GMR Infrastructure Initiating Coverage Research Report By IDBI Capital

Now Boarding: A Horse with a Wing!

Summary

 With a major presence across Indian airports, power plants and roads, GMRI stands as a testament to world-class conglomerate. Yet like many, the path to heights was blighted by systemic issues. Worse, saddled with debt, the financials were caught flat-footed. Not anymore.

 With stake sale to Tenaga, implying $1bn valuation for GMRI energy, the days are brighter ahead. Further, with TDSAT ruling due, the re-rating of airport assets—and subsequent value unlocking is on cards. Divestment of roads is a matter of time. Monetization of land bank is a sweetener.

 With this note, we initiate our coverage on GMRI with a BUY. In our pecking order of industrial stocks, GMRI stands as our top pick.

Key Investment Highlights

 The events are lined up: For GMRI, the sum of the parts has always been greater than whole. Well, if not always, at-least a major part since its listing. Currently, the cash-cows and crown-jewels are smothered by loss making entities.

That may not be the case in future for sure. Three events are lined up for the biggest re-rating: First, listing of airports arm; second, divestitures of roads, if required at a discount; and third, monetization of land banks—both DIAL/GHIAL and Special Investment region; they all signal the right capital allocation.

Further, the incremental cash will chase hybrid /price monitoring model of airports and projects with scope of heavy engineering. Make no mistake: the past was bleak; the future is not.

 And the re-rating is around the corner:The restructuring opens up multiple possibilities. A carve out of GMR Energy and other energy vertical is the first step. With the stake sale to Tenaga, the Malaysian Utility, the GMR energy is an associate company. Notwithstanding the effective holding of GMR Energy, treatment of Airports, Highways and Other Energy is where the next re-rating drivers are, we find. And that is where the focus of the report is.

 Outlook and Valuation: We value the company using sum-of-the-parts. We rate this company BUY with a target price of Rs32, implying 78% upside.