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Pieces of Jigsaw finally falling into place

Traffic on airports is back, corporate structure has been simplified, a strategic investor has checked in and new terminals are being commissioned – tell-tale signs of improving earnings trajectory and increasing investor interest in airports business. There was a drastic decline in air traffic during Covid. Now, airports of GMR are teeming with activity – growth is back to normal. The simplification of corporate structure has been undertaken in a series of steps: a) Hived of non-airports business – it has emerged as a pure-play company in airports, b) bringing strategic investor in the listed entity (in the works) and c) reducing its corporate debt by selling non-core assets. It has been roller coaster ride for airports business, but worth its while. Moreover, it is all set to capture the tariff growth by commissioning new terminals at Delhi and Hyderabad. We expect GMR Airports Infra’s EBITDA to grow 2x over the next 24 months. Initiating coverage on the stock with ADD rating and SoTP-based target price of Rs48.

* A new simplified corporate structure; strategic investor checks in: A series of steps are being undertaken to reduce the complexity of corporate structure. In the last three years, GMR Infrastructure Ltd demerged its airport business (GMR Airport Infrastructure Ltd (GAIL)), reduced corporate debt and has sold 49% stake in its airport business to a strategic investor (Groupe ADP). Now it is looking to merge its subsidiary GMR Airports Ltd (GAL) and GMR Airports Infrastructure Ltd., thus, bringing the strategic investor into the listed entity. We believe could potentially reduce investor concerns on the complexity of the business.

* Owns two of the largest airports in India: GMR is the largest airport operator in the country with stake in two of the largest airports, Delhi and Hyderabad, with concession life of 45 years. Delhi and Hyderabad handled 66mn pax and 21mn pax, respectively, (market share of ~27%) in FY23. Also, it has just commenced operations in Goa - a lucrative destination.

* Traffic growth back to normal: Combined traffic at Delhi and Hyderabad airports was 87mn pax in FY23 (-2% of FY20). 2MFY24 traffic was at 16mn pax (+17% of 2MFY20). Domestic traffic is +20% pre-Covid levels while international traffic is at pre-Covid levels.

* Attractive business model; significant option value in non-aero business: Airport businesses are monopoly, as a result, they are regulated in nature. However, non-aero charges and land side development provide attractive upside for the airport operator. Moreover, we expect the strategic investor to aid in unleash the non-aero revenue potential. Note that, ab initio, it started to operate non-aero business in JV with partners at its airport. It is looking to explore lucrative non-aero businesses on its own, thereby, creating huge optionality for minority shareholders (est.~Rs10/share).

* New terminals on the anvil: GMR has been expanding its terminals in Delhi and Hyderabad with capex of Rs170bn – increasing the regulated asset base by 2x. The terminal capacity is likely to increase to 100mn pax in Delhi and 34mn pax in Hyderabad by FY24E-end. We believe the impact of these will likely be seen H2FY24 onwards.

* Initiate coverage with ADD: We expect airport traffic CAGR at 12% over FY25-FY26E. We value the business on an SoTP basis at Rs48 per share. Note that Delhi and Hyderabad contribute Rs18 and Rs6.3 per share to the target price.

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