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With a majority of projects on stream and generating cash, GMR could focus on upcoming opportunities to secure future growth.

Within the infrastructure space, offers a good investment opportunity on the back of its capabilities and business model. The increased revenues from its airport business led by new capacities going on stream and the recent commissioning of more than half of its road projects portfolio augur well. Among some recent developments that provide enhanced revenue and profit visibility is the availability of gas from the KG basin, which has provided a fresh lease of life to the company’s power business. Notably, since many of its projects are now operational, the company is expecting higher internal cash accrual, which along with plans to raise funds will enable it to focus on new projects. However, the run up in its stock price on the back of these developments indicates that investments in this stock will need to be made with a long-term perspective.

Airports
GMR is better known for its prestigious airport projects including the Delhi Airport, Hyderabad Airport and Sabiha Gokcen (SGIA) in Turkey. Importantly, its Indian airports put together account for 27 per cent of the total air traffic of the country. The company's airport business is growing fast as new projects have become operational. For instance, the airport segment revenues grew by 156 per cent year-on-year to Rs 1,216 crore in 2008-09. This can be attributed to the commissioning of its Hyderabad airport project in March 2008 and revenues booked from its Turkey airport project. Further benefits are expected to accrue on account of full year operation and expansion of capacities at its Turkey airport. Secondly, led by increasing traffic volumes at its Hyderabad and Delhi airports as well as non-aero (rentals from duty free shops, advertisement income, parking etc) income, revenues are expected to be 30 per cent higher in 2009-10.

The company is expected to complete the greenfield terminal (T3) at Delhi airport before the start of commonwealth games in 2010. This project will increase its present capacity of 22 million passengers to 37 million passengers by 2012, which will later be increased to 100 million. These expansions will help sustain growth in passenger traffic for many years to come. Also, the total area under the airport will now be higher by almost four times as compared to the current area, providing scope for increasing non-aero revenues in the long run. The company has already announced the tenders for food and beverage outlets.

However, all these benefits will start accruing only from 2010-11 onwards, which is assuming a gradual increase in the traffic growth.

Additionally, the company is yet to fully monetise the land attached to these two airport projects measuring 1,750 acres (250 acres in Delhi and 1,500 acres in Hyderabad). Since the company has leased out only about 40 acre of the Delhi airport land to hospitality majors, expect further upsides going ahead.

Meanwhile, the impact of depreciation, interest cost and other fixed overhead, which are typically higher during the project commissioning stages, could eat into GMR’s profits. During 2008-09, the airport business reported net loss of Rs 167.7 crore on this count. While in 2009-10, this business is expected to report profits of about Rs 75-80 crore, it could again report losses in 2010-11 due to the commissioning of the T3 terminus at the Delhi airport. Going ahead, given GMR’s track record, expect it to bid for new upcoming opportunities in this segment.

Energy
The company operates three power projects with total capacity of 808 mw, while another 4,200 mw is at various stages of development. Here, among key recent developments is the allotment of Reliance’s KG basin gas to GMR. Thus, since April 2009, its 388 mw Vemagiri project has been able to record 90 per cent plant load factor (PLF) (against 60-65 per cent in 2008-09), and the company is now planning to sell the additional power (above 80 per cent PLF) on merchant basis, which typically yields higher realisations. The company also intends to expand this facility by 800 mw (by 2012), for which, the land acquisition and environment clearance is in place. Additionally, the benefit would accrue from the company’s move to convert its 220 mw Mangalore power plant from Naphtha to a gas-based plant. This plant is expected to be commissioned by March 2010 and will operate on merchant basis, while costs are likely to be lower by about 50 per cent due to change in fuel mix. Overall, the energy business could double its profits this year due to higher volume and realisations, led by increased share of merchant power sales.
 

ON THE ROAD TO GROWTH
in Rs crore FY08 FY09 FY10E
Net revenue 2,295 4,019 5,050
EBITDA 599 1,067 2,200
EBITDA (%) 26.1 26.6 43.6
Net profit 210 279 554
EPS (Rs) 1.2 1.5 3.0
PE (x) 133.3 106.7 53.3
E: analyst estimates

Roads
GMR has a portfolio of six road projects, of which, three are annuity based and the other three are BOT based road projects, with a combined length of 420 km. During 2008-09, the road segment reported revenue of Rs 152.2 crore. However, here too revenues are expected to be significantly higher this year as road projects measuring 205 km were commissioned only during February and April 2009; another 35 km is likely in November 2008.

On 28 May 2009, the company bagged a 181 km Hyderabad-based BOT project. It is also eying and has pre-qualified for several road projects, which are expected to be awarded by NHAI (worth about Rs 30,000 crore) over the next six to eight months.

Outlook
Across the three segments (airport, power and roads), most of GMR’s projects are now operational leading to better revenue visibility and higher cash generation, which is also positive considering that the company can now target upcoming projects. Additionally, “We are raising (through equity placement) about Rs 5,000 crore in tranches, which will be used for the funding of the upcoming and existing projects. Also, considering that most of our projects are operational, we should be able to generate internal cash of about Rs 1,000-1,200 crore this year,” says Ashutosh Agarwala, CFO strategic finance, GMR Infrastructure.

So, while GMR’s long term prospects look good, the run in the share price (now at Rs 160) has brought it closer to its sum-of-the-parts based value (as assigned by analysts) of Rs 150-200. Investors should hence, consider the stock on dips and with a long-term perspective.

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