BofA-ML

We retain our ?underperform? rating on GMR Infra as commissioning of low RoE power projects, coupled with lower fuel availability, leading to lower plant load factor (gas+coal) for the 2.5-GW power segment (16% of SOTP), will negate positives of a tariff hike in Delhi airport (12% of SOTP).

A potential decline in Delhi airport tariff for FY15-19e by 64%, deferred real estate monetisation to FY14e (45% of SOTP) and asset portfolio shrinkage in airports (Male) and roads Kishangarh-Udaipur-Ahmedabad (KUA) also act as headwinds.

We cut our sum-of-the-parts-based price objective to R19 from R20, based on our revised FY14/15e estimates.

GMR?s focus is to cut its nine months of FY13 gross debt (R43,000 crore) by 23% (R10,000 crore) over the next 12-15 months through continued asset sale.

However, almost all of the equity released through this process (R4,300 crore) will be used to meet equity gaps in low RoE power projects and possible payout to PE investors in FY15e. In addition, GMR requires multiple regulatory approvals/rulings, which coincide with elections, limiting chances of a re-rating in our view. In the near term, however, any further asset divestitures will be a positive for the stock.

GMR will use the entire amount raised through sale of its stake (70%) in Island Power ($330 million) to fund its FY14e equity gap (R2,200 crore) in power projects.

The company?s equity requirement has increased 30% on a 12-25% increase in project costs in past 12 months, mainly on foreign exchange and IDC. The company also needs to provide exit to PE investors in energy and airport divisions over the next 12-24 months. We estimate value of R4,700 crore in FY14-15e for R2,900 crore invested in FY11-12. GMR has already met 40% of its R10,000-crore target for debt reduction through Island Power (R3,700 crore) and Jadcherla (R400 crore). The company expects further asset sales in roads and energy sectors to meet its target.

In our view, multiple regulatory hurdles limit chances of a re-rating ? (a) Projects contributing 50% of our SOTP require regulatory approvals to operate/yield value; (b) Haryana PPA renegotiation with CERC for 1,050MW Kamalanga (CoD H1FY14e). c) FSA for 1.4GW Chhattisgarh ? not a part of the 61GW list of MoP & MoC.