ADP merger likely to give wings to GMR Airports Infrastructure stock

Current fair value of Rs 48-Rs 50 indicates room for upside

The GMR Group and its joint venture (JV) partner -- the French Groupe Aeroports de Paris (ADP) -- will merge their unlisted company, GMR Airports (GAL) into the listed GMR Airports Infrastructure (GIL), alongside an infusion of €331 million (Rs 2,900 crore) via the foreign currency convertible bond (FCCB) route by ADP. While the merger is subject to regulatory clearance and shareholder approval, it could take place in the early part of the 2024 calendar year.

ADP holds 49 per cent in GAL and had agreed to equity earnouts of 8 per cent of GAL and cash earnouts of Rs 1,060 crore to GIL, when the JV was announced in 2020. The GMR Group holds 51 per cent in the unlisted GAL and 58.9 per cent of GMR Infrastructure (roughly 67 per cent of the GIL stake is pledged).

The capital infusion would enable paying out some debt, and provide a cover for some of its contingent liabilities of Rs 6,100 crore. After the merger, the GMR Group will remain the single largest shareholder in GIL owning 33.7 per cent. ADP will hold 32.3 per cent with the public float at 34 per cent – foreign portfolio investors own a substantial chunk of the float.

GMR operates airports in Delhi, Goa and Hyderabad and is looking to expand its portfolio. The fair value of airports is hard to assess but there’s recovery in traffic volumes & retail and “city-side” revenues are also improving. Land monetisation will be another long-term payoff.

GMR has a contract for the Rs 4,200 crore Bhogapuram Airport, Visakhapatnam, to be done in PPP (public-private-partnership) model. Construction is due to start in June and land acquisition is completed. GMR also has a 40-year concession (extendable by 20 years) to develop, operate, and maintain Mopa airport in Goa at a cost of Rs 2,870 crore. Since Goa is a tourist destination, there is strong growth potential. The airport has an operating capacity of 4.4 million passengers and civil infrastructure for handling 7.7 million passengers. Domestic operations in the airport started in January 2023 and international operations in March. Cargo capacity will be scaled to 150,000 tonnes per annum (25,000 tonnes initially). GMR plans to increase capacity to 33 million passengers, and may be 40 million. Mopa also has commercial real estate of 232 acres and Phase I includes monetisation of 23 acres with 5 hotels and 1 retail plot. Future plans include a golf course and casino.

GMR is also expanding capacity at the Delhi airport (DIAL) -- from 65 million passengers to 100 million passengers -- at a capex of Rs 11,600 crore while in Hyderabad it is expanding the capacity to 34 million from 12 million at a capex of Rs 5,500 crore.

DIAL has monetised 106 acres of a total of 230 acres, and GMR has monetised 260 acres in Hyderabad of the available 1,500 acres.

The group is looking to add new overseas assets in Indonesia, Philippines, Vietnam and Greece. GMR completed the EPC contract of Clark Airport before time, which enhanced its qualifications. Domestically, GMR plans to participate in future auctions for airports approved for privatisation. The overseas strategy hinges on recycling capital from mature assets to new assets, while in India, GMR will operate airports, focus on land monetisation and bid for concessions, like duty free, car park, cargo, F&B, etc.

GMR Infrastructure may have a current fair value of Rs 48-50 but this could change rapidly, given the nature of the business. The stock has gained a net 4 per cent in the last month, but lost a little ground after the merger was announced.