<strong>Institutional</strong> <strong>Equities</strong> This page has been intentionally left blank 54 Reliance Infra
Initiating Coverage <strong>Institutional</strong> <strong>Equities</strong> GMR Infrastructure Reuters: GMRI.BO; Bloomberg: GMRI IN On Recovery Path GMR Infrastructure, a leading infrastructure company, has underperformed the Nifty in the past three years by 55% because of multiple issues like Balance Sheet concerns post leveraged buyout of Intergen, funding constraints for mega expansion plan, overhang of regulatory issues and pressure on profitability. Looking at the recent developments like adequate raising of capital for near-term expansion, sale of Intergen stake and expected other positive developments like improvement in profitability and clarity on regulatory issues, we believe the concerns have been largely priced in the CMP of GMR Infrastructure and provides a good investment opportunity for long-term investors. We assign a Buy rating and a target price of Rs39 to the stock based on SOTP valuation. Blend of improvement in profitability and growth: Post commercial operations of projects like Delhi airport, Turkey airport and shifting of Barge mount power plant, the company has started incurring losses due to higher capacity charges. We believe robust growth in traffic coupled with cost-cutting measures will improve profitability and loss-making projects will turn FCF positive in FY12, staging a turnaround in the next two years (favourable tariff outcome at Delhi airport to expedite the process). Three thermal power projects of 2.7GW are in advanced stage of construction and slated for commercial operations in FY12-13, which will drive growth. Projects under construction well funded: The company has divested stake and booked all losses pertaining to Intergen in 4QFY11, which has released equity capital of Rs 9.58bn and eased rising leverage concerns. Apart from this, the company has raised around $950mn (for power and airport subsidiary), which is sufficient to meet the near-term funding requirements of the project pipeline. Clarity expected on regulatory issues: The company continues to face a lot of regulatory issues like enhanced project costs, renewal of suspended ADF and incremental ADF of Rs17bn, rate of return on regulated base and gas/coal availability for power projects under construction. We believe the current market price seems to be factoring in most of these uncertainties and our earnings model is based on a worst case scenario. Hence, clarity on these issues, which is expected in the next two-three months, will be positive for the stock. Valuation: We assign a Buy rating and a SOTP-based target price of Rs39 to GMR Infrastructure. In our target price, 75% is contributed by operational projects and the remaining 25% from projects at various stages of development. Key contributors to our TP of Rs39 comprise Rs20 from airports business (including real estate), Rs14 from power generation and coal mining, and Rs3 from the road segment. Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Net Sales 40,192 45,665 57,738 71,096 105,284 YoY (%) 75.1 13.6 26.4 23.1 48.1 EBIDTA 10,668 13,643 15,553 21,644 38,014 EBIDTAM (%) 26.5 29.9 26.9 30.4 36.1 Adj. Net Profit 2,794 1,581 (1,313) 811 4,777 EPS Growth (%) 33.0 (43.4) (183.0) 161.8 489.2 Adj. EPS 0.7 0.4 (0.3) 0.2 1.2 P/BV (x) 0.8 1.7 1.2 1.2 1.2 PER (X) 41.8 73.9 NA 144.0 24.4 EV/EBIDTA 18.7 19.2 19.0 15.6 9.5 ROE (%) 4.3 2.4 NA 1.0 5.8 ROCE (%) 5.2 4.6 4.3 5.7 9.4 Source: Company, Nirmal Bang <strong>Institutional</strong> <strong>Equities</strong> Research 26 September 2011 BUY Sector: Infrastructure CMP: Rs28 Target Price: Rs39 Upside: 39% Amit Srivastava amit.srivastava@nirmalbang.com +91-22-3926 8116 Nitin Arora nitin.arora@nirmalbang.com +91-22-3926 8169 Key Data Current <strong>Share</strong>s O/S (mn) 3,892.4 Mkt Cap (Rsbn/US$bn) 110.4/2.2 52 Wk H / L (Rs) 61/26 Daily Vol. (3M NSE Avg.) 4,080,979 <strong>Share</strong> holding (%) 3QFY11 4QFY11 1QFY12 Promoter 70.7 71.2 71.4 FII 13.2 12.8 12.6 DII 8.3 8.2 8.1 Corporate 1.4 1.2 1.2 General Public 6.4 6.7 6.8 One Year Indexed Stock Performance Price Performance (%) 1 M 6 M 1 Yr GMR Infra 0.5 (24.1) (51.7) Nifty Index (1.6) (11.2) 18.3 Source: Bloomberg