GMR Infrastructure - Right strategy, right price - BNP Paribas

Right strategy, right price

- Asset-light and asset-right strategy to drive upside

GMR management has adopted an 'asset-light asset-right' strategy to de-lever its over-stretched balance sheet. It is planning more asset sales; we estimate INR31.7b of sale proceeds in FY15. We expect its D/E ratio to decline from 3x in FY14E to 2.2x in FY15. We upgrade to BUY from Hold.

- Asset sales a key catalyst

There have been media reports that the company is looking to sell one each of its airport and energy assets. Separately, the company is looking to sell or publicly list its highway assets, and is planning a public listing of its airport holdco.

- Earnings to continue to disappoint

Higher capacity charges from assets being commissioned should start being expensed to the income statement. Almost all its underexecution assets could be commissioned in FY14-15. Bottom-line loss is a key negative, but we expect investors to focus more on balance sheet repair than earnings.

- SoTP-based valuation of INR28

We value GMR at INR28 (previously INR26) using a SoTP methodology. We use DCF (at 13.5% COE) to value individual assets, offset by any debt at the corporate level. Company-specific downside risks to our recommendation include delays in asset monetization, lower-than-expected realization, cost overruns and delays in commissioning projects that are under execution, and fuel price and availability.

Source : Equity Bulls

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