Deepak Kapur of Tapaks Capital Management presented his in-depth investment thesis on GMR Infrastructure (India BSE/NSE: GMRINFRA) at Asian Investing Summit 2018.

Thesis summary:

GMR Infrastructure is a play on India’s fast-growing airport sector. It is one of the largest infrastructure companies in India, owning and operating assets in the following segments: energy (power plants and coal mines), transportation (airports and highways), and property development (commercial property and special investment regions for industrial development).

The thesis is based primarily on the growing value of GMR’s cash-generating airport and allied businesses, growing at 15+% (aero revenues are based on assured return on equity, and non-aero business has reasonable operating leverage). GMR is the largest private sector airport operator in India. It owns and operates the Delhi International Airport as well as the Hyderabad International Airport under the public-private partnership model. It recently also won the mandate to build and operate a greenfield airport at Goa. Apart from India, GMR has airport development and operating interests in the Philippines and Greece.

In the last few years, the energy and highway businesses have been a drag, as their leveraged balance sheets and suboptimal operations led to large losses and increasing debt. The suboptimal performance was due to issues such as inadequate fuel supply for power plants, lack of long-term power purchase agreements from buyers, lack of environmental clearances leading to stuck projects, excess capacity in the industry, poor realizations, and inadequate toll collections.

The stock has languished in a narrow band for the last six years and is down 85% from its 2007-2009 peak during the infrastructure craze in India. However, asset monetization (sold a stake in its energy business), fund raising (QIP and rights issues), refinancing as well as debt restructuring and asset disposal initiatives of recent years, supported by a pick-up in the economy, have lent some stability to the balance sheet. The worst times seem to be behind the company. Looking ahead, GMR aims to sell the highway projects, restructure its energy operations, and shift the growth focus to airport, property, and EPC businesses.

The complexity of the operations and holding structure, the negativity surrounding the debt on balance sheet, certain regulatory issues, and various ongoing litigations have kept the valuation depressed. The recent market cap of INR 106 billion represents at least a 40-50% discount to underlying value and provides reasonable downside protection for the long-term investor, even after considering dilution risk. An unpleasant regulatory surprise for the airport business remains the biggest risk to the investment thesis.

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About the instructor:

Deepak Kapur is an investor and educator based in Chennai, India. He has over 15 years of experience in the secondary equity markets of India. In the past, he managed equity portfolios for individuals but currently manages only proprietary funds. He focuses on the mid and small-cap space in the secondary equity markets of India. He is value conscious and his preferred style is to hunt for opportunities in businesses that are currently out of favor in the market. He is a visiting lecturer at the Indian Institute of Management, Indore, where he has been teaching a course on Business Valuation since the last eleven years. He earned his Bachelors in Chemical Engineering and Master’s in Biological Sciences from the Birla Institute of Technology and Science, Pilani, and completed his MBA from Indian Institute of Management, Indore. He is an avid surfer, yoga practitioner and loves reading. His subjects of interest include; history, brain sciences, empirical psychology, financial markets, entrepreneurship, health and nutrition.