>GMR INFRASTRUCTURE LIMITED (JP MORGAN)

Forex loss re-classification leads to better than expected results, maintain Neutral

• GMRI reported FY2009 PAT of Rs2.8B (up 33%) vs. our estimate of Rs1.7 B. Results were better than expected due to 1) exchange loss of Rs1.8B for FY09 now directly added to the cost of assets, vs. earlier policy of charging through P/L and 2) sharp improvement in revenue and EBIT from construction activities, as GMRI has begun to recognize profits on its construction JV with Limak, for building the Sabiha airport. Profits of airport and power segment trailed estimates: power EBITDA was lower than estimated mainly due to lower-than-expected utilization of Vemagiri plant.

• The key constituents of our Mar-10 SOP-based PT of Rs150 are a) airports – Rs56, b) real estate – Rs28, c) power, incl Intergen – Rs51 and d) roads, net cash and coal mines: Rs15. While a stable government and return of funding appetite provide a stronger basis to view infra names
favorably, superior execution track record of the GMR group provides reason to view its development pipeline with less skepticism. In case of GMRI, a conducive policy and funding environment could add Rs17.7 to our SOP from 2.4GW power projects in the works. Improved real estate sentiment and concrete development plans could add a further Rs63, as our current valuation is conservative.

• The stock appreciation of GMRI seems to have already captured some of these positive tailwinds. GMRI trades at 19.4x FY11 EV/EBITDA, which already builds in 43% EBITDA CAGR through FY11. Thus, we maintain Neutral. Sharp improvement in real estate sentiment, coupled with faster-than-expected progress on the project development pipeline, constitute the key upside risks to our PT. As our growth estimates factor in further user charge increases at Delhi airport, regulatory disapproval is the key downside risk to our FY11 earnings and our PT as well.

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