 5.86% by existing PE investors.

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The settlement of the dispute with PE investors in GAL and transfer of balance airport assets to GAL is positive for GMR in more than one ways. It establishes a benchmark valuation of Rs210bn for GAL (in line with our estimate). Also, all airport assets owned by GMR will now be consolidated within GAL. GAL will be the growth vehicle for all future airport assets and has recently emerged as preferred bidder for development of Nagpur airport. Lastly, it paves the way for value unlocking in GAL. The stock trades at 2.3x FY19E P/B. We maintain our Outperformer rating on the stock with our SOTP-based target price of Rs25.