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GVK Power & Infrastructure
Attractive mix of cash-yielding and growth assets; Buy
We initiate coverage on GVK Power & Infra with Buy and Dec ’11e
price target of `54 on the back of its attractive mix of cash-yielding
and growth assets. Monetization of Mumbai airport land and gas
allocation for power projects would be the key near-term triggers.
Smart mix of yield, growth, development assets. GVK’s
operational assets (3 power plants, 2 airports, 1 toll road) comprise
55% of our SOTP target price (vs. 35% for GMR) and projectsunder-
development (3 power plants, airport real estate, 1 toll road,
SEZ, oil & gas blocks) comprise the rest. Its ‘cash earnings yield’ or
cash profit-to-market cap at 6.7% (GMR: 5.7%) aids the stock’s
defensive character. GVK entails lower risk than GMR Infra.
Airport-land monetization, funding of power projects key. We
expect ~1m sqft of Mumbai airport land to be monetized in FY12e,
post-MMRDA approval; GVK plans monetizing 20m sqft within 8-
10 years. MIAL real estate forms 27% of our SOTP. GVK has raised
`12bn from private equity investors, led by 3i (`8bn) for 21.1%
equity stake in GVK Energy. This would bridge the FY11-13 funding
gap for GVK’s power business.
Other share-price catalysts: i) Favorable decision on higher
recovery of aeronautical (aero) charges for BIAL by airport regulator;
ii) approval for merchant sale or additional fixed-charge recovery in
Jegurupadu-2 and Gautami power plants; iii) growth in non-aero
revenue in BIAL (38% of total revenue vs. 45% in GMR’s HIAL).
Valuation and risks. GVK’s valuation, at a discount to its nearest
peer GMR Infra, is justified by its relatively lower-growth profile and
lower RoE. Key risks: i) execution delay; ii) equity raising in airportholding
company (holdco) at a discount to fair value.
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