Tuesday, January 17, 2012

>GMR INFRA: A consultation paper on the framework for determining the tariff for DIAL (Delhi International Airport) released by the Airports Economic Regulatory Authority (AERA).

AERA proposes tariff hike for DIAL in two phases
A consultation paper on the framework for determining the tariff for DIAL (Delhi International Airport) released by the Airports Economic Regulatory Authority (AERA) has proposed the shared-till method for revenue calculation, weighted average cost of capital (WACC) of 10.33%, cost of equity of 16%, project cost of Rs12.5bn and disallowance of refundable interest-free security deposit (RSD) as equity. The airports regulator has also recommended tariff hike by 148% in FY13 and FY14 each at DIAL, effective from 1 April 2012 to 31 March 2014. We believe this is a positive development that will eliminate the overhang on DIAL’s valuation and therefore retain our Buy rating on GMR Infrastructure with a target price of Rs39.

Key highlights:

  • AERA has proposed that the first regulatory period may be taken as 1 April 2009 to 31 March 2014 and recovery of the revised tariff may be contemplated during 1 April 2012 to 31 March 2014.
  • The regulator has proposed WACC of 10.33% as compared to bid WACC of 11.6% for the purpose of calculation of the returns on regulatory asset base (RAB). The reduction in WACC is primarily because of lower CoE of 16% against the projected CoE of 22%.
  • AERA has proposed that the targeted revenue be calculated on the basis of the shared-till method, which includes reduction of 30% of non-aeronautical revenue. The regulator has proposed allowable project cost of Rs125bn, which is as per its order in respect of the development fee.
  • Proposed average RAB for the first regulatory period would be lower by Rs12.7bn than what was submitted by DIAL because of lower hypothetical asset base and disallowance of future capex.
  • AERA has proposed that refundable interest-free security deposit (RSD) of Rs 14.5bn, which was used for financing of the project, should not be considered as equity.
  • AERA has not clarified on the issue of monetisation of remaining land bank at DIAL and usage of the funds generated. We believe this uncertainty would keep the hangover on valuation of DIAL’s land parcel.

Valuation: We have not revised our earnings estimates for DIAL based on the consultation paper and prefer to wait for the final order which is due in 4QFY12. However, we believe that based on the revised tariff the DIAL project is likely to report net profit of Rs0.6bn in FY13 and Rs7bn in FY13. Clarity on land monetisation and usage of the funds raised from it would be the next trigger for the GMR Infrastructure stock. We maintain our Buy rating on it with a SOTP-based target price of Rs39.

To read the full report: GMR INFRA