Airport Expansions At Hyderabad And Mopa Will Increase Future Passenger Traffic

Key Takeaways

• Expansion projects and improved tariffs at key airports likely enhance revenue and earnings growth for GMR Airports.
  
• Non-aero revenue and reduced debt costs position the company for stronger profitability.
  
• Delays in tariff notifications, high debt levels, currency sensitivity, and reliance on airline expansion pose risks to GMR Airports' financial stability and growth.

Catalysts

Operates and develops airports in India.

• Expected growth in Indian airline seat capacity and increased international travel by Indian tourists suggest strong future passenger growth, potentially boosting airport revenues for GMR Airports.
  
• The narrowing of losses and positive cash generation, along with expected tariff revisions at Delhi Airport, indicate potential improvement in margins and overall profitability.
  
• The completion and increased utilization of expansion projects at airports like Hyderabad and Mopa, along with improved tariffs, are likely to enhance revenue and earnings growth.
  
• Increased non-aero revenue from commercial developments, Duty Free operations, and airport adjacency businesses can significantly contribute to higher net margins.
  
• Reduction in debt-related costs through refinancing and hedging strategies, coupled with a stabilized capital expenditure post major expansions, positions GMR Airports for stronger earnings growth.

GMR Airports Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GMR Airports's revenue will grow by 22.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.1% today to 6.6% in 3 years time.
• Analysts expect earnings to reach ₹13.6 billion (and earnings per share of ₹1.06) by about September 2028, up from ₹-4.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 146.4x on those 2028 earnings, up from -199.3x today. This future PE is greater than the current PE for the IN Infrastructure industry at 16.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.88%, as per the Simply Wall St company report.

GMR Airports Future Earnings Per Share Growth

Risks

• Delays in the tariff notification at Delhi Airport could impact future revenue and earnings as the anticipated increase in charges has not yet been realized.
  
• High levels of consolidated net debt (₹297 billion) could pressure interest costs and net margins if not managed or if refinancing becomes necessary.
  
• Dependency on the expansion of international networks by Indian airlines like Air India and IndiGo, restricted by current supply chain constraints, may slow international traffic growth, potentially affecting revenue.
  
• Sensitivity to currency fluctuations due to USD bond exposure, despite hedging, could lead to accounting impacts and affect reported net income and financial stability.
  
• Continued large capital expenditures, particularly at Bhogapuram Airport, while indicative of growth plans, could strain cash flows and impact net margins until revenue from new operations materializes.

Valuation

• The analysts have a consensus price target of ₹98.75 for GMR Airports based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹108.0, and the most bearish reporting a price target of just ₹80.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹204.6 billion, earnings will come to ₹13.6 billion, and it would be trading on a PE ratio of 146.4x, assuming you use a discount rate of 15.9%.
• Given the current share price of ₹87.37, the analyst price target of ₹98.75 is 11.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.