We retain underperform on GMR Infrastructure due to execution and fuel supply risks, mainly in power, coupled with risk of deferment of realty monetisation at Delhi. We also cut our price objective by 10% to R21 as GMR as the stock is highly valued at P/BV of 1x for 2% RoE in FY13e.

As a result we cut our FY13 and FY14 earnings by 56% and 24%, respectively. We believe front-loading would likely to fall 40% in tariff in FY15-19e. In addition, EPS would remain under pressure on lower fuel availability, leading to lower PLF (gas+coal) for 3.2 gigawatts power plants. The company is also likely to face higher execution risk, as 60% of capex is in green-field projects, GMR Infra, which owned 77% stake in Male airport, was made to hand over the asset to Government of Maldives (GoM), as GoM felt that the bidding process was not transparent and a levy of $25 per departing pax on account of ADC was only benefitting the airport operator. However, GMR has been assured compensation in lieu of premature contract cancellation.

GMR-Malaysia Airport Holdings took over operations of the Male Airport in November 2010. Based on our estimates GMR should have invested $23-30 million in equity over past two years. Total capex for Phase-I (FY11-15) was $511 million (inclusive of $78 million up-front fee). This would increase annual passenger capacity from 2 million currently to 5 million per annum by FY15e. We believe that GMR?s equity infusion was mainly for the up-front fee ($23 million). However, we believe the process of compensation may be complicated and prolonged as GoM will conduct detailed audit on financials. Further, lack of clarity on compensation, GMR will seek in addition to equity infusion and receivables and payments will be made keeping in mind the state of Maldivian budget.

In addition to the up-front fee, the operator was to pay a $1.5-million annual fee. A passenger service charge of $18 per passenger (payable to GoM) was also levied. However, based on media interactions, we gather that the levy of airport development charge ($25 per departing passenger) to be used as a viability gap funding was the contentious issue between the two parties.

BofAML