GMR Infrastructure –Buy- Anand Rathi
Our revised target price is lower by Rs20 vs. previously, as we have: left out four hydropower projects from SOTP [890MW, Rs5/sh impact]; reduced LT share of merchant power to more than 35% from over 40% [Rs5]; and factored more conservative HIAL valuation [Rs5]. We have also factored higher project costs as revealed in QIP document, ongoing/potential execution delays in power, and dilution from recent QIP issue. We maintain our view that GMR stock can potentially double over a 3-year horizon; Reiterate BUY.
GMR needs to contribute approximately $1 billion over FY11-12 as project equity in power and roads segment, of which it has raised approx $850 million recently, through LT debt, NCDs, convertible preference shares (CCPS) and QIP issue. Another $100-150 million through CCPS in GMR Energy (GEL) should make
GMR fully funded till FY12; after that, a likely GEL IPO + internal cash generation would finance the company’s domestic growth, in our view.
Impact of higher DIAL capex offset by likely higher land valuation, guaranteed revenues. DIAL’s project capex is likely to be Rs127 billion versus our forecast of Rs102bn. The negative impact on equity value is more than offset by additional debt, likely higher regulated revenues, and higher land value. DIAL has asked the airport regulator for additional Rs10.2 billion of development fee (ADF)—an upside risk to our target price.
GMR’s premium valuations are supported by robust LT growth outlook—stock trades at 14.6x/10.0x our FY13e/14e EPS; FY11 and FY12 earnings are modest. Catalysts are: Regulatory approval for higher fixed charge recovery in Vemagiri plant; Re-start of merchant power sale by GEL; (3) Fuel tie-up and subsequent financial closure of Vemagiri expansion and Chhattisgarh power projects.
Key risks to our view are execution delays; lower-than-expected regulated revenues in DIAL; govt. disapproval for high ‘upfront’ deposit in DIAL; and (3) Lower-than-expected merchant tariffs.
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