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Earnings in line, but mix is worrisome
GVK Power and Infra (GVK) reported Q3FY11 earnings of INR 419 mn, in line
with our estimate of ~INR 408 mn. However, there was significant deviation in
the mix as airport businesses and tax write back offset lower power business
earnings to the extent of ~ INR 120 mn due to higher plant heat rate and
auxiliary consumption.
Strong traffic growth across airports; flat at road asset
Both Mumbai and Bengaluru airports reported robust traffic (10% and 17%,
respectively) and cargo growth (13% and 25%, respectively), which aided
robust earnings growth (20% and 134%, respectively). Road traffic grew at a
nominal 2%, but due to higher toll rate, revenue jumped ~10%.
Higher borrowings to fund oil & gas / power expansion
Management stated that it has borrowed INR 2 bn @9% interest rate to fund its
oil & gas entry as well as initial equity towards 1.6 GW of power expansion
projects. GVK has also refinanced its bridge loan of INR 6.8 bn with a fresh loan
of INR 7.5 bn for a year @10% interest rate. Management is confident of
repaying this post the equity fund raising in the airport vertical.
To appeal against AERA’s single till guideline
Management during the conference call indicated that it will contest AERA
guidelines; it has not calculated the impact of the same if regulations are
implemented in the current form. We believe the concern whether the regulatory
framework will be based on single till and whether MIAL regulations also will be
relooked at by AERA will continue to be a significant overhang on the stock.
Outlook and valuations: Fund raising the trigger; maintain ‘HOLD’
While worries about the power and road business have been offset with robust
airport business performance, change in airport regulations, delay in real estate
monetization, higher borrowing, and likely equity dilution are some of the new
concerns that have emerged. We are introducing FY13 estimates and have also
increased our risk-free rate assumptions 100bps to 8%. We have incorporated
the uncertainty in airport regulations through a beta of 1.5x for these assets. We
have also reduced the value of BIAL airport land and incorporated the recent
corporate borrowing. Hence, our revised SOTP value for GVK comes to INR 34
/share (INR 46/share earlier). We maintain ‘HOLD/ Sector Performer’.
Key takeaways from conference call
• Management is confident of gas allocation due to Government of India’s indication of
60 mmscmd of gas reserves to be available from FY13. As GVK’s gas-based projects
are expected only post FY12 (in the XII Plan period) they have been categorized in
the second priority list along with nine other companies.
• The company has placed Notice To Proceed (NTP) for 400 MW of gas-based projects.
NTP will be issued for other projects once the environment clearance is received.
• MIAL land deal: Management expects some monetization in Q2FY12.
• In MIAL, capex spent so far aggregates to INR 45 bn.
• RIL supplied 15% lower than the stipulated gas supplies during the quarter.
Company Description
GVK was promoted by Mr. GV Krishna Reddy, and is a part of the GVK Group that has
interests in infrastructure, bioscience, and hospitality. The company is the flagship of the
group and holds its infrastructure assets under it. GVK entered the infrastructure
segment by building the 216MW Jegurupadu phase I power project in Andhra Pradesh.
The company has since then expanded across different infrastructure verticals with
presence in airports, power, roads, and urban infrastructure. Winning the bid for
developing the Mumbai Airport has been a major milestone for the company. It is also
bidding for deep sea gas blocks under the National Exploration Licensing Plan (NELP –
VII) in partnership with BHP Billiton.
Investment Theme
Redeveloping India’s largest and busiest airport
GVK, together with Airports Company South Africa (ACSA), bagged the project for
modernisation of the Mumbai International Airport (MIAL). The renovation project,
though highly prestigious and visible, is one of the most complicated projects in terms of
scope and size. It involves renovation and modernisation of the exiting domestic
terminals 1A and 1B, followed by modernisation of international terminals 2A and 2B.
Gas from Reliance fields could enhance power portfolio
GVK had an early start as a power developer with the commercialisation of its
Jegurupadu (phase I) gas-fired project in 1997. After a couple of years’ delay, the next
two projects (Jegurupadu phase II and Gautami power projects) commenced operations
post commissioning of RIL’s KG basin. However, the same has been allocated for only
five years. The company is now planning to further expand capacity by 800 MW fuelled
by the same gas source to be operational post FY12.
Real estate from MIAL and ROFR for Navi Mumbai Airport could provide upsides
MIAL’s Operating and Management Agreement (OMDA), allows GVK to commercially
exploit ~10% (197 acres) of the total airport land. However, a substantial portion of this
land is encroached by slum dwellers. Given the land’s prime location, even a modest
success in clearing the encroachments could provide significant upside to the company.
Key Risks
Natural gas security for existing power plants
GVK’s current power plants are running short of gas. Currently, the gas supply
agreement with RIL is valid for 5 years and even this is contingent on the legal dispute
between RIL and RNRL would be favourably settled. Since the company has given up the
dual fuel (naphtha) option for its Jegurupadu II and Gautami projects, timely availability
of gas is crucial for the company.
MIAL: Securing land from encroachments
A part of the mandatory projects that GVK has to execute under the terms of agreement
depends on the land that will be acquired by clearing sum encroachments on it. Some
part of the commercial real estate development from the project also depends on
clearing of the encroached land.
Competition from second airport in Mumbai
The central government has already approved the plan to construct the second airport in
Navi Mumbai, and the government of Maharashtra is trying to acquire land for it. The
airport bidding offers an opportunity to GVK on account of the ROFR clause. However, if
GVK loses the bid, the new airport could compete with the existing airport, hampering
the latter’s profitability.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Earnings in line, but mix is worrisome
GVK Power and Infra (GVK) reported Q3FY11 earnings of INR 419 mn, in line
with our estimate of ~INR 408 mn. However, there was significant deviation in
the mix as airport businesses and tax write back offset lower power business
earnings to the extent of ~ INR 120 mn due to higher plant heat rate and
auxiliary consumption.
Strong traffic growth across airports; flat at road asset
Both Mumbai and Bengaluru airports reported robust traffic (10% and 17%,
respectively) and cargo growth (13% and 25%, respectively), which aided
robust earnings growth (20% and 134%, respectively). Road traffic grew at a
nominal 2%, but due to higher toll rate, revenue jumped ~10%.
Higher borrowings to fund oil & gas / power expansion
Management stated that it has borrowed INR 2 bn @9% interest rate to fund its
oil & gas entry as well as initial equity towards 1.6 GW of power expansion
projects. GVK has also refinanced its bridge loan of INR 6.8 bn with a fresh loan
of INR 7.5 bn for a year @10% interest rate. Management is confident of
repaying this post the equity fund raising in the airport vertical.
To appeal against AERA’s single till guideline
Management during the conference call indicated that it will contest AERA
guidelines; it has not calculated the impact of the same if regulations are
implemented in the current form. We believe the concern whether the regulatory
framework will be based on single till and whether MIAL regulations also will be
relooked at by AERA will continue to be a significant overhang on the stock.
Outlook and valuations: Fund raising the trigger; maintain ‘HOLD’
While worries about the power and road business have been offset with robust
airport business performance, change in airport regulations, delay in real estate
monetization, higher borrowing, and likely equity dilution are some of the new
concerns that have emerged. We are introducing FY13 estimates and have also
increased our risk-free rate assumptions 100bps to 8%. We have incorporated
the uncertainty in airport regulations through a beta of 1.5x for these assets. We
have also reduced the value of BIAL airport land and incorporated the recent
corporate borrowing. Hence, our revised SOTP value for GVK comes to INR 34
/share (INR 46/share earlier). We maintain ‘HOLD/ Sector Performer’.
Key takeaways from conference call
• Management is confident of gas allocation due to Government of India’s indication of
60 mmscmd of gas reserves to be available from FY13. As GVK’s gas-based projects
are expected only post FY12 (in the XII Plan period) they have been categorized in
the second priority list along with nine other companies.
• The company has placed Notice To Proceed (NTP) for 400 MW of gas-based projects.
NTP will be issued for other projects once the environment clearance is received.
• MIAL land deal: Management expects some monetization in Q2FY12.
• In MIAL, capex spent so far aggregates to INR 45 bn.
• RIL supplied 15% lower than the stipulated gas supplies during the quarter.
Company Description
GVK was promoted by Mr. GV Krishna Reddy, and is a part of the GVK Group that has
interests in infrastructure, bioscience, and hospitality. The company is the flagship of the
group and holds its infrastructure assets under it. GVK entered the infrastructure
segment by building the 216MW Jegurupadu phase I power project in Andhra Pradesh.
The company has since then expanded across different infrastructure verticals with
presence in airports, power, roads, and urban infrastructure. Winning the bid for
developing the Mumbai Airport has been a major milestone for the company. It is also
bidding for deep sea gas blocks under the National Exploration Licensing Plan (NELP –
VII) in partnership with BHP Billiton.
Investment Theme
Redeveloping India’s largest and busiest airport
GVK, together with Airports Company South Africa (ACSA), bagged the project for
modernisation of the Mumbai International Airport (MIAL). The renovation project,
though highly prestigious and visible, is one of the most complicated projects in terms of
scope and size. It involves renovation and modernisation of the exiting domestic
terminals 1A and 1B, followed by modernisation of international terminals 2A and 2B.
Gas from Reliance fields could enhance power portfolio
GVK had an early start as a power developer with the commercialisation of its
Jegurupadu (phase I) gas-fired project in 1997. After a couple of years’ delay, the next
two projects (Jegurupadu phase II and Gautami power projects) commenced operations
post commissioning of RIL’s KG basin. However, the same has been allocated for only
five years. The company is now planning to further expand capacity by 800 MW fuelled
by the same gas source to be operational post FY12.
Real estate from MIAL and ROFR for Navi Mumbai Airport could provide upsides
MIAL’s Operating and Management Agreement (OMDA), allows GVK to commercially
exploit ~10% (197 acres) of the total airport land. However, a substantial portion of this
land is encroached by slum dwellers. Given the land’s prime location, even a modest
success in clearing the encroachments could provide significant upside to the company.
Key Risks
Natural gas security for existing power plants
GVK’s current power plants are running short of gas. Currently, the gas supply
agreement with RIL is valid for 5 years and even this is contingent on the legal dispute
between RIL and RNRL would be favourably settled. Since the company has given up the
dual fuel (naphtha) option for its Jegurupadu II and Gautami projects, timely availability
of gas is crucial for the company.
MIAL: Securing land from encroachments
A part of the mandatory projects that GVK has to execute under the terms of agreement
depends on the land that will be acquired by clearing sum encroachments on it. Some
part of the commercial real estate development from the project also depends on
clearing of the encroached land.
Competition from second airport in Mumbai
The central government has already approved the plan to construct the second airport in
Navi Mumbai, and the government of Maharashtra is trying to acquire land for it. The
airport bidding offers an opportunity to GVK on account of the ROFR clause. However, if
GVK loses the bid, the new airport could compete with the existing airport, hampering
the latter’s profitability.
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