Shares of GMR Airports Infrastructure have rallied 20 per cent in the last one week, taking their six-month return to 72 per cent. Kotak Institutional Equities said the stock is factoring in aggressive assumptions on reinvestment of $1 billion of equity funding beyond internal accruals and a higher 3 times price-to-book value (P/BV) multiple. While the brokerage sees a strong case for investment in airports in India and the rest of Asia, the constraints on cash flows to reinvest limits its optimism. It called the stock valuations 'expensive'.
On Friday, the stock was trading at Rs 64.71, down 0.19 per cent. Kotak has increased its fair value on the stock to Rs 54 from Rs 53, factoring the likely reinvestment over the next 15 years of attributable free cash flow (post-interest cost) at 2 times P/BV, downgrading the stock to 'Sell' rating from 'Add'.
GMR Airports is at the end of a $2.5 billion capex into expanding capacities in Delhi and Hyderabad assets and setting up the greenfield airport in Goa. The same led to its leverage nearing 10 times levels.
"The same will ensure limited FCF over the next few years. We estimate the NPV of equity growth capital at $1.4 billion from internal accruals over the next 15 years. At 2 times P/BV, the value creation from re-investment that we factor is a similar to $1.4 billion or 16 per cent share of our Rs54 per share SoTP," it said.
For justifying GMR Airports' prevailing price, the value of new asset wins at $4.4 billion, equivalent to 37 per cent share of value, has been factored in, Kotak said. "The $4.4 billion implied value of new asset wins is difficult to realise against the growth capital of $1.4 billion that we estimate. The same requires valuing internal accruals at higher 3 times P/BV multiple and another $1 billion of fresh funding. It also requires us to take the following calls that we find aggressive: competition remaining benign over the long term and new investors coming in at current stiff valuations," Kotak said.
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