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Airports to drive value; initiate with a HOLD

GMR Infrastructure (GMRI) is one of the largest Indian airport developers and operators, with a large portfolio of assets across the energy, transport and urban infra sectors. It operates two of India’s largest airports – Delhi and Hyderabad – which handled 25-28% of all-India passenger traffic in the past decade. The airline sector is witnessing speedy recovery from the covid impact. However, we estimate the airports business to return to pre-covid levels profitability by FY25E. Ongoing demerger process, which will separate airport and non-airport businesses, is expected to unlock value and simplify the corporate structure. Recent focus on debt reduction has been successful, helped by Groupe ADP partnership and asset monetisation/sale. Initiate coverage on GMRI with a HOLD rating and target price of Rs40.

* Earnings recovery pace of airport business may surprise: Even though we factor recovery to pre-covid level profits for both Delhi (DIAL) and Hyderabad (GHIAL) airports in FY25E, current trend of economic recovery, vaccination drive, opening up of borders and higher confidence/willingness to travel, may lead to a faster than anticipated recovery. Post ongoing expansion completion, DIAL’s capacity will reach 100mn/119mn pax by FY25/FY31 and GHIAL’s 34mn by FY24. Although gross aero revenue growth will be steady for DIAL owing to the base airport charges model, GHIAL which deploys building block model, may see a steady decline post capex completion. However, increase in non-aero revenues will be key, main drivers being: 1) pax growth, 2) pax mix favouring international, increasing spend per pax, and 3) higher air traffic movement.

* Demerger to unlock value: GMRI’s ongoing demerger process, expected to complete within FY22, is aimed at creating a pure-play listed airport company, unlocking value, simplifying the corporate structure and increasing management focus. While the airport business will remain listed under GMRI, non-airport businesses will be merged into GPUIL and separately listed. All existing GMRI shareholders will get GPUIL shares in the same proportion, and for every ten GMRI shares, one share of GPUIL will be issued.

* Strategic partnership, assets sale / monetisation help in deleveraging; improved operations may bring in higher earn-outs: GMRI entered into a financial and strategic partnership with Groupe ADP, which included investment of Rs107.8bn by ADP for 49% stake in GMR Airports (GAL). While GMRI has already received Rs98.1bn, the deal was restructured in the wake of covid impact on the aviation sector to include operational performance based earn-outs of Rs10.6bn and equity-related earn-outs which can increase GMRI’s stake in GAL from 51% to 59% by FY24E (we have factored 50% achievement to take GMRI’s stake to 55% in GAL). Further, agreement for sale of Kakinada SIR has been signed for Rs27.2bn (Rs16.9bn received), while Krishnagiri SIR’s monetisation and development is in process. GMRI is also looking to exit the highway business and increase focus on EPC, particularly railways.

* Valuations and risks: We value GMRI’s businesses on SoTP basis and initiate coverage with a HOLD rating and target price of Rs40. Key risks: 1) further regional / national lockdowns and / or restriction in operations; 2) slower/faster than expected recovery of pax / air traffic; 3) non-achievement of ADP earn-outs; 4) GMRI asked to pay the AAI’s revenue share, which it discontinued, after invoking force majeure.

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