Sale of the Kamalanga plant would negate unconsolidated corporate debt in GMR Energy.
Our positive stance on GMR Infrastructure banks on three phenomena: (1) growing air travel, (2) growing spends at airports, and (3) privatisation of airports. Recent developments favour a sharp reduction in corporate debt and a demerger of GMRI’s airport business. We initiate coverage with an SoTP-based fair value of `30 and expect FCF generation after FY22. Risks include changes in the airport monetisation deal structure, lower cap on duty-free alcohol purchases and negative aero tariff at Delhi airport. Recommend ‘buy’.
Our SoTP includes GMR Airports at Rs 25.2, GMR Energy at Rs 2.3 and land in Special Investment Regions at Rs 1.6. We value GMR Airports at Rs 34,000 crore on a one-year forward basis or ~13% premium to the upper end of the valuation range of deal with Groupe ADP. The divergence may have been caused by limited bargaining power with GMRI, given its burgeoning corporate debt and higher discounting rate factored in for unknown regulatory exigencies. Our DCF-based airport valuation assumes a 9% decadal passenger CAGR, 13% CAGR in non-aero revenues and 13-13.5% CoE. The implied blended FY21E EV/Ebitda is ~13X for key domestic airports versus the 11-18X range for global peers.
A combination of business restructuring and airport stake monetisation would lower the corporate debt of GMRI (consolidated) to Rs 1,500 crore vs Rs 11,000 crore. Sale of the Kamalanga plant would negate unconsolidated corporate debt in GMR Energy. These, coupled with limited known variables of regulatory uncertainty, make GMRI a protected play on growth in air travel. We also envisage GMRI participating in the privatisation opportunity in airports in India and globally, in partnership with Groupe ADP. Monetisation of stake in the airports business will also pave the way for a demerger of the airports business.