GMR Infrastructure: Turnaround in sight

Analysts positive on the company?s stock after the rise in DIAL rates

The GMR Infrastructure stock has risen 11 per cent to Rs 21.60 in the last four trading sessions, outpacing the 4.3 per cent rise in the Bombay Stock Exchange Sensex. After the rally, which reduced the decline of the stock in the past year from 41 per cent (as on June 6) to 35 per cent, it is trading at reasonable valuations. At 0.9 times the FY13 price-to-estimated book value, analysts feel the stock has bottomed out, and there is an upside potential of 60 per cent, based on the average target price of Rs 35. This is also based on their expectation of the company returning to profitability in the current financial year.

Though the regulatory overhang in the airports business is passé, power business woes continue. Shankar K, analyst, Edelweiss Securities, says, “The tariff rise order for Delhi International Airport (DIAL) has eliminated the regulatory overhang, though the spectre of lower economic growth hurting passenger growth is a concern. However, fuel issues in power plants remain. Steady progress in the projects being developed, along with improvement in profitability of operational projects, underpins our bullish stance on GMR.”

Muted March quarter
Non-recognition of revenues from National Aviation Company of India (Air India) hit growth in the revenue from the airports business in the quarter ended March. This business, which accounts for 51 per cent of total consolidated revenue, grew about seven per cent, amid healthy growth in traffic. Shortage of gas led to a lower plant load factor (below 50 per cent for all three operational plants) in the power business, which accounts for 23 per cent of total consolidated revenue. However, the roads (led primarily by traffic growth) and the engineering, procurement and construction businesses were satisfactory.
 

REVIVING FORTUNES
In Rs crore	Q4’ FY12	FY12	FY13E
Revenues	2134.3	7642.0	9368.6
% change y-o-y	-2.1	32.4	22.6
Operating profit	268.7	1759.0	3183.2
% change y-o-y	-39.1	13.1	81.0
Adjusted net profit / (Loss)	-204.0	-441.0	234.2
% change y-o-y	200.0	237.0	LTP

Consolidated financials                                                                          E: Estimates
Note: LTP is Loss to Profit                                 Source: Company, Analyst reports  

SUM OF THE PARTS
Rs per share	Edelweiss Securities	ICICI Direct	MF Global	Religare Securities
Airports	26.5	13.0	12.7	21.7
Roads	-7.2	4.0	-1.2	2.8
Power	3.5	8.0	10.1	13.0
Others	15.1	-2.0	10.2	-5.9
Total	37.9	23.0	32.0	32.0
Source: Analyst reports

The company incurred a higher-than-estimated net loss (even on an adjusted basis) in the quarter ended March, owing to weak operational performances, primarily by the airports and power businesses. While the airports segment incurred a loss before interest and tax of Rs 7 crore (first since March 2009), the power business saw losses rise to Rs 63.5 crore, compared with Rs 15 crore in the previous quarter. Higher interest expenses related to DIAL and losses recorded by foreign power subsidiaries (Homeland Energy Group and Indonesia-based Golden Energy Mines, in which it has a stake of 30 per cent) also hit profitability.

Worst over
Analysts believe the worst is over for the company. This is primarily because the Airports Economic Regulatory Authority of India (which regulates rates for aeronautical services at major Indian airports) approved a 352 per cent rise in aero charges for DIAL with effect from May 15. Group Chairman G M Rao, says, “With increased tariff and the resultant higher revenues, DIAL’s profitability and cash would improve significantly from the first quarter of FY13, enabling DIAL to move towards profitability.”

DIAL was recording losses mainly due to the delay in the revision of aeronautical charges, stagnant since 2001 and among the lowest in the world (the company had demanded a rise of 774.3 per cent in these charges). The rise is, therefore, a significant step towards making DIAL viable. The revised rates would in the form of an enhanced landing and parking fee for aircraft and a user development fee for passengers. Given these changes, GMR expects the airports business to break even at the net profit level in FY13.

The roads business is expected to fare well, with three projects (cumulative 309 kms) under construction expected to be commissioned in the second half of 2012. The company has also achieved financial closure of a six-lane mega highway project for which toll collection is expected to begin in September. The company's roads business would have six toll-based and four annuity-based projects by the end of FY13. Since the new projects are an extension of existing highway projects (two-laning or four-laning), traffic growth is expected to be better and risks are expected to be low. Also, 40 per cent of the total portfolio under annuity provides support to profitability in a challenging environment.

Shirish Rane, analyst, IDFC Institutional Securities, says, “We see a turnaround in GMR’s earnings in FY13, led by the approval for an increase in Delhi airport rates effective May. Along with improving profitability of road assets, we see better earnings driving stock performance.”

In the power business, the company plans to add 3,788 Mw of new capacity in a phased manner by FY15, of which 768 Mw would be gas-based. However, fuel availability (gas and coal) for the power business remains both a concern, as well as a catalyst.