GMR Infrastructure's Q2FY18 results (Outperformer) - Losses rise on sharp cut in aero tariffs at DIAL

Q2FY18 result highlights

• GMR Infrastructure’s (GMR) Q2FY18 net loss came in at Rs4.2bn, lower than our estimate of net loss of Rs4.6bn, led largely by creation of deferred tax asset in DIAL and also due to stronger margins in the Indonesian mining business (PT GEMS, 30% stake).
• Consolidated EBITDA declined 43.9%yoy to Rs4.4bn (est: Rs3.5bn), and EBITDA margin declined to 30.1% from 52.5% in Q2FY17 (est: 18.6%) led by sharp cut in aero tariff/revenue in DIAL and notional expenses in DIAL (Ind-AS adj. of Rs90-100m and MTM forex loss of Rs700m). Implementation of interim tariff order at Delhi airport from 7^th July-17 led to lower revenue (Rs8bn, -33.5%qoq & -26.6%yoy) and PAT (Rs1.3bn, -44%qoq & -32%yoy) in the airport segment.
• Warora (EMCO) PAT grew 53.4%yoy to Rs178m led by decline in interest cost (-30.1%yoy) due to reduction in borrowing cost and partial repayment of loans. Coal shortage led to lower PLF at Warora at 65.1% (78% in Q2FY17). Kamalanga reported a lower net loss of Rs330m (net loss of Rs1.3bn in Q2FY17) led by improved PLF at 59% (56% in Q2FY17) and decline in interest cost by 13.6%yoy. PT GEMS reported PAT of Rs1.3bn (100% basis, Rs144m in Q2FY17) led by 18.5% growth in sales to 3.2mt and 35% yoy increase in realizations.  
• Net Debt (ex-FCCBs) grew Rs2.2bn qoq to Rs143bn (6.9x FY18E EBITDA).

Key positives: Strong growth in air traffic.

Key negatives: High corporate debt of Rs44.5bn (ex-FCCBs of Rs20bn).

Impact on financials: Increase in FY18E/FY19E net loss to Rs17.7bn/Rs12.6bn from Rs16.1bn/Rs11.7bn.

Valuations & view

Profitability of the two operating power plants of EMCO and Kamalanga has continued to improve due to favourable tariff orders. Completion of SDRs for the stranded assets of Chhattisgarh and Rajahmundry has also stopped the cash burn for GMR. While the ~90% cut in Aero tariffs at DIAL will be a significant drag on earnings, it is unlikely to impact DIAL’s debt service ability given its cash balance of Rs27.8bn and also since there is no principal repayment due till 2022. Further, a favourable outcome of the on-going disputes in the appellate tribunal would lead to an upward revision on DIAL’s aero tariffs.  Likely reduction in corporate debt through asset sales/ value unlocking (e.g. IPO of the Airports business) is a stock trigger. The stock trades at 2.5x FY18E P/B. Maintain Outperformer with a price target of Rs22.