>GMR INFRASTRUCTURE (HSBC)

3Q earnings disappoint: GMR’s 3Q net profit was down 85% y-o-y to INR92m (HSBCe INR395m – 35% decline, consensus INR547m – 10% decline) due to 1) lower power business profitability and 2) losses at associate companies (Homeland Energy). The decline in the power business was due to the short-term impact of lower plant load factor (PLF) resulting in lower generation. We expect these power plants to return to normal operations, with no impact on our FY11-12 earnings. Airport EBIT was up 34% q-o-q, driven by 13% q-o-q growth in passengers and 96% q-o-q growth in roads on lower operating expenses (Table 4).

UW(V): Payday remains a long way off

• 3QFY10 results below expectations due to short-term impact of power business profitability and associates’ losses
• Expansion plans in power will take time to bear fruit; in the interim, earnings to decline at 12% CAGR over FY09-12
• We cut our already below consensus FY10 earnings by 19% but maintain FY11-12 earnings. Reiterate TP of INR51.9, implying –13.4% return

Project progress (Table 2): A key positive is the recently received approval to increase the capacity of its 1050MW under-construction Kamalanga project by 350MW (33% increase) with no change in the timeline of the project. With this additional capacity, GMR’s power capacity under development has increased to c8GW.

Estimate change: We reduce our FY10 earnings by 19% to incorporate lower than expected 3QFY10 profitability. However, we maintain FY11-12 estimates as we expect the power plant to return to normal operations going forward.

Why we’re still cautious: The stock has underperformed the market by c15% in the last 45 days. We believe there may be a further 13% downside from current levels because 1) nearterm pressure (we estimate earnings fall at a 12% CAGR in FY09-12 vs. consensus estimates of 28% growth); 2) power projects are long term (the first project is not scheduled to start operations until 2012) and hence carry execution risk; and 3) projects have long payback periods and face regulatory risks — as long-term investments, they are also exposed to the economic cycle. In our view, the current valuation doesn’t factor in execution, tariff, funding and regulatory risks. Reiterate INR51.9 TP and UW(V) rating.

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