Buy GMR Infra; target of Rs 38: Emkay 9th-Sep-2011

Emkay Global Financial Services is bullish on GMR Infra and has recommended buy rating on the stock with a target of Rs 38 in its September 8, 2011 research report.

“GMR Infrastructure is expanding rapidly in the energy vertical with the installed capacity set to rise from 823 MW to ~3,600 MW by FY13E and 8,471 MW by FY18E. Strong captive mining assets along with adequate funding are likely to ensure smooth execution. Its ability to tie up future capacity at lucrative rate will determine the success of power vertical. Strong parent balance sheet with ~ Rs 50 bn of Cash & liquid investments which can be utilised in funding equity portion along with Rs 36 bn of operating cash flow over FY12-13E will be sufficient to fund projects till FY13E. While the power vertical is still in investment phase, its commissioned projects are likely to ensure contribution rising to ~54% overall EBITDA by FY14E.”

“DIAL airport, which has been a major overhang on the airport vertical’s profitability due to its sheer size, is now fully operational. Given the momentum in aviation sector coupled with the regulatory backdrop, it is showing signs of turning around by FY16E. The key factor in the DIAL turnaround is the implementation of the regulatory tariff, which is expected to drive its aero revenues and provide revenue visibility. With GMR’s other airports (Male, Turkey and Hyderabad) offering relatively better revenue stability, the turnaround of DIAL from a loss making entity (Rs 2.4bn in FY11) is likely to sway the fortunes of the airport vertical. We expect GMR’s airport vertical to report a PAT of Rs 2.1bn in FY16E. Apart from operational profits, monetisation of land parcels can prove to be the icing on the cake with significant opportunity to realize upfront deposits.”

“GMR is available at a discount to its SOTP fair value with the current valuations ignoring the enormous long term potential of key operating assets like DIAL. The recent corrective phase led by ambiguous regulatory mechanism and sub optimal availability of fuel at gas based power plants offers an opportunity for investors to position such long term plays in the infrastructure universe. Our SOTP based value of Rs 38 offers 27% upside from the present price. Airport assets (incl real estate) form ~49%, Power ~23% and Roads ~10% of fair value. Key risks to our positive ratings are the delays in implementation of tariff mechanism, Non availability of gas based fuel & ability to source long term PPAs at attractive rates,” says Emkay Global Financial Services research report.
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