Company update: GMR Infrastructure (Outperformer) - Readying for a take off

GMR’s airports business is on an upswing, as we expect strong traffic growth at the group’s operational assets, Delhi, Hyderabad and Mactan Cebu (Philippines) airports. Growth in passenger traffic will further propel a pick-up in non-aero revenue streams of the airports business. Meanwhile, operating power assets of Warora and Kamalanga are also on the verge of a turnaround, even as we await clarity on the resolution of SDR of Chhattisgarh and Rajahmundhry assets. Also, GMR has been able to monetize assets worth Rs117bn since 2011 and has raised US$300mn through strategic equity infusion in GMR Energy. We believe monetization of road and SIR land assets along with value unlocking in airports would drive meaningful reduction in GMR’s corporate debt of ~Rs49bn. While GMR’s earnings do look weak over FY18-20E, superior performance in airports business and viability of operating assets provide a sanguine outlook on the stock. We maintain our Outperformer rating with a revised-SoTP-based target price of Rs28.

Airports – key value driver: GMR’s Airports business continues to witness robust performance, aided by ~17% CAGR in passenger traffic over FY14-17. Non-aero revenue streams like retail, duty free, food and beverages (F&B) and advertisements too are picking-up, making us hopeful that the segment should emerge as a strong value driver. Captive airport traffic and 2-7x scalability in airport capacity will drive growth in non-aero revenues. GMR has chalked out an accelerated land development schedule at the Delhi and Hyderabad airports for next five years, which in addition to generating cash for expansion will also set a benchmark for the value of the land.

Operating power plants stabilising: GMR’s Warora (600MW) and Kamalanga (1050MW) power plants are close to a turnaround. Improved off take, stabilising coal supplies and favourable tariff orders will drive the turnaround. Starting FY19, we expect these plants to become self-sufficient in their ability to service debt. While Chhattisgarh and Rajahmundhry power plants will continue to remain stressed, post SDR, we do not expect residual funding liabilities on GMR towards them. 

En route to consolidation: GMR has monetized assets worth Rs117bn since 2011 and secured US$300mn strategic equity infusion in GMR Energy. Going forward, GMR plans to monetize its road assets and SIR land holdings and as well as unlock value in its airports business. We believe this will help GMR meaningful reduce it corporate debt of ~Rs49bn. We maintain our Outperformer rating on GMR with a revised SoTP-based target price of Rs28. Key risks: Unfavourable regulatory decisions in airports, adverse fallout of its Rs27bn corporate guarantee given for Rajahmundhry power plant, and slowdown in air traffic.