Airports a play on rising affluence
GMR Airports is a play on Indian aviation and passenger spending prowess. It is a logical extension to our earlier ports and liquid logistics thematic, which delved into the cargo sector. Airports are an asset-based logistics infra play but on passengers and on their spending capacity.
We believe Indian aviation is at the cusp of strong growth given rising affluence and leisure-spending propensity. Further, a strong project pipeline of new airports and a healthy orderbook of aircraft to be delivered makes us believe that airlines expect a sharp growth in domestic and international passenger growth. Rising affluence leads to strong growth in international traffic, while increased penetration into non-metro drives domestic traffic leading to overall strong traffic growth.
The spending power of metro passengers drives a strong 10% CAGR in non-aero revenue at JV airports over FY26-28, leading to a balanced share of aero/non-aero, resulting in attractive economics. The relative attractiveness rises with commercial land development further adding to valuations.
However, we do not share the optimism on cargo due to lack of hub traffic and infrastructure. Selective pockets may witness MRO-linked growth but development of broad-based capabilities (full engine overhauls and C-checks) are still some time away.
Key differentiated themes in the report
We discuss reasons behind the mechanism of duty-free spend pattern in India, including shifts in trend from arrival only and alcohol only to other categories
An alternative scenario where Mumbai develops as a hub airport for internationals flights vs. DIAL following closure of western airspace and winter-linked disruptions.
Analysis of air cargo and MRO dynamics that, we believe, is an area less addressed. The lack of dedicated freighters and mostly narrow-body fleet has its challenges.
We initiate with BUY as, despite a recent rally, a surge in non-aero revenue streams driven by rising affluence in India and commercial development of real estate is not fully factored in yet. GMR Airports could witness robust PAT growth (>100% CAGR) over FY26-28 as it exits a capex-intensive phase, which, in turn, drives significant deleveraging.
India appears to be on the cusp of strong air traffic growth after a lull due to Covid-linked restrictions. Large-scale ordering of aircraft by airlines underpins expectation of rapid air traffic growth over FY26-30. Further, with increase in USD millionaires and rise in upper-middle class affluence, we expect a rise in international travel around metro cities and an associated increase in dutyfree/retail spends by such passengers. We expect the JV airports to deliver 10% non-aero revenue CAGR over FY26-28.
A regulated return model on investments de-risks aero capex: JV model airports like DIAL, GHIAL for GMR and MIAL/NMIAL for Adani Airports have a built-in regulated return model that assures 15.5% RoE on regulated asset base (RAB). Regulated returns significantly de-risk from lower passenger traffic by higher tariffs in subsequent traffic control periods. Since 85-90% of capex is aero, bulk of the capital investments are, thus, de-risked.
GMR to witness positive PAT and strong growth in profitability: We estimate that DIAL airport will complete its final expansion over FY26-30, which will result in GMR exiting a capex-intensive phase. This should support deleveraging of the stock, leading to overall GMR maintaining PAT positive. The consolidation of non-aero revenue streams into the GAL standalone platform will increase revenue/EBITDA visibility. We estimate 19% EBITDA CAGR over FY26-28E, resulting in PAT CAGR of 111%.
Initiate with BUY and SOTP based TP of INR 120: We value the operational airports in India at GMR’s long-term average 12-month forward EV EBITDA of 21.2x and add to it the valuation for monetisable land at airports, the upcoming Bhogapuram airport and the Medan airport to arrive at our TP of INR 120. The risk-reward is favourable considering potential for commercial land development, but we see risks arising from MIAL/NMIAL emerging as an alternate hub for airlines due to ongoing capacity additions and competition to DIAL from Noida/Hindon.
