PE infusion in GVK's energy assets finally: JPMorgan

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GVK Power & Infrastructure Overweight
GVKP.BO, GVKP IN
PE infusion in GVK's energy assets finally





• Finally the announcement on PE infusion in GVK’s energy assets.
GVK has signed an agreement with 3i India Infrastructure Fund to lead
an investment of Rs12B for a 21.1% stake in wholly owned subsidiary
GVK Energy. The deal implies an equity value of Rs56.9B or
Rs36/share (CMP of Rs45.6).


• The power hold co. includes- (a) Operational capacity of 901MW, (b)
870MW of under construction projects, (c) Coal mines with mineable
reserves of 119MMT and, (d) Brownfield gas capacity expansion of
2x800MW. It does not include the under development Goriganga hydro
project (370MW) and Ratle hydro project (690MW).

• Key upside catalyst has finally materialized. We have valued the
operational and under construction power projects of GVK at Rs31.5B.
The power segment contributes Rs16.5/share or 29% of our Rs57/share
SOP value (taking GVK’s attributable share of 63.6% in 464MW
Gautami plant), core airport operations at Mumbai and Bangalore
contribute 43% to SOP, associated real estate 25%, and others 3%. The
recent deal is clearly positive and at a sharp premium to our
valuation of GVK's power segment (implies Rs19.5/share upside).
The stock outperformed the Sensex by ~3% today.

• Implied deal value is a reflection of PE investor confidence in GVK’s
gas projects under development and future pipeline. They are
factoring in value for 2x800MW Brown field gas expansion projects in
our view, not currently featuring in our valuation. The Empowered
Group of Ministers (EGoM) is expected to meet this month and finalize
gas allocation, the key hurdle before construction of gas based projects
can commence. GVK has awarded the construction contract for Gautami-
II (800MW) to L&T and has identified equipment suppliers for both
expansion projects.

• IPO of GVK Energy in future to provide an exit option to PE
investor(s). According to management an IPO of the power hold co.
would be done over a 60-72-month timeframe. 3i is investing Rs8B of
the total Rs12B investment required, for the remaining Rs4B 3i/Actis
have evinced interest, as per the company. Of 3i’s initial investment,
Rs5B is expected to flow into GVK over the next 1 week, balance by
Mar-11.