Male Airport uncertainty clouds GMR Infra's prospects

Last Updated: Mon, Dec 03, 2012 22:01 hrs

After dropping to its all-time low of Rs 16.75 last Thursday post the Maldives’ government cancelling the airport contract with GMR Infrastructure, the latter’s share price has recovered 17.3 per cent, including the 5.4 per cent rise seen on Monday. The gains are consequent to the company getting a stay order against the cancellation of the contract from the High court of Singapore. Secondly, post the event, promoters have also bought shares from the open market. While most analysts believe there would not be much impact on stock valuations even if the airport development contract is cancelled, they see potential loss in revenues and profits which could mean some pressure on the stock in the interim as it would come at a time when some of GMR’s domestic businesses are under pressure.

GMR has so far has invested about Rs 126 crore in the airport through its 77 per cent subsidiary, GMR Male’ International Airport Private Ltd (23 per cent is held by Malaysia Airports Holding Berhad). This investment is equal to 1.4 per cent of GMR’s consolidated shareholders’ funds of Rs 9,161 crore (as of end-September) and 1.7 per cent of its market capitalisation of Rs 7,648 crore. This explains that even if the investments are required to be written off (worst case scenario) the valuations may not change drastically. Secondly, GMR’s stock is currently trading near historically low levels and analysts believe that most of the negatives are reflecting in the price.

GMR holds various infrastructure assets, including two prestigious Delhi and Hyderabad airports (almost a third of revenues), several road and power projects. In these segments, the company has invested equity capital of about Rs 9,500 crore, which make up for most of its stock valuation. In comparison, the Maldives project is small.

In Rs crore FY 12 FY13E FY14E
Net sales 7,642.1 9,471.8 11,728.6
Ebitda 1,758.2 2,759.1 4,134.1
Ebitda (%) 23.0 29.1 35.2
Net profit/(loss) -441.2 -353.6 348.5
EPS (Rs) -1.1 -0.9 0.9
PE (x) NA NA 21.8
E: Estimates                                                             Includes Male Airport financials
Source: Nirmal Bang Institutional Equities Research
  In Rs crore
Maldives airport project size 2,810.50
Investment so far (equity+debt) 1,265.00
Total equity investment 165.00
GMR’s equity contribution 126.50
GMR’s total shareholder's funds 9,161.00
GMR’s equity in male/total equity 0.01
Market cap of GMR 7,648.00
GMR’s equity in Male/Market cap 0.02

Deepak Purswani, who is tracking the company at ICICI Securities, has valued GMR’s stock at Rs 20 per share. He says, “In terms of valuation, Maldives Airport was contributing Rs 0.6 per share in our valuation. Hence, we are removing that from our valuation now”. Consequent to the uncertainty, analysts at Nirmal Bang have also excluded the project in their valuation estimates and accordingly lowered their target price for GMR from Rs 27 to Rs 26.

However, there is one more dimension to the Male airport episode. Analysts were expecting the airport to contribute about 10-12 per cent to the company’s consolidated revenues and about Rs 150 crore in annual profits in FY13 and FY14. Including the Male airport, analysts were expecting GMR to report a turnaround (profit of over Rs 350 crore) in FY14. Given that the contract involves building and operating the airport for a period of 25 years (extendable by another 10 years), the company would lose out on future revenues and profits as well, if the contract is terminated.

Nevertheless, the Maldives project cannot be written off today, as the company has taken legal action to protect its interests. On this front, the Singapore court has given a stay order. Recently, Axis Bank has also sent notice to Maldives government for the recovery of its $350 million loan given to GMR Infrastructure. Besides, there is also pressure from India’s foreign ministry (as the news reports suggest) which could impact the bilateral ties between the two countries (if the matter is not dealt with lawfully).

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