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The GMR management has adopted an asset-light,asset-right strategy to de-leverage its over-stretched balance sheet. It is planning more asset sales; we estimate R31.7 billion of sale proceeds in FY15. We expect its D/E (debt-equity) ratio to decline from 3x in FY14e to 2.2x in FY15. We upgrade to buy from hold.
Earnings to continue to disappoint: Higher capacity charges from assets being commissioned should start being expensed to the income statement. Almost all its under-execution assets could be commissioned in FY14-15. Bottom-line loss is a key negative,but we expect investors to focus more on balance sheet repair than earnings.
SoTP-based valuation of R28: We value GMR at R28 (previously R26) using a SoTP (sum-of-the parts) methodology. We use DCFdiscounted cash flow(at 13.5% COEcost of equity) to value individual assets,offset by any debt at the corporate level. Company-specific downside risks to our recommendation include delays in asset monetisation,lower-than-expected realisation,cost overruns and delays in commissioning projects that are under execution,and fuel price and availability.
Company background: GMR Infrastructure Ltd is an infrastructure conglomerate with interests in airports,energy,highways and urban infrastructure sectors. In the energy portfolio,the company owns 13 power generating assets (6.7GW),of which five are operational (1.4GW). In the airport sector,the company operates Delhi and Hyderabad airports in India and has a stake in Istanbul Airport in Turkey. The highways portfolio comprises eight operational assets,and one under-construction highway. The company also owns coal resources in Indonesia.
Earnings sensitivity: We have assumed R32 billion of proceeds from assets sales in FY15. A 5% change in Kamalangas PLF (plant load factor) impacts FY14e EPS by 1.9% and FY15e EPS by 8.1%. A 5% change in EMCOs (GMR EMCO Energy Ltd) PLF impacts FY14e EPS by 3.1% and FY15e EPS by 7.2%.
Investment thesis: GMR has in the past,in an attempt to gain market share, invested in various assets primarily in the airport,power,highway and coal segments,both domestically and internationally. However,this strategy has stretched its balance sheet: debt-to-equity as of FY13 was 3x.
The situation worsened to such an extent that the company had to borrow to infuse equity in some of these assets. Additionally,some of these assets had cost overruns and did not come up on time,primarily for reasons outside the companys control,in our view.
The management then decided to change its strategy to an asset light and asset right model,pursuant to which it decided to sell assets to deleverage the balance sheet and recycle its capital. Accordingly,in the last 12 months,GMR has sold several assets. Total debt outstanding corresponding to these assets as of FY13 is R20.5 billion,or roughly 5% of consolidated debt outstanding. The absolute amount of debt reduction is not significant in our view,but the strategy is a move in the right direction.
Potential sale of highway assets: In the last 12 months,GMR has sold two highway assets for R4.17 billion and consequently unlocked equity in these assets. Separately,these asset sales also result in debt reduction on the consolidated balance sheet. We believe there could be additional asset sales in the highway segment,in line with its asset Light strategy.
Monetisation of land parcels at Delhi Airport: GMR has 250 acres of land that was given as an incentive to invest in the development of Delhi Airport. Of this,the company already monetised 45 acres of land in FY10 in a structured deal. Accordingly,the company received an upfront refundable deposit (in the 57th year),a non-refundable infrastructure development deposit,and regular annual lease receipts. Both the deposits are interest-free.
In our estimate,the approximate NPV (net present value) of cash flows at a 13.5% discount over the life of the lease works out to be INR632m/acre. Our checks with real estate consultants in this geography indicate that the current realisable value could be higher than the first phase.
The realisable value also depends on the end-use of the land parcels (commercial,warehouse,hospitality,etc.). In the first phase,a majority of the land was leased to the hospitality industry. However,leasing for commercial development in subsequent phases could realise higher value. We also believe that the timing of such sale could be phased out,and hence we have assumed complete monetisation by 2021.
