GMR Infra: Ready to take off

Turnaround in operations, higher volumes and infusion of funds will drive the company’s profitability

GMR Infrastructure seems to be headed for good times, thanks to the recent fund infusion in its subsidiary and turnaround across its key business verticals. While the fund infusion should ease GMR’s funding issues and provide fuel to fund new projects, analysts believe the operational turnaround in its core businesses should further help GMR churn profits, as compared to an expected net loss in 2010-11.

Although its stock has significantly underperformed broader markets since May last year, it has risen seven per cent in the last week on the back of the announcement. Also, given the improving outlook, it should deliver good returns over the next two years.
 

TURNING AROUND
In Rs crore	FY11E	FY12E
Sales	5,234	6,581
Ebitda	1,340	1,998
Ebitda (%)	25.6	30.4
Interest	909	1,017
Net profit	-72	209
EPS (Rs)	-0.3	0.5
PE (x)	NA

81.8 E:Estimated                           Source: Edelweiss Sec.

EASING FUNDING ISSUE
On March 31, the company announced that private equity firm , Macquarie SBI Infrastructure Investments will invest Rs 893.2 crore into GMR Airport Holding against issue of compulsorily convertible preference shares (CCPS). According to analysts, the funds would be transferred to GMR Infra and GMR Energy through equity share transfer of their stake in DIAL (Delhi International Airports), in which they own 44 per cent and 10 per cent, respectively. As part of the deal, the private equity firm could convert the CCPS into equity shares at the time of the planned listing of GMR Infra’s airport business. Says, Rahul Agarwal, analyst at Anand Rathi, “The investment is positive for GMR Infra, since it has happened even before the pending Airport Economic Regulatory Authority order on aeronautical tariffs related to DIAL. The proceeds may be used as growth capital for new projects across business segments.”

TURNAROUND ACROSS VERTICALS
While the infusion of funds has been well received by the market, the benefits of turnaround in its operations should start accruing in 2011-12. The company, expected to report a net loss of Rs 72 crore in 2010-11, is seen reporting a net profit of Rs 208 crore in 2011-12 and Rs 336 crore in 2012-13. Airports, which accounts for 46 per cent of GMR’s consolidated revenue, has seen an 8-17 per cent improvement in traffic during the quarter ended December.

The uptrend in traffic is expected to continue at the Delhi International Airport. Also, the benefits of the rise in user development fees at Hyderabad airport and increase in non-aeronautical revenues after the commissioning of the new terminal at the Delhi airport will mean better growth. In addition, with the monetisation of the airport and SEZ land, analysts expect another Rs 100 crore to be added to the company’s revenue and operating profit. Factoring these, the airport revenues alone is seen doubling over the next two years.

The power business, which contributes almost 35 per cent of revenue, too, is expected to grow strongly. The company has about 823 Mw of operational capacity currently and another 4,138 Mw is under various development phases. By the end of 2012-13, about 1,400 Mw of new power generation capacity will become operational, adding directly to the revenue. Analysts estimate the power vertical’s revenue to jump two-and-a-half fold from an estimated Rs 2,000 crore in 2010-11 to Rs 5,000 crore in 2012-13. Apparently, it will result in higher profitability, given that half the capacity is targeted to be sold as merchant power, which typically earns better realisation.

The prospects of GMR’s road and construction segment, which accounts for the remaining 20 per cent of consolidated revenue , is not different and should see strong growth. Revenue is estimated to increase from about Rs 1,000 crore in 2010-11 to Rs 2,000 crore in 2012-13, driven by six road projects, of which three are already operational.

To sum up, all the four verticals of GMR – Airport, power, road and construction – will witness strong growth in revenue and add to profitability and returns due to economies of scale and absorption of fixed costs, including the interest cost and depreciation. This will lead to company turning into strong profits over the next two years.

VALUATIONS
In terms of valuations, the stock is trading at Rs 41. While it may not appear cheap, given the PE discounting of 82 times its 2011-12 estimated earnings, it is largely due to the early stages (hence lower profitability) in which the businesses are. However, growth rates are expected to pick up led by its portfolio of lucrative infrastructure assets, and the company expected to report rising profitability.

Importantly, considering its assets-based business model, it is incorrect to value the stock purely on the basis of earnings. Analysts, thus, value the stock on the basis of sum of the part, and have pegged it at Rs 61 per share.