INDIA DAILY February 25, 2020 India 24-Feb 1-day 1-mo 3-mo Sensex 40,363 (2.0) (3.0) (1.3) Nifty 11,829 (2.1) (3.4) (2.0) Contents Global/Regional indices Dow Jones 27,961 (3.6) (3.5) (0.4) Special Reports Nasdaq Composite 9,221 (3.7) (1.0) 6.8 FTSE 7,157 (3.3) (5.7) (3.2) Initiating Coverage Nikkei 22,684 (3.0) (4.8) (1.9) GMR Infrastructure: Poised for flight Hang Seng 26,849 0.1 (3.9) (0.5) Initiate coverage on GMRI with a BUY rating and fair value of Rs30/share KOSPI 2,097 0.9 (6.6) (1.2) Mar-21 SoTP Value traded – India Cash (NSE+BSE) 411 412 244 GMRI: Banking on increasing relevance of airports and of non-aero Derivatives (NSE) 12,813 9,719 7,715 revenues Deri. open interest 3,875 3,756 3,409 Financials: Expect 4-year CAGR of 12% in EBITDA, FCF generation beyond FY2022 Forex/money market Key risks: Changes in the shape or timeline of airport monetization deal Change, basis points Daily Alerts 24-Feb 1-day 1-mo 3-mo Rs/US$ 71.9 (17) 43 20 Sector alerts 10yr govt bond, % 6.7 (4) (33) (30) Insurance: Fire and motor TP recover Net investment (US$ mn) 20-Feb MTD CYTD Motor TP picks up in January 2020; motor OD growth steady FIIs 117 2,239 3,612 Retail health steady, but group health moderates MFs 98 235 (140) Top movers Crop business flat yoy in January 2020; up 28% yoy in YTD FY2020 Change, % Best performers 24-Feb 1-day 1-mo 3-mo DMART IN Equity 2,390 (3.0) 22.6 30.0 IHFL IN Equity 331 (2.2) 2.6 27.5 APHS IN Equity 1,797 (0.2) 7.7 23.9 DIVI IN Equity 2,160 (0.4) 13.1 22.5 TGBL IN Equity 369 (3.0) (4.0) 22.2 Worst performers YES IN Equity 35 (1.4) (18.3) (45.2) BHEL IN Equity 34 (3.4) (24.7) (39.6) EDEL IN Equity 93 3.5 0.5 (27.7) HPCL IN Equity 216 (2.8) (11.7) (26.9) ONGC IN Equity 98 (4.6) (17.2) (25.1) [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. BUY GMR Infrastructure (GMRI) Transportation FEBRUARY 24, 2020 INITIATING COVERAGE Sector view: Attractive Poised for flight. Our positive stance on GMRI banks on three phenomena: (1) growing CMP (`): 25 air travel, (2) growing spends at airports and (3) privatization of airports. Recent developments favor a sharp reduction in corporate debt and a demerger of GMRI’s Fair Value (`): 30 airport business. We initiate coverage with an SoTP-based fair value of Rs30 and expect BSE-30: 40,363 FCF generation after FY2022. Risks: (1) changes in the airport monetization deal structure, (2) lower cap on duty-free alcohol purchases and (3) negative aero tariff at Delhi airport. GMR Infrastructure Stock data Forecasts/valuations 2020E 2021E 2022E 52-week range (Rs) (high,low) 27-14 EPS (Rs) (2.8) (0.9) (0.4) Mcap (bn) (Rs/US$) 154/2.2 EPS growth (%) (13.2) 66.4 55.1 ADTV-3M (mn) (Rs/US$) 389/5 P/E (X) (9.1) (27.1) (60.2) Shareholding pattern (%) P/B (X) (6.1) (15.4) (12.3) Promoters 63.6 EV/EBITDA (X) 15.8 12.9 14.6 FIIs 21.2 RoE (%) 101.5 36.4 22.7 MFs/BFIs 1.5/3.6 Div. yield (%) 0.0 0.0 0.0 Price performance (%) 1M 3M 12M Sales (Rs bn) 84 90 95 Absolute 5 24 55 EBITDA (Rs bn) 26 29 30 Rel. to BSE-30 8 24 38 Net profits (Rs bn) (17) (7) (3) Initiate coverage on GMRI with a BUY rating and fair value of Rs30/share Mar-21 SoTP Our SoTP includes (1) GMR Airports at Rs25.2, (2) GMR Energy at Rs2.3 and (3) land in Special Investment Regions at Rs1.6. We value GMR Airports at ~Rs340 bn on a one-year forward basis or ~13% premium to the upper end of the valuation range of deal with Groupe ADP. The divergence may have been caused by (1) limited bargaining power with GMRI given its burgeoning corporate debt and (2) higher discounting rate factored in for unknown regulatory exigencies. Our DCF-based airport valuation assumes a (1) 9% decadal passenger CAGR, (2) 13% CAGR in non-aero revenues and (3) 13-13.5% CoE. The implied blended FY2021E EV/EBITDA is ~13X for key domestic airports versus the 11-18X range for global peers. We factor ~53% shareholding in airports, assuming half of the earn-outs from the airport deal. We factor in ~19% dilution in GMRI on FCCB conversion (at Rs18) beyond Rs25 price level. GMRI: Banking on increasing relevance of airports and of non-aero revenues A combination of business restructuring and airport stake monetization would lower the corporate debt of GMRI (consolidated) to ~Rs15 bn versus ~Rs110 bn current levels, levels that can be taken out by potential sale(s) of land assets. Sale of the Kamalanga plant would negate unconsolidated corporate debt in GMR Energy. These coupled with limited known variables of regulatory uncertainty makes GMRI a protected play on growth in air travel. Other levers that would add to passenger growth include (1) improving spending profile of passengers, (2) support of minimum aero yield per passenger for Delhi airport and (3) real-estate development from land near airports. We also envisage GMRI participating in the privatization opportunity in airports in India and globally, in partnership with Groupe ADP. Monetization of stake in the airports business will also pave the way for a demerger of the airports business. Financials: Expect 4-year CAGR of 12% in EBITDA, FCF generation beyond FY2022 Aditya Mongia We envisage a 12% FY2020E-24E EBITDA CAGR for GMRI (consolidated) driven by (1) 9% CAGR in passenger and (2) 4% CAGR in non-aero revenue per passenger. Airport expansion capex over FY2020-22 would defer improvement in debt metrics. We envisage FCF generation Teena Virmani for GMRI (consolidated) beyond FY2022, which can be used to bid for new concessions. Key risks: Changes in the shape or timeline of airport monetization deal Key risks are (1) sale of pledged shares in event of deferral of the airport monetization deal, (2) performance earn-outs not materializing, (3) prospect of negative aero tariff for Delhi airport (4) lower cap on duty-free shopping of liquor to one bottle and (5) COVID-19 impact. [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. GMR Infrastructure Transportation FINANCIAL OVERVIEW: CASH PROFITS FROM FY2021 Exhibit 1: GMRI would start generating cash profits from FY2021 Forecasts and valuations of GMR Infrastructure (consolidated), March fiscal year-ends, 2016-24E Cash Net sales EBITDA PAT profit EPS EV/EBITDA (a) RoIC(a) (Rs mn) (Rs mn) (Rs mn) (Rs mn) (Rs) (X) (%) 2016 82,610 27,577 (3,475) 8,492 (0.6) 17.4 3.3 2017 97,686 32,200 (5,188) 5,412 (0.9) 17.7 7.1 2018 87,212 21,859 (13,319) (3,035) (2.2) 18.7 7.1 2019 73,997 15,295 (14,917) (5,078) (2.5) 27.0 3.2 2020E 84,003 25,879 (16,885) (6,911) (2.8) 15.8 8.4 2021E 89,534 28,583 (6,721) 3,042 (0.9) 10.5 10.1 2022E 94,631 30,207 (3,020) 6,571 (0.4) 10.0 10.9 2023E 106,473 35,676 (4,722) 11,447 (0.7) 12.8 6.5 2024E 116,962 40,790 (5,586) 16,442 (0.8) 10.8 4.7 Notes: (a) We take out capital work in progress out of invested capital and EV for the RoIC and EV/EBITDA calculation (b) Cash profit=PAT+depreciation (c ) We increase share count ot 7.14 mn from FY2021, accounting for conversion of FCCBs into equity Source: Company, Kotak Institutional Equities estimates Exhibit 2: We expect FCF generation beyond current airport expansion ending FY2022 Trend in FCF and net debt/EBITDA for GMRI (consolidated), March fiscal year-ends, 2017-28E Free cash flow (LHS, Rs bn) Net debt / EBITDA (RHS, X) 90 18 Pro-forma net debt / EBITDA (RHS, X) 15 60 15 15 30 15 12 10 10 - 8 8 9 10 8 6 8 5 8 5 (30) 5 6 7 7 4 3 5 5 (60) 4 3 4 3 2 (90) - 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Notes: (a) Proceeds from airport stake monetization reduce net debt/EBITDA in FY2020/21 (b) Proforma calculation takes into account the potential sale of land parcel in Kakinada and Krishnagiri and of stake in PT Gems mines over the next two years (c) Free cash flow calculated after accounting for interest outgo. Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Transportation GMR Infrastructure Exhibit 3: Summary financials of GMR Infrastructure (consolidated), March fiscal year-ends, 2016-24E (Rs mn) 2017 2018 2019 2020E 2021E 2022E 2023E 2024E Income statement Net revenues 97,686 87,212 73,997 84,003 89,534 94,631 106,473 116,962 Total operating expenses (65,487) (65,353) (58,703) (58,123) (60,951) (64,423) (70,797) (76,172) EBITDA 32,200 21,859 15,295 25,879 28,583 30,207 35,676 40,790 Other income 4,654 5,530 7,198 5,847 5,135 3,411 4,938 5,685 Depreciation & Amortization (10,599) (10,284) (9,840) (9,974) (9,763) (9,591) (16,169) (22,028) EBIT 26,255 17,105 12,654 21,752 23,955 24,027 24,445 24,447 Interest expense (21,285) (23,163) (25,190) (32,587) (25,034) (21,795) (24,823) (27,159) PBT 4,970 (6,058) (12,536) (10,835) (1,079) 2,233 (378) (2,711) Tax expense (7,370) (455) 874 (983) (959) (1,143) (1,512) (1,572) Recurring PAT prior to associate income and (2,401) (6,513) (11,662) (11,819) (2,038) 1,090 (1,890) (4,283) minority interest Exceptional items and prior period items (net) (558) (319) (21,022) — — — — — Reported PAT prior to associate income and (2,959) (6,832) (32,684) (11,819) (2,038) 1,090 (1,890) (4,283) minority interest Associate profits (684) (4,314) (879) (1,185) (1,348) (947) (689) (355) Minority interest (2,103) (2,493) (2,376) (3,881) (3,336) (3,163) (2,143) (947) Reported PAT (5,746) (13,639) (35,939) (16,885) (6,721) (3,020) (4,722) (5,586) Recurring PAT (5,188) (13,319) (14,917) (16,885) (6,721)