Morgan Stanley is underweight on GMR Infrastructure. Research firm continue to believe that the company has one of the best long-term stories in the infrastructure development sector in India

Results below expectations:

GMR reported consolidated revenue of Rs 7 billion, up 98% YoY (Exhibit 1). While the major contributor to higher revenues remained the power division, accounting for 42% YoY increase in revenue, road division revenue declined 10% YoY. While the airport division is not comparable on a YoY basis, it posted revenue growth of 7% on a QoQ basis, with the ratio of Non Aero revenues: Aero Revenues at 56%:44%.

Power business and capex led weakness in profits:

Losses from Vemagiri and the higher plant load factor (PLF) affected results in the quarter, with the power business reporting a 24% decline in PBIT, leading to a 22% YoY decline in company EBIT. With debt mounting as the capex schedule for the company’s projects rolls out, interest costs shot up 98%, leading to a PBT decline of 14% YoY. The increase in MAT (Minimum Alternate Tax) resulted in a 47% YoY decline in net income.

Value unlocking at airports in progress:

A variety of contracts on both the construction and operations side (advertisement at Delhi and duty free at Hyderabad) were given out in the quarter. We believe that the market is focused on the potential value creation from the monetization of a 45 acre (5.9 million sq ft) hospitality district at Delhi Airport. GMR expects to finalize the developer for this land parcel by September 2007.

Premium valuations:

Valuations remain high; hence, we retain our Underweight call on the company. While we continue to believe that GMR has one of the best long-term stories in the infrastructure development sector in India, the premium valuations still do not reflect the lack of earnings in the near-to-medium term.