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GVK Power & Infrastructure
Overweight
GVKP.BO, GVKP IN
A princess in a stepdaughter's shoes; maintain OW
• GVK has seen a sharp underperformance in the past two quarters,
on the back of: a) continued suspense in Mumbai real estate
monetization, as the master plan for this has not yet been approved by
MMRDA; b) the perceived high price paid for Bangalore airport; and c)
regulatory uncertainty on airport charges. Markets have also ignored the
higher-than-expected P/E deal valuation for its power vertical.
• Stock price already seems to be factoring in zero value for Mumbai
airport land (22% of our SOP value), and a significant discount to our
estimated value for Bangalore airport (15% of SOP). Any news flow on
Mumbai real estate would be a strong stock catalyst, in our view. Clarity
on airport charges (expected around 2Q CY11) too should drive
sentiment for GVKP, although we expect this event would be more
significant for GMRI (OW), whose Delhi airport is complete and is
facing losses on account of high opex, interest and depreciation.
• Power PE deal (~US$330MM) implies a higher value for power
verticals (US$1.3B) than the street was expecting, as it likely gives
credibility to gas project expansions totaling 1.6GW. We include these
in our valuation (Rs3/share, 5.4% of SOP) albeit with a 50% discount
given the uncertainty around gas allocation. GVK has an operating
capacity of 901GW and under-construction capacity of 870MW, which
should drive growth through 2014.
• We maintain OW, with a revised Mar-12 SOTP-based price target of
Rs53: Continued real estate monetization delay is the key risk to our
price target, in our view.
Maintain OW based on visible intrinsic
value
GVK Power has seen a sharp underperformance in the past two quarters on
regulatory concerns and mainly delays in monetization on Mumbai real estate.
However our new Mar-12 SOTP-based PT of Rs53 (see Table 1 below), valuing only
visible assets, implies 42% upside from the current level. Our PT derives 59% of its
value from airports and associated real estate, 39% from power, and 7% from roads.
We continue to use DCF to value each SPV.
The stock price already seems to be factoring in zero value for Mumbai airport
land (22% of our SOP value), and a significant discount to our estimated value for
Bangalore airport (15% of SOP). Ex-MIAL real estate, we value GVK at Rs41/share,
implying 10% upside to the current share price. Delay in MMRDA approval does not
impact our SOP as long as real estate prices appreciate. However, airport completion
may be delayed if 2.4M sft not leased out in FY12.
The stock has not reacted positively to the conclusion of Rs15B of PE deals for a
25% stake in the power vertical, which implies a valuation of ~Rs60B or
Rs38/share; thus the entire market cap of the stock seems to be equal to the PE dealimplied
valuation of the power vertical alone. Post money, we value the power
vertical at Rs50B. Even if no value is given to 1.6GW of brownfield gas-based
projects (Rs3/share) which are yet to receive fuel allocation, our SOTP value
decreases to Rs50/share, implying upside of ~35% from the current share price.
We roll forward our PT to Mar-12 and reduce it to Rs53 from Rs57. Key
changes include: a) Airports: A more conservative view of aero charge increases as
well as long-term non-aero revenues resulting in lower value for airport assets, we
perform a sanity check our valuations with implied valuations for publicly listed pure
plays; b) Real estate: Maintaining our valuation here; and c) Power: Inclusion of
brownfield gas-based projects (1.6GW) given management and PE investor
confidence on fuel allocation. However we conservatively apply a 50% discount to
our valuation given the uncertainty/ potential delay in fuel supply. Our Rs50B
valuation is post money compared to the implied valuation of Rs60B from recently
concluded PE deals; we adjust for a 25% dilution of GVK’s stake in the power
vertical accordingly.
GVK stock is trading at 21x FY13E P/E, 9x EV/EBITDA, and 1.5x P/BV.
Valuation prima facie appears expensive given the high proportion of unmonetized
real estate value in the SOP. Excluding the real estate valuation, GVK trades at 15.4x
and 7.7x FY13E P/E and EV/EBITDA respectively.
Mumbai airport real estate
Management is currently awaiting MMRDA approval to commence its development
plans and is expecting an outcome in the next two quarters: this implies a delay of
over a year. There is a risk of this being delayed further, in our view. Nonmonetization
of this real estate implies a valuation risk of 22% to our SOTP. We
value 12.6mn sq ft to be monetized at Rs3,990/sq ft.
Of the total available area of 1,976 acres, MIAL is allowed to commercially develop
10%, or 198 acres of real estate around the airport. To handle the politically sensitive
issue of slum encroachment, MIAL engaged HDIL, a slum rehabilitation specialist.
In exchange HDIL will get 65 acres of airport land for its own development, in
addition to the extra FSI that slum rehabilitation projects are entitled to. Also an
additional 52 acres is occupied by AAI for its staff quarters and offices. If MIAL gets
to develop 100 acres, management is confident that it can build 15-20 mn sqft
(implying 3.5-4.5x FSI).
MIAL: FCF positive in FY13E
Earnings and cash flow outlook
We model MIAL to continue its profitable run through FY12 and then report losses
as capital costs begin to flow via the P&L upon project completion. We expect a
6.6% CAGR in traffic (vs 12.3% for DIAL) and 10% for FY14-FY20 as the PAX
handling capacity expands. We expect EBITDA to grow at a 27.7% CAGR during
FY10-14.
On a cash flow basis we expect a positive FCFF FY13 onwards as the capex phase
gets completed in FY12. We currently do not model any cost overruns to the
scheduled project cost of Rs98B.
Valuation
We value MIAL’s core airport operations at Rs.48B (Mar-12 DCF) vs. Rs65B (Mar-
11 DCF) previously based on a more conservative view on non aero revenues,
inflation in regulated aero charges offsetting the benefit of a roll forward to FY12.
Our valuation implies an 18.5x FY12E EV/EBITDA at a discount to DIAL’s 26x. In
FY13E MIAL is at a premium at 16.1x, with DIAL at 14.6x, with opex beginning to
stabilize at DIAL and assuming some debt repayment from real estate sale.
The implied EV/EBITDA multiples are more comparable to Macquarie airports as
well as to Beijing Capital. The premium to European airports is warranted, in our
view, due to higher traffic growth potential and non-aeronautical revenue growth
possibilities at Indian airports (see Table 6 on page 7 below for valuation of GVK's
airport assets compared to GMR and other international airports).
Bangalore airport – what’s the fair value?
GVK purchased its 29% stake in BIAL in two tranches: 17% from L&T for Rs6.8B
and 12% from Zurich Airport for Rs4.8B, implying a valuation of Rs40B. L&T and
Zurich made >500% return on their investment in BIAL. Given our Rs43B valuation
for core airport and real estate, GVK's acquisition was fully priced limiting upside to
SOTP. However, in our view the stock price is factoring in a steep discount to our
valuation.
Potential increase in stake by buying out Siemens' 14% of the total 40% share, which
comes out of lock-in this May. Past valuation benchmark suggests further investment
of Rs5.6B by GVK, although it is not known if GVK will exercise its right of first
refusal at this price, which is already perceived to be too high.
Earnings and cash flow outlook
Compared to other Indian airports BIAL is a profitable one; we expect a 10.2%
CAGR in traffic through FY15 (10.8% for Hyderabad) and 21.3% growth in PAT
(360% for Hyderabad). We expect a sustainable ROE of 20-24%. While we expect a
steady growth in OCF, the airport should be FCF positive in FY15 as the airport
expands its capacity to 17MM PAX, while GMRI's Hyderabad airport is already in
the black
Valuation
Based on a DCF approach we value the core airport operations at Rs32.6B
(Rs6/share for GVK’s 29% stake or 15% of SOTP) vs. Rs50B previously. Our
valuation implies an 11.9x and 10.8x FY12E and FY13E EV/EBITDA respectively
compared to 13.1x and 10.4x for Hyderabad airport.
We continue to value the 515 acres of leasable area at Rs20MM/acre, implying a
valuation of Rs10.3B or Rs2/share for GVK’s stake. Given that the development of
the land parcels is still in the planning stage, we have made our valuation
conservative.
Power: More positive on gas
GVK has 901MW of operating power assets, and an under-construction portfolio of
870MW including the 330MW Alaknanda hydro project and 540MW coal based
Goindwal Sahib. In addition the company has 1.1GW of hydro projects in the
pipeline which we don't include in SOTP given their nascent progress and risks in
execution.
In 2010, GVK announced 1.6GW of brownfield expansion projects for its gas-based
projects. Management seems confident of getting gas since it has land in hand, water
allocation and environmental clearance for half the capacity. A positive outcome on
gas allocation (expected to be a 2011event) is another potential upside catalyst.
The recent PE investment of Rs15B in the power vertical should partly fund equity
growth through FY15. In our view, GVK requires Rs32B of equity for 2.5GW of
incremental capacity in SOTP. Management is targeting an IPO for this vertical 4-5
years from now.
Earnings outlook
We estimate 670MW of capacity addition through FY14 and a CAGR of 38% and
94% in EBITDA and PAT respectively. In our view the contribution power segment
earnings will increase to 77% in FY14 from 30% in FY10. We model no merchant
sales in 2H FY11 and FY12 pending APDICOM’s resolution of the matter.
Valuation
GVK’s power vertical appears higher than peers at 19.5x FY12E EV/EBITDA
compared to Adani Power at 15x, which has a larger pipeline and more merchant
exposure as well as NTPC and TPWR at 11x. This is due to 15% of the power
valuation coming from gas-based project expansion (valued at a 15% discount) that
will be commissioned around early FY15, and contribute significantly to earnings
(19% of FY15 power segment EBITDA).
Financial Analysis
We expect GVK to report a PAT of Rs1.8B in FY11, up 18.5% yoy (Rs762MM in
1H FY11) with no new assets being commissioned in the year.
FY12 marks an inflection point in terms of profitability with Rs2.8B of PAT given
the completion of the planned maintenance in road and airport assets having a
positive impact on EBITDA. We model GVK to sell its apportioned merchant
capacity according to a fixed price of ~Rs4/unit to PTC as per the agreement; the
APDISCOM resolution to sell at merchant rates is still pending.
We expect modest improvement in numbers in FY13, expecting the commissioning
of Alaknanda and improved PLF at Gautami. However this is slightly offset by our
expecation of MIAL reporting a loss post the completion of its expansion project
with higher operating expenses and capital costs flowing through the P&L.
We estimate that GVK will turn FCF positive in FY13 as the majority of the capex
for its two under-construction power plants nears completion. The capex cycle
should once again pick up in FY14 in the power vertical. As MIAL turns around in
FY14E and more power capacity is commissioned, we expect numbers to continue to
improve. However, on the balance sheet front there is likely to be some capital
infusion as capex for the 1.6GW of gas based projects commences.
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