GVK Power and Infra -Growth funding tied up through PE: Macquarie

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GVK Power and Infra
Growth funding tied up through PE
Event
􀂃 GVKP has announced that it has raised Rs12bn of funding from private equity
players led by 3i by offering a 21.1% stake in GVK Energy. The implied
valuations of power assets are significantly ahead of our valuations. We raise
our price target to Rs60. GVKP is one of our high conviction Outperform calls.


Impact
􀂃 GVKP ties up funds for power expansion projects through PE deal:
GVKP has tied up funding to the tune of Rs12bn from private equity players
led by 3i in GVK Energy Ltd, which is the holding company of all power assets
except Goriganga and Rattle hydropower plants. This would lead to eventual
dilution of 21.1% in GVK Energy.
􀂃 Straightforward equity deal with no structures / guaranteed returns: GVK
Energy will get Rs5bn upfront, with the remaining amount being drawn as
projects progress and require equity. GVKP will also invest Rs2.5bn during
this period. Unlike some of the recent PE investments in the infra space, the
deal does not give any guaranteed returns or in-built structures to investors.
Exit to investors would be through IPO within next five years.
􀂃 Increases certainty on growth assets and rules out dilution in parent:
GVK Energy needs equity of Rs20-25bn over next three years for all of the
power projects, including 1,600MW of planned gas-based projects. With this
PE funding along with internal accruals and parent funding, most of the
required financing is tied up, significantly raising certainty on these projects.
Key event to watch out for would be the gas allocation for these projects.
Earnings and target price revision
􀂃 We revise our price target to Rs60 from Rs53 to factor in PE funding. We
have reduced earnings in FY12 by 6% to factor in delay by one quarter in
Alaknanda.
Price catalyst
􀂃 12-month price target: Rs60.00 based on a Sum of Parts methodology.
􀂃 Catalyst: Resolution of merchant issue and Mumbai airport land monetisation.
Action and recommendation
􀂃 GVK Energy valuations factor in growth assets, at 1.8x post funding
P/BV: Implied valuations from PE deal for power assets is significantly ahead
of our earlier valuations, which were based on existing assets while this deal
values growth opportunities. Post infusion, implied valuations at 2x P/BV are
reasonable, in our view.
􀂃 We raise our price target to Rs60 to factor in funding from PE deal: We
have raised valuations for power projects under construction and introduce
value for expansion projects with the secured funding. We remain confident
on GVK getting a gas allocation, as it satisfies all of the necessary conditions.
􀂃 Residual value for other assets at only Rs22/share or Rs35bn: GVKP’s
other assets, which include stakes in Mumbai and Bangalore airports, Mumbai
airport land, and highly profitable roads, are valued only at Rs35bn, almost
half of our valuations. Risk/reward remains extremely favourable for GVKP.