The GMR management has adopted an ‘asset-light, asset-right’ strategy to de-leverage its over-stretched balance sheet. It is planning more asset sales; we estimate R31.7 billion of sale proceeds in FY15. We expect its D/E (debt-equity) ratio to decline from 3x in FY14e to 2.2x in FY15. We upgrade to ‘buy’ from ‘hold’.
Asset sales a key catalyst: There have been media reports that the company is looking to sell one each of its airport and energy assets. Separately, the company is looking to sell or publicly list its highway assets, and is planning a public listing of its airport holdco.
Earnings to continue to disappoint: Higher capacity charges from assets being commissioned should start being expensed to the income statement. Almost all its under-execution assets could be commissioned in FY14-15. Bottom-line loss is a key negative, but we expect investors to focus more on balance sheet repair than earnings.
SoTP-based valuation of R28: We value GMR at R28 (previously R26) using a SoTP (sum-of-the parts) methodology. We use DCF—discounted cash flow—(at 13.5% COE—cost of equity) to value individual assets, offset by any debt at the corporate level. Company-specific downside risks to our recommendation include delays in asset monetisation, lower-than-expected realisation, cost overruns and delays in commissioning projects that are under execution, and fuel price and availability.
Company background: GMR Infrastructure Ltd is an infrastructure conglomerate with interests in airports, energy, highways and urban infrastructure sectors. In the energy portfolio, the company owns 13 power generating assets (6.7GW), of which five are operational (1.4GW). In the airport sector, the company operates Delhi and Hyderabad airports in India and has a stake in Istanbul Airport in Turkey. The highways portfolio comprises eight operational assets, and one under-construction highway. The company also owns coal resources in Indonesia.
Earnings sensitivity: We have assumed R32 billion of proceeds from assets sales in FY15. A 5% change in Kamalanga’s PLF (plant load factor) impacts FY14e EPS by 1.9% and FY15e EPS by 8.1%. A 5% change in EMCO’s (GMR EMCO Energy Ltd) PLF impacts FY14e EPS by 3.1% and FY15e EPS by 7.2%.
Investment thesis: GMR has in the past, in an attempt to gain market share, invested in various assets primarily in the airport, power, highway and coal segments, both domestically and internationally. However, this strategy has stretched its balance sheet: debt-to-equity as of FY13 was 3x.
The situation worsened to such an extent that the company had to borrow to