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Event - GVK Power & Infrastructure Ltd has signed an agreement with M/s. 3i India Infrastructure Fund (established by international private equity firm 3i Group Plc) to lead an investment of INR 12 bn for a minority stake (21.10%) in GVK Energy Ltd., a wholly owned subsidiary of GVK.
Deal specifics – The deal includes the existing power projects (JP-1, JP-2 and Gautami) as well as the pipeline coal based (540 MW – Goindwal Sahib and its linked coal mines), gas based (1600 MW potential capacity at Jegrupadu and Gautami) and under construction hydel power (330 MW Alaknanda) projects. However, it does not include the proposed Goriganga 370 MW and Ratle 690 MW hydel power projects. .
Impact on valuations - We had valued the power portfolio of GVK at INR 17.4 bn which included JP1, JP2, Gautami, Alaknanda and Goindwal Sahib projects. We had not valued the Goriganga and Ratle hydel power projects as well as the pipeline 1600 MW gas based capacity as they had not achieved financial closure.
Assigning an option value of INR 16 bn for the 1600 MW gas based capacity (assuming ~ INR 10 mn/MW of equity investment and based 2.2 – 2.5x P/BV x for a operational project) the value for operational and financially closed projects works out to ~INR 29 bn. We had valued these assets at ~ INR 17.4 bn implying upside to our valuations to the extent of INR 11.6 bn or INR 7.4/share.
Our SOTP value - Since the deal includes pipeline projects for which the financial closure and gas supplies are yet to be concluded, and there is limited clarity on (i) merchant sale option for JP2 and Gautami, (ii) extension of JP1’s PPA beyond FY15 and (iii) structure of the private equity deal, we retain our SOTP value at INR 46/share.
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