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GVK Power & Infrastructure (GVKP)
Infrastructure
Navi Mumbai airport – opportunity ahoy. GVK-led consortium (MIAL) has the right
of first refusal for the Navi Mumbai international airport project provided it matches the
L1 bid and if its bid is within 10% of the L1 bid. We believe that such a large project
(~Rs90 bn) is likely to attract stiff competition. Actual NPV would depend on revenue
share, contract structure and real estate opportunity. We retain our BUY rating on
attractive valuations, large proportion of visible value based on cash flows and PE
investment.
GVK-led consortium (MIAL) has right of first refusal; however, not without riders
The consortium led by GVK (MIAL) would have right of first refusal, during the bidding for the Navi
Mumbai airport. However, GVK’s right of first refusal would be valid only if its bid is within the
10% band of the L1 (highest revenue share) bid. The GVK-led consortium (MIAL) would have the
right to develop the project provided it matches the L1 bid.
Project likely to attract stiff competition; NPV would depend on bids, contract structure, real estate
We believe the project is likely to attract stiff competition. A project opportunity of this scale has
come up after a considerable amount of time, the previous being the Mumbai and Delhi airports
awarded in January 2006. The actual value of the airport in NPV terms for the winning consortium
would depend upon the competition, which can be very intense as well as revenue share offered
by the winning bidder. Another key driver of the value would be the potential real estate
opportunity offered. Note that a majority of the value for the Mumbai, Delhi and Hyderabad
airport development projects lies in the associated real estate development opportunities.
Navi Mumbai airport gets go-ahead from MoEF; airport a must to ease traffic levels from MIAL
The Ministry of Environment recently gave its clearance for the development of an international
airport in Navi Mumbai (potential size of Rs85-90 bn) with an ultimate capacity of 60 mn pax by
2030, developed over four phases. We expect traffic at Mumbai airport to reach its peak ( 40 mn
passengers) by FY2015-17E.
Retain estimates and target price of Rs54/share; reiterate BUY
We retain our BUY rating (TP: Rs54) based on relatively attractive valuations and pick up in road,
airport traffic. We believe that a large proportion of the value is already visible based on cash flows
and private equity investment. The stock underperformance has been likely on account of (1) low
visibility on monetization of Mumbai real estate, (2) risks/uncertainty related to regulatory
environment and (3) relatively slow progress in development of project pipeline.
GVK-led consortium (MIAL) has right of first refusal for Navi Mumbai airport
We believe the bidding is likely to take place on a revenue share basis. The consortium led
by GVK (MIAL) would have right of first refusal, during the bidding for selecting the
developer of the Navi Mumbai airport. However, GVK’s right of first refusal would be valid
only if its bid is with in 10% band of the L1 (highest revenue share) bid. For instance, if the
L1 bid is from L&T at 35% then GVK’s bid has to be above 25% revenue share for it to be in
the reckoning, otherwise GVK’s right of first refusal would be ignored. The GVK-led
consortium would have the right to develop the project provided it matches the L1 bid.
NPV would depend on revenue share, contract structure, real estate opportunity
Actual value of the airport in NPV terms for the winning consortium would depend upon the
competition, which can be very intense as well as revenue share offered by the winning
bidder. Another key driver of the value would be the potential real estate opportunity
offered. Note that a majority of the value for the Mumbai, Delhi and Hyderabad airport
development projects lies in the associated real estate development opportunities. For
instance, in MIAL of the total estimated value of Rs104 bn almost 65% (Rs67 bn) is from the
associated real estate development opportunity.
Proposed airport uncommonly large—competition can be intense
The proposed Navi Mumbai airport is uncommonly large, with is a potential project size of
Rs85-90 bn. The previous airport development opportunities in this size range were Mumbai
(Rs98 bn project size) and Delhi (Rs90 bn project size) airports awarded in January 2006.
Hence, GVKPIL could face stiff competition as we believe that the bid for Navi-Mumbai
airport could be keenly contested.
Navi Mumbai airport project receives go-ahead from MoEF
The Navi Mumbai international airport project (coming up in the Kopra-Panvel area) received
the clearance from the Ministry of Environment & Forest on Monday, November 22, 2010.
The airport would be spread over an area of about 1,160 hectares and is likely to involve a
total project cost of about Rs87.2 bn. The project involves the construction of two runways
of about 4.5 km length each for independent parallel operation with the provision of fulllength
taxi ways on either side of the runways. The airport is planned to be executed in four
phases and is expected to handle about 10 mn passengers in its first year of operations -
scheduled for 2015. The airport is planned to handle an ultimate capacity of 60 mn
passengers by 2030. Mr. Prithviraj Chavan, Chief Minister of Maharashtra, has cited that the
bidding process and award of contracts for the airport is likely to be completed within the
next 12 months.
The Navi Mumbai Airport is proposed to be developed through public-private participation in
which CIDCO/AAI will hold 26% equity and rest will by held by private developer to be
raised through public bidding. The airport is to be located near Panvel, about 35 km away
from the existing Mumbai International Airport.
Navi Mumbai airport is an example of winding route of approvals that large
infrastructure projects go through
We believe this project is a good example of the winding route of approvals that large
infrastructure projects typically go through. Post the proposal for the airport in 1997, the
project was finally approved by the Union Cabinet only in 2007 and subsequently by the
state government in 2008. Environmental clearance for the project was also delayed due to
conflicts on various issues related to diversion of a river, relocation of villagers etc. The key
milestones and developments in the Navi Mumbai airport project are enlisted below.
We expect all clearances to be in place in next two months, post that Maharashtra
government would structure a bidding process which may take about six to nine months.
Actual award of the project to the developer (potentially GVK) may be by the end of
FY2012E.
New airport a must to ease traffic; MIAL to reach peak capacity by FY2015-17
We expect the passenger traffic and aircraft movement at the Mumbai airport to grow at
about 8-9% CAGR through FY2015E. Mumbai Airport handled about 26 mn passengers
and about 229,801 aircraft movements in FY2010. The airport would be designed to handle
a maximum passenger capacity of 40 mn passengers. We believe the airport would achieve
this volume within five years and would be able to operate at a maximum of 15% higher
volumes than the rated capacity. We highlight that capacity expansion would not be
possible in the Mumbai airport unlike the Delhi airport due to airside constraints. Hence, the
traffic growth beyond this would have to be absorbed by another airport - most likely the
new Navi Mumbai airport.
Recession bought two years, but expect strong traffic growth from here on; traffic
back to FY2008 levels post dip in FY2009
Mumbai airport passenger traffic demonstrated strong recovery in 1HFY11, growing at 15%
yoy. The yoy growth in the traffic was also partially aided by the low base effect - Mumbai
airport passenger traffic levels had remained relatively flat on a yoy basis in 1HFY10. The
growth was led by the domestic segment which grew by 16% yoy while the international
passenger segment recorded a 13% yoy growth. We highlight that the long-term CAGR of
passenger traffic at Mumbai airport, for FY2003-10, stands at 11%.
CMP implies Rs10/share (for GVK) or Rs41 bn for MIAL; same as equity value of
BIAL
We believe a considerable proportion of our target value for GVKPIL is already visible which
includes (1) Rs11 bn or Rs6.7/share value from the GVK Jaipur Kishangarh road project - the
project is already operational with a steady stream of positive cash flows, (2) Rs33 bn or
Rs21/share for value from power projects - recent private equity investment implies a premoney
value of Rs45 bn for versus our valuation of Rs44 bn on a post-money basis (have
built in cash from PE investment), (3) Rs12 bn or Rs7.4/share based on book value of
investment in Bangalore International airport.
Adjusted for these values and Rs5/share of net debt at standalone level, the current market
price of Rs42/share implies a value of only Rs10/share for GVK’s stake in MIAL or about
Rs40-42 bn for MIAL. This is versus our ascribed value of Rs101 bn for MIAL. This is even
broadly equal to the implied equity value for Bangalore International Airport Ltd - based on
GVK’s transaction of buying out 29% stake in BIAL for a compensation of Rs11.7 bn.
Reiterate BUY with target price of Rs54/share
We retain our SOTP-based target price of Rs54/share. We reiterate our BUY rating on the
stock based on (1) visible progress across projects under construction, (2) pick up in road and
airport traffic witnessed in the past few quarters, (3) relatively attractive valuation of about
2X FY11E P/B, and (4) potential realization of better than expected value for stake sale in
airport vertical.
Stock underperformance likely on the back of slow real estate monetization,
regulatory uncertainties
The stock has underperformed the market in the past one month and three month period by
about 4% and 9.6%, respectively. The underperformance is likely on account of (1) low
visibility on monetization of Mumbai real estate - contributes to about 28% of the total
value of the company, (2) risks/ uncertainty related to regulatory environment in power
(merchant sales) and airport (Single versus Dual till model) sectors and (3) relatively slow
progress on development of projects in the pipeline.
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