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GVK Power & Infrastructure Ltd.
A conservative company in Indian Infrastructure, Buy
„Conservative business model, Buy
We rate GVK, a diversified infrastructure company as Buy due to (1) an assured
ROE for 92% of FY13E power volume with recoverable fuel cost inflation; (2)
profitable airport assets on strong traffic growth; (3) private equity infusion at
valuation of Rs60bn for power vs current mcap implies a negligible value for other
business (vs 37% for airport, 17% for roads in SOTP); (4) 57% pot’l upside at our
SOTP based PO of Rs48/sh, post the stock’s 21% underperformance in last 6m
vs mid-cap index. Catalysts include Mumbai realty monetization, gas/FC for
1.6GW, doubling power capacity in FY13E and ST sale of power from FY12E.
Mix of regulated power story and profitable airports
Unlike peers, GVK has adopted a conservative approach in power with 92% of
FY13E volume is regulated. This ensures (a) secured ROE of 14-16%, could
exceed 20% through operational efficiency and (b) fuel cost fluctuation
recoverable in tariff. Airports are benefiting from strong traffic growth, thus
operating close to their capacity with fixed costs at 35-60% of FY11-13E sales
driving profitability.
Below-consensus earnings for FY11-12E, RoE rise to 8%
We estimate a 41% CAGR in FY10-13E earnings, while transitioning the
coverage, on (1) 13% power volume growth; (2) 9-18% airport passenger traffic
growth in FY11-13E; (3) ST tariff at Rs4.25/unit for FY12-13E; and (4) realty
monetization at Rs10,000/sf for 2.25m sf by FY13E. ROE rises from 6% in FY10
to 8% in FY13E. CFO up from Rs3.5bn in FY10 to Rs10.8bn in FY13E.
SOTP-based PO, key risks
Our SoTP based PO of Rs48 is based on a combination of DCF, exit P/BV and
10% conglomerate discount (power Rs19/sh, airport Rs18/sh). Downside risks:
significant delays in execution, aggressive competitive bid in power, delay in
commencement of ST sale of power and lower merchant realization, slower realty
monetization at value discount to our base case (Rs10,000/sf).
Valuation
We rate GVK Power and Infra a Buy with a price objective of Rs48. We use sumof-the-parts (SOTP) as our valuation methodology because GVK has interests in
diverse business areas (airports, power, highways, mining, oil & gas, and urban
infrastructure). Our SoTP is based on the DCF to value the infrastructure assets
and book value multiple for the regulated power generation assets that provide
GVK with an assured RoE. We apply a conglomerate discount of 10% given
GVK’s inter-company holding structure through a network of subsidiaries and
associate companies.
Our SOTP approach…
Only projects meeting stringent criteria & with all clearances included
We have applied stringent criteria to include only those infrastructure assets in
the SOTP where financial closure has been achieved, statutory approvals like
environmental / forest clearance is obtained and fuel secured.
For instance, in the power portfolio we have valued about 1,771MW (of total
capacity envisaged of 4,447MW) individually where projects have completed
developmental milestones and are either operating or under construction. Of the
three road projects in its portfolio, two are valued individually (one operating and
other under construction) while the third is under development. Both airports are
valued separately since they are operating. The realty business at the Mumbai
International Airport is valued separately since most of the milestones are
achieved and is awaiting final approval from MMRDA – the urban planning
authority in Mumbai for roll out. We have not valued the real estate at the
Bangalore airport as it is in the planning stage.
Varying costs of equity to reflect risk-return profile
We have used varying costs of equity (CoE) for each asset to reflect the inherent
risk-return profiles, execution, and operating risks. For operational assets, we use
a CoE of 12.5%. Likewise, for assets under construction, CoEs of 13.5-15% are
used. For real estate, we use a higher CoE of 17.5%, in line with peers.
…yields a PO of Rs46
Our SoTP-based methodology yields a value of Rs46 (after conglomerate
discount of 10%). Our PO is made up of the following elements:
(a) Rs19/sh (39%) for the four power generation assets and one coal mine. We
value the operational assets at Rs9.5/sh using an average of DCF (CoE 12.5%)
and exit P/BV of 1.5x FY12E; we value the assets under construction (two power
projects aggregating 870MW) at Rs7.3/sh using an average of DCF (CoE 13.5%)
and exit P/BV of 1.25x FY13E , discounted back to FY12E.
(b) Rs18/sh (37%) for the airport assets. We value Mumbai airport including the
realty at Rs14.5/sh; for both airports we use DCF with a CoE of 13.5%;
(c) Rs8/sh (17%) for the two road assets using DCF; and
(d) The remaining Rs9/sh is liquid investments and the cash balance as of
September 2010 at book value.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GVK Power & Infrastructure Ltd.
A conservative company in Indian Infrastructure, Buy
„Conservative business model, Buy
We rate GVK, a diversified infrastructure company as Buy due to (1) an assured
ROE for 92% of FY13E power volume with recoverable fuel cost inflation; (2)
profitable airport assets on strong traffic growth; (3) private equity infusion at
valuation of Rs60bn for power vs current mcap implies a negligible value for other
business (vs 37% for airport, 17% for roads in SOTP); (4) 57% pot’l upside at our
SOTP based PO of Rs48/sh, post the stock’s 21% underperformance in last 6m
vs mid-cap index. Catalysts include Mumbai realty monetization, gas/FC for
1.6GW, doubling power capacity in FY13E and ST sale of power from FY12E.
Mix of regulated power story and profitable airports
Unlike peers, GVK has adopted a conservative approach in power with 92% of
FY13E volume is regulated. This ensures (a) secured ROE of 14-16%, could
exceed 20% through operational efficiency and (b) fuel cost fluctuation
recoverable in tariff. Airports are benefiting from strong traffic growth, thus
operating close to their capacity with fixed costs at 35-60% of FY11-13E sales
driving profitability.
Below-consensus earnings for FY11-12E, RoE rise to 8%
We estimate a 41% CAGR in FY10-13E earnings, while transitioning the
coverage, on (1) 13% power volume growth; (2) 9-18% airport passenger traffic
growth in FY11-13E; (3) ST tariff at Rs4.25/unit for FY12-13E; and (4) realty
monetization at Rs10,000/sf for 2.25m sf by FY13E. ROE rises from 6% in FY10
to 8% in FY13E. CFO up from Rs3.5bn in FY10 to Rs10.8bn in FY13E.
SOTP-based PO, key risks
Our SoTP based PO of Rs48 is based on a combination of DCF, exit P/BV and
10% conglomerate discount (power Rs19/sh, airport Rs18/sh). Downside risks:
significant delays in execution, aggressive competitive bid in power, delay in
commencement of ST sale of power and lower merchant realization, slower realty
monetization at value discount to our base case (Rs10,000/sf).
Valuation
We rate GVK Power and Infra a Buy with a price objective of Rs48. We use sumof-the-parts (SOTP) as our valuation methodology because GVK has interests in
diverse business areas (airports, power, highways, mining, oil & gas, and urban
infrastructure). Our SoTP is based on the DCF to value the infrastructure assets
and book value multiple for the regulated power generation assets that provide
GVK with an assured RoE. We apply a conglomerate discount of 10% given
GVK’s inter-company holding structure through a network of subsidiaries and
associate companies.
Our SOTP approach…
Only projects meeting stringent criteria & with all clearances included
We have applied stringent criteria to include only those infrastructure assets in
the SOTP where financial closure has been achieved, statutory approvals like
environmental / forest clearance is obtained and fuel secured.
For instance, in the power portfolio we have valued about 1,771MW (of total
capacity envisaged of 4,447MW) individually where projects have completed
developmental milestones and are either operating or under construction. Of the
three road projects in its portfolio, two are valued individually (one operating and
other under construction) while the third is under development. Both airports are
valued separately since they are operating. The realty business at the Mumbai
International Airport is valued separately since most of the milestones are
achieved and is awaiting final approval from MMRDA – the urban planning
authority in Mumbai for roll out. We have not valued the real estate at the
Bangalore airport as it is in the planning stage.
Varying costs of equity to reflect risk-return profile
We have used varying costs of equity (CoE) for each asset to reflect the inherent
risk-return profiles, execution, and operating risks. For operational assets, we use
a CoE of 12.5%. Likewise, for assets under construction, CoEs of 13.5-15% are
used. For real estate, we use a higher CoE of 17.5%, in line with peers.
…yields a PO of Rs46
Our SoTP-based methodology yields a value of Rs46 (after conglomerate
discount of 10%). Our PO is made up of the following elements:
(a) Rs19/sh (39%) for the four power generation assets and one coal mine. We
value the operational assets at Rs9.5/sh using an average of DCF (CoE 12.5%)
and exit P/BV of 1.5x FY12E; we value the assets under construction (two power
projects aggregating 870MW) at Rs7.3/sh using an average of DCF (CoE 13.5%)
and exit P/BV of 1.25x FY13E , discounted back to FY12E.
(b) Rs18/sh (37%) for the airport assets. We value Mumbai airport including the
realty at Rs14.5/sh; for both airports we use DCF with a CoE of 13.5%;
(c) Rs8/sh (17%) for the two road assets using DCF; and
(d) The remaining Rs9/sh is liquid investments and the cash balance as of
September 2010 at book value.
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