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GVK Power & Infrastructure (GVKP)
Infrastructure
Regulatory hurdles clip GVK’s wings. Recent AERA orders appear unfavorable for
airport developers: (1) Favors single till model, (2) argues for passing real estate benefit
to airport users and (3) argues against higher RoE. These policies and low visibility on
real estate monetization may adversely impact potential PE investment in airport
vertical. BIAL investment implies valn of 10X P/B; regulatory stance may lead to
downside of Rs4-5/share. Cut TP but retain BUY on cheap valn post sharp correction.
Unfavorable policies: Argues in favor of single till, including real estate; argues against high RoE
The Airports Economic Regulatory Authority of India (AERA) has recently specified several terms in
the matter of regulation of airport operators. Several of these seem to be unfavorable for
developers such as (1) preference of single till model versus dual or hybrid till, (2) real estate
benefits to be passed on to passengers—value to be adjusted out of regulated asset base and (3)
argues against higher return on equity based on the fact that the government has guaranteed and
provided protection by way of UDF (may choose RoE of 18.33% as per State Support Agreement).
BIAL acquired at P/B of 10X; regulation may not allow more than 3-4X—downside of Rs4-5/share
GVK acquired 29% stake in BIAL for a value of Rs11.7 bn implying a price to book value of about
10.5X (based on initial equity of Rs3.85 bn). We believe that the regulatory stance is likely to imply
a valuation of about 3-4X book value for the airport asset. This implies a potential downside of
Rs7-8 bn or Rs4-5/share versus GVK’s initial invested value. The AERA order also indicated that
MIAL may also be brought under regulatory purview—potential downside risk to our valuation.
Real estate monetization, power cost escalation compensation remain elusive; may delay airport PE
The company is yet to make any significant progress in MIAL real estate monetization—expects to
start only in 2QFY12E. Progress on slum rehabilitation is slower than expected, leading to delays as
well as potentially reducing the area available for development. GVK’s plans for a PE investment in
the airport vertical may be delayed, led by unfavorable regulatory orders and lack of visibility on
MIAL real estate. Further, the company is yet to receive reimbursements for the sharp cost
escalations in its power projects (were delayed due to non-availability of gas).
Cut TP to Rs42/share on lower MIAL real estate and BIAL value; retain BUY on cheap valuations
We cut our TP to Rs42 from Rs54 based on (1) lower value for MIAL real estate development and
(2) reduced value for BIAL stake (used 50% of invested value versus full value earlier). Reiterate
BUY on (1) cheap valuations of 1.5X FY2011E book value and (2) current market price provides
upside of about 39% to our target price (post sharp correction). Aggressive bids for coal mines in
Australia, airport project in Indonesia and high leverage on standalone balance sheet are key risks.
Regulator argues for single till, including real estate; argues against high RoE
The Airports Economic Regulatory Authority of India (AERA) in its order dated January 12,
2011 specified several terms in the matter of regulation of airport operators. Several of these
seem to be unfavorable for developers such as (1) preference of single till model versus dual
or hybrid till, (2) real estate benefits to be passed on to passengers—value to be adjusted
out of regulated asset base and (3) argues against higher return on equity based on the fact
that the government has guaranteed and provided protection by way of UDF (base case RoE
of 18.33%).
Regulator argues in favor of single till
AERA has argued in favor of the single till model for the basis of regulation rather than the
hybrid or dual till models. Excerpt from the AERA order date January 12, 2011 (pg. 40) “the
Authority is of the opinion that Single Till is most appropriate for the economic regulation of
major airports in India”.
Under the single till basis the airport charges would be set by the regulator taking into
account the non-aeronautical revenues of the airport as well. This is versus only aeronautical
revenues considered in the dual till model (i.e. no cross-subsidization between aero and nonaero
revenue streams). In case of the single till tariff, the charges to airlines are kept low
because they are subsidized by higher prices paid by the users of other facilities such as duty
free, advertisements etc. Hence naturally, the private airport operators and their investors
would benefit from a double-till model because this will help them increase revenue.
The management has indicated that the company might push for an appeal against the
order.
Regulator argues to include real estate—adjusts out of regulated asset base
AERA believes that the benefits from land exploitation should be passed on to passengers
and users of the cargo facilities at the airport. This would be with respect to moderating the
aeronautical charges levied by the developers. For this purpose, AERA has argued for the
adjustment of the real estate assets from the scope of the Regulated Asset Base (RAB) (ref.
AERA order dated January 12, 2011, pg. 43-44). Essentially RAB is used as a basis for the
airport’s regulated operating assets on which the owners of the airports earn a return. Thus
higher the RAB, greater the level of airport charges that the airport would be allowed to levy.
Related AERA order excerpt (pg. 43): “The Authority thus considers that the benefits of land
exploitation should go to the passengers and cargo facility users in terms of moderating the
aeronautical charges”.
Regulator argues against high return on equity for airport citing comfort given by
government
AERA has argued against a high return on equity for the airport (assured return of equity of
18.33% specified in the State Support Agreement, or SSA). The arguments put forward by
AERA for the same include (from Annexure II, pg.3 of 22, of the AERA order dated October
26, 2010 regarding revision of UDF at GMR’s Hyderabad airport):
Risks related to lower-than-expected returns may be low as the authority allows for the
issuance of a User Development Fee (UDF) to ensure a fair return to the airport.
Merrill Lynch report dated November 26, 2007 estimated cost of equity of 13.5% for
GHIAL based on 1.0 equity beta, 8% risk free rate and equity premium of 5.5%. Further,
this estimate was prepared when the project was under development—post start of
commercial operations the risk perception of the project should be lower.
In its monthly review (October 2010), CMIE calculated the equity beta of the three listed
Indian airlines at an average of about 1.5; airports beta is believed to be lower than beta
of airline companies.
Related AERA order excerpt (Annexure II, pg.3-5 of 22, of the AERA order dated October 26,
2010): “Keeping in view the above, it would appear that the request for higher cost of
equity for HIAL, considering the "severities of Indian airports as well as additional risks
specific to Indian aviation market" may not be justified and the risks, if any, are at least
being over stated. However, the Authority is not yet in a position to take a final view in the
matter and therefore considers it appropriate to adopt the rate assured in the SSA (of
18.33%) by the Government of Andhra Pradesh”.
BIAL acquired at P/B of 10X; regulation may not allow more than 3-4X—
potential downside of Rs4-5/share
GVK has acquired 29% stake in Bangalore International Airport (BIAL) at a total investment
of Rs11.7 bn. About Rs6 bn of the June 2009 QIP were utilized for this acquisition;
remaining was funded via a bond raised from Standard Chartered Bank to the tune of Rs6.8
bn.
The total investment of Rs11.7 bn for 29% stake implies a price to book valuation of about
10.5X (total equity investment of Rs3.85 bn in the project—equity book value for GVK’s
stake of Rs1.1 bn). We believe that the regulation would not allow for a valuation of greater
that 3-4X book value for the airport asset. This implies a potential downside of Rs7-8 bn or
Rs4-5/share versus GVK’s initial invested value.
We also note that AERA has indicated that Mumbai airport may also be brought under the
purview of regulated return. This would lead to a potential for downside risk to our
valuation for MIAL in this case.
May become incrementally difficult to attract PE investors in the airport vertical
GVK is thinking of inducting private equity investors in the airport vertical holding company
(which would holds stakes in Bangalore and Mumbai international airports). However,
uncertainty about value unlocking in real estate transaction in Mumbai as well as regulatory
uncertainty on tariffs in Bangalore airport may keep investors away in that transaction.
GVK had borrowed about Rs6.85 bn from Standard Chartered Bank for buying the stake in
BIAL in GVK Airport Developers. This loan was due for repayment on December 13, 2010.
GVK had planned to repay the loans though potential private equity investment in the
airport vertical. However, GVK has faced delays in raising private equity funds—
management cited intentional extension of the PE raising due to lack of clarity on the
regulations. The company has currently refinanced the loans (to the tune of Rs7.5 bn) from a
consortium of banks including Standard Chartered Bank, HDFC Ltd and IDFC—due for
repayment on December 13, 2011.
MIAL land clearance remains elusive; possible disappointment on slum rehab.
The company is yet to make any significant progress with respect to Mumbai airport real
estate monetization. The company is yet to receive the MMRDA approval for the
development plans, post which it is likely to invite bidders. The management expects the real
estate monetization to begin only in 2QFY12E. Further, a large proportion of the land is
under encroachment. We believe that there could be a possibility of disappointments in real
estate development due to delays in slum rehabilitation—company had signed a contract
with HDIL for the rehabilitation of about 65,000 hutments.
We believe that low visibility on monetization of Mumbai real estate is a key risk to our
valuation as it contributes about 15% of the total value of the company. We have reduced
our valuation of the Mumbai airport real estate development to Rs10.2 bn from Rs24 bn
earlier based on (1) assumption of lower total area for real estate of 12 mn sq. ft versus 20
mn earlier (based on potential disappointments related to slum rehabilitation), (2) lower
assumptions for monetization in the first few years (2011-12E) based on low visibility so far
and (3) assuming only 20% of value gets captured as upfront deposit post FY2013E (versus
60% earlier).
Reimbursement of cost escalation in power assets also remains elusive
GVK’s Jeguruapadu-II and Gautami power plants (cumulative capacity of about 684 MW)
witnessed severe cost escalation due to non-availability of gas. The commissioning of
Jeguruapadu-II and Gautami was delayed by more than two years due to non-availability of
natural gas. Jeguruapadu-II was commissioned in April 2009 and Gautami in June 2009. The
company is yet to receive reimbursements for these cost escalations potentially impacting
the viability of these projects.
Cut target price on lower MIAL real estate value and lower value for BIAL
We have cut our target price for GVK to Rs42/share from Rs54 earlier based on (1) lower
value for real estate development at Mumbai Airport and (2) reduced value for stake in BIAL
to 50% of invested value (versus full invested value earlier).
Our target price of Rs42 is comprised of (1) Rs14 for Mumbai airport (core + real estate), (2)
Rs7.6 from road SPV, (3) Rs21 from the power assets (including cash from PE investment of
Rs6/share), (4) Rs4/share for Bangalore airport valued at 0.5X invested value, and (5)
Re1/share from SEZ project.
Reiterate BUY on cheap valuations—trading at less than 2X FY2011E P/B
We maintain our earnings estimates and reiterate our BUY rating on the stock based on (1)
stock is trading at a cheap valuation of 1.5X FY2011E book value and 1.4X FY2012E book
value, (2) current market price provides upside of about 39% to our target price (post sharp
correction) and (3) potential realization of better-than-expected value for stake sale in the
airport vertical.
3QFY11 result highlights
Results: GVK reported 3QFY11 revenues of Rs4.6 bn, down 3% yoy and about 10%
below our estimates. EBITDA margin at 28% was broadly in line with estimates. Lower
income tax and higher-than-expected contribution from share of profit of associates led
to a net PAT of Rs419 bn, about 12% ahead of our estimate.
Power: Lower gas availability impacted both the revenues as well as the profitability for
the power segment (revenues down 8.7% and margins dip by 370 bps yoy).
Roads: Roads segment reported a revenue growth of 10% yoy primarily led by hike in toll
rate for the Jaipur expressway project. Traffic levels remained relatively flat on a yoy basis.
Airports: Both Mumbai (MIAL) as well as the Bangalore (BIAL) airports reported a strong
growth in passenger traffic levels driving the revenue growth in the quarter
Slow power business leads to yoy decline in revenues; margins broadly in line
GVK reported 3QFY11 results of Rs4.6 bn, down 3% yoy and about 10% below our
estimate of Rs5.1 bn. The yoy revenue decline was primarily led by the power segment
(reported 8.7% drop in revenues) while the roads segment recorded a 10% yoy growth.
EBITDA declined by about 160 bps yoy to 28.1% from 29.7% in 1QFY10—broadly in line
with our estimates. The company reported a negative income tax payment of Rs9 mn in the
quarter attributed to availing of MAT credit during the quarter. The negative income tax and
higher-than-expected contribution from share of profit of associates led to a net PAT of
Rs419 bn, about 12% ahead of our estimate.
For the nine months ending December 31, 2010, GVK reported revenues of Rs14.5 bn, up
12% yoy. Margin at 27.6% was about 210 bps down on a yoy basis. Margin decline, high
interest cost and lower other income led to a net income decline of 4% yoy to Rs1.2 bn.
Lower gas availability mars power sector performance
The yoy decline in power segment revenues was primarily due to lower gas availability at the
GVKIL I & II gas-based power plants. This is reflected in lower load factor of about 80% both
in Jegurupadu phase I and II versus PLFs of 93% for Jegurupadu - I and 97% for Jegurupadu
- II in 3QFY10. Partial load operations for a power plant lead to lower efficiencies—reflected
in higher heat rates and auxiliary consumption.
The lower efficiencies led to lower profitability during the quarter—EBITDA margin for GVK
Industries (Jegurupadu I & II) declined to 15.1% in 3QFY11 from 22.4% in 3QFY10 and
18.3% in the previous quarter. GVK Industries reported a net loss of Rs50 mn during the
quarter versus a profit of Rs62 mn in 3QFY10.
Roads sector growth primarily on toll hike; traffic remains flat on yoy basis
The 10% yoy growth in the road segment was primarily led by a toll rate hike in the Jaipur-
Kishangarh expressway while traffic remained relatively flat on a yoy basis. This is post a
strong 14% traffic growth witnessed in FY2010 and a long-term average growth rate of
about 9.5% over FY2006-10.
JKEL reported 3QFY11 revenue of Rs487 mn, up 10% yoy. EBITDA margin was significantly
higher at 72.7% versus 67.2% in 3QFY10. This is versus 2QFY11 margin of 76.6%; the
margin expansion was likely due to absence of periodic maintenance expenses. Strong
margin expansion led to a net PAT of Rs215 mn in 3QFY11, up 22% yoy.
Airport business—performance boosted by strong traffic growth
Both Mumbai (MIAL) as well as the Bangalore (BIAL) airports reported a strong growth in
passenger traffic levels driving the revenue growth in the quarter. Mumbai airport passenger
traffic demonstrated a yoy growth of about 10% in 3QFY11 (13% in 9MFY11)—note that
this is over a 23% growth in passenger traffic witnessed in 3QFY10. The Bangalore airport
also recorded a strong passenger traffic growth of 17% yoy led by the international
passenger traffic (up 21% yoy). For the nine-month period BIAL has recorded an 18% yoy
growth in passenger traffic.
Both the airport recorded a strong growth in revenues on the back of traffic growth. MIAL
reported revenue of Rs3 bn for 3QFY11, up 15% yoy. EBITDA grew at 28.9% yoy on
account of lower other expenses (15% of sales in 3QFY11 versus 19.9% in 3QFY10)
potentially due to operating leverage. PAT for MIAL airport for 3QFY11 was Rs498 mn, up
19.5% yoy, despite higher depreciation and interest expense.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GVK Power & Infrastructure (GVKP)
Infrastructure
Regulatory hurdles clip GVK’s wings. Recent AERA orders appear unfavorable for
airport developers: (1) Favors single till model, (2) argues for passing real estate benefit
to airport users and (3) argues against higher RoE. These policies and low visibility on
real estate monetization may adversely impact potential PE investment in airport
vertical. BIAL investment implies valn of 10X P/B; regulatory stance may lead to
downside of Rs4-5/share. Cut TP but retain BUY on cheap valn post sharp correction.
Unfavorable policies: Argues in favor of single till, including real estate; argues against high RoE
The Airports Economic Regulatory Authority of India (AERA) has recently specified several terms in
the matter of regulation of airport operators. Several of these seem to be unfavorable for
developers such as (1) preference of single till model versus dual or hybrid till, (2) real estate
benefits to be passed on to passengers—value to be adjusted out of regulated asset base and (3)
argues against higher return on equity based on the fact that the government has guaranteed and
provided protection by way of UDF (may choose RoE of 18.33% as per State Support Agreement).
BIAL acquired at P/B of 10X; regulation may not allow more than 3-4X—downside of Rs4-5/share
GVK acquired 29% stake in BIAL for a value of Rs11.7 bn implying a price to book value of about
10.5X (based on initial equity of Rs3.85 bn). We believe that the regulatory stance is likely to imply
a valuation of about 3-4X book value for the airport asset. This implies a potential downside of
Rs7-8 bn or Rs4-5/share versus GVK’s initial invested value. The AERA order also indicated that
MIAL may also be brought under regulatory purview—potential downside risk to our valuation.
Real estate monetization, power cost escalation compensation remain elusive; may delay airport PE
The company is yet to make any significant progress in MIAL real estate monetization—expects to
start only in 2QFY12E. Progress on slum rehabilitation is slower than expected, leading to delays as
well as potentially reducing the area available for development. GVK’s plans for a PE investment in
the airport vertical may be delayed, led by unfavorable regulatory orders and lack of visibility on
MIAL real estate. Further, the company is yet to receive reimbursements for the sharp cost
escalations in its power projects (were delayed due to non-availability of gas).
Cut TP to Rs42/share on lower MIAL real estate and BIAL value; retain BUY on cheap valuations
We cut our TP to Rs42 from Rs54 based on (1) lower value for MIAL real estate development and
(2) reduced value for BIAL stake (used 50% of invested value versus full value earlier). Reiterate
BUY on (1) cheap valuations of 1.5X FY2011E book value and (2) current market price provides
upside of about 39% to our target price (post sharp correction). Aggressive bids for coal mines in
Australia, airport project in Indonesia and high leverage on standalone balance sheet are key risks.
Regulator argues for single till, including real estate; argues against high RoE
The Airports Economic Regulatory Authority of India (AERA) in its order dated January 12,
2011 specified several terms in the matter of regulation of airport operators. Several of these
seem to be unfavorable for developers such as (1) preference of single till model versus dual
or hybrid till, (2) real estate benefits to be passed on to passengers—value to be adjusted
out of regulated asset base and (3) argues against higher return on equity based on the fact
that the government has guaranteed and provided protection by way of UDF (base case RoE
of 18.33%).
Regulator argues in favor of single till
AERA has argued in favor of the single till model for the basis of regulation rather than the
hybrid or dual till models. Excerpt from the AERA order date January 12, 2011 (pg. 40) “the
Authority is of the opinion that Single Till is most appropriate for the economic regulation of
major airports in India”.
Under the single till basis the airport charges would be set by the regulator taking into
account the non-aeronautical revenues of the airport as well. This is versus only aeronautical
revenues considered in the dual till model (i.e. no cross-subsidization between aero and nonaero
revenue streams). In case of the single till tariff, the charges to airlines are kept low
because they are subsidized by higher prices paid by the users of other facilities such as duty
free, advertisements etc. Hence naturally, the private airport operators and their investors
would benefit from a double-till model because this will help them increase revenue.
The management has indicated that the company might push for an appeal against the
order.
Regulator argues to include real estate—adjusts out of regulated asset base
AERA believes that the benefits from land exploitation should be passed on to passengers
and users of the cargo facilities at the airport. This would be with respect to moderating the
aeronautical charges levied by the developers. For this purpose, AERA has argued for the
adjustment of the real estate assets from the scope of the Regulated Asset Base (RAB) (ref.
AERA order dated January 12, 2011, pg. 43-44). Essentially RAB is used as a basis for the
airport’s regulated operating assets on which the owners of the airports earn a return. Thus
higher the RAB, greater the level of airport charges that the airport would be allowed to levy.
Related AERA order excerpt (pg. 43): “The Authority thus considers that the benefits of land
exploitation should go to the passengers and cargo facility users in terms of moderating the
aeronautical charges”.
Regulator argues against high return on equity for airport citing comfort given by
government
AERA has argued against a high return on equity for the airport (assured return of equity of
18.33% specified in the State Support Agreement, or SSA). The arguments put forward by
AERA for the same include (from Annexure II, pg.3 of 22, of the AERA order dated October
26, 2010 regarding revision of UDF at GMR’s Hyderabad airport):
Risks related to lower-than-expected returns may be low as the authority allows for the
issuance of a User Development Fee (UDF) to ensure a fair return to the airport.
Merrill Lynch report dated November 26, 2007 estimated cost of equity of 13.5% for
GHIAL based on 1.0 equity beta, 8% risk free rate and equity premium of 5.5%. Further,
this estimate was prepared when the project was under development—post start of
commercial operations the risk perception of the project should be lower.
In its monthly review (October 2010), CMIE calculated the equity beta of the three listed
Indian airlines at an average of about 1.5; airports beta is believed to be lower than beta
of airline companies.
Related AERA order excerpt (Annexure II, pg.3-5 of 22, of the AERA order dated October 26,
2010): “Keeping in view the above, it would appear that the request for higher cost of
equity for HIAL, considering the "severities of Indian airports as well as additional risks
specific to Indian aviation market" may not be justified and the risks, if any, are at least
being over stated. However, the Authority is not yet in a position to take a final view in the
matter and therefore considers it appropriate to adopt the rate assured in the SSA (of
18.33%) by the Government of Andhra Pradesh”.
BIAL acquired at P/B of 10X; regulation may not allow more than 3-4X—
potential downside of Rs4-5/share
GVK has acquired 29% stake in Bangalore International Airport (BIAL) at a total investment
of Rs11.7 bn. About Rs6 bn of the June 2009 QIP were utilized for this acquisition;
remaining was funded via a bond raised from Standard Chartered Bank to the tune of Rs6.8
bn.
The total investment of Rs11.7 bn for 29% stake implies a price to book valuation of about
10.5X (total equity investment of Rs3.85 bn in the project—equity book value for GVK’s
stake of Rs1.1 bn). We believe that the regulation would not allow for a valuation of greater
that 3-4X book value for the airport asset. This implies a potential downside of Rs7-8 bn or
Rs4-5/share versus GVK’s initial invested value.
We also note that AERA has indicated that Mumbai airport may also be brought under the
purview of regulated return. This would lead to a potential for downside risk to our
valuation for MIAL in this case.
May become incrementally difficult to attract PE investors in the airport vertical
GVK is thinking of inducting private equity investors in the airport vertical holding company
(which would holds stakes in Bangalore and Mumbai international airports). However,
uncertainty about value unlocking in real estate transaction in Mumbai as well as regulatory
uncertainty on tariffs in Bangalore airport may keep investors away in that transaction.
GVK had borrowed about Rs6.85 bn from Standard Chartered Bank for buying the stake in
BIAL in GVK Airport Developers. This loan was due for repayment on December 13, 2010.
GVK had planned to repay the loans though potential private equity investment in the
airport vertical. However, GVK has faced delays in raising private equity funds—
management cited intentional extension of the PE raising due to lack of clarity on the
regulations. The company has currently refinanced the loans (to the tune of Rs7.5 bn) from a
consortium of banks including Standard Chartered Bank, HDFC Ltd and IDFC—due for
repayment on December 13, 2011.
MIAL land clearance remains elusive; possible disappointment on slum rehab.
The company is yet to make any significant progress with respect to Mumbai airport real
estate monetization. The company is yet to receive the MMRDA approval for the
development plans, post which it is likely to invite bidders. The management expects the real
estate monetization to begin only in 2QFY12E. Further, a large proportion of the land is
under encroachment. We believe that there could be a possibility of disappointments in real
estate development due to delays in slum rehabilitation—company had signed a contract
with HDIL for the rehabilitation of about 65,000 hutments.
We believe that low visibility on monetization of Mumbai real estate is a key risk to our
valuation as it contributes about 15% of the total value of the company. We have reduced
our valuation of the Mumbai airport real estate development to Rs10.2 bn from Rs24 bn
earlier based on (1) assumption of lower total area for real estate of 12 mn sq. ft versus 20
mn earlier (based on potential disappointments related to slum rehabilitation), (2) lower
assumptions for monetization in the first few years (2011-12E) based on low visibility so far
and (3) assuming only 20% of value gets captured as upfront deposit post FY2013E (versus
60% earlier).
Reimbursement of cost escalation in power assets also remains elusive
GVK’s Jeguruapadu-II and Gautami power plants (cumulative capacity of about 684 MW)
witnessed severe cost escalation due to non-availability of gas. The commissioning of
Jeguruapadu-II and Gautami was delayed by more than two years due to non-availability of
natural gas. Jeguruapadu-II was commissioned in April 2009 and Gautami in June 2009. The
company is yet to receive reimbursements for these cost escalations potentially impacting
the viability of these projects.
Cut target price on lower MIAL real estate value and lower value for BIAL
We have cut our target price for GVK to Rs42/share from Rs54 earlier based on (1) lower
value for real estate development at Mumbai Airport and (2) reduced value for stake in BIAL
to 50% of invested value (versus full invested value earlier).
Our target price of Rs42 is comprised of (1) Rs14 for Mumbai airport (core + real estate), (2)
Rs7.6 from road SPV, (3) Rs21 from the power assets (including cash from PE investment of
Rs6/share), (4) Rs4/share for Bangalore airport valued at 0.5X invested value, and (5)
Re1/share from SEZ project.
Reiterate BUY on cheap valuations—trading at less than 2X FY2011E P/B
We maintain our earnings estimates and reiterate our BUY rating on the stock based on (1)
stock is trading at a cheap valuation of 1.5X FY2011E book value and 1.4X FY2012E book
value, (2) current market price provides upside of about 39% to our target price (post sharp
correction) and (3) potential realization of better-than-expected value for stake sale in the
airport vertical.
3QFY11 result highlights
Results: GVK reported 3QFY11 revenues of Rs4.6 bn, down 3% yoy and about 10%
below our estimates. EBITDA margin at 28% was broadly in line with estimates. Lower
income tax and higher-than-expected contribution from share of profit of associates led
to a net PAT of Rs419 bn, about 12% ahead of our estimate.
Power: Lower gas availability impacted both the revenues as well as the profitability for
the power segment (revenues down 8.7% and margins dip by 370 bps yoy).
Roads: Roads segment reported a revenue growth of 10% yoy primarily led by hike in toll
rate for the Jaipur expressway project. Traffic levels remained relatively flat on a yoy basis.
Airports: Both Mumbai (MIAL) as well as the Bangalore (BIAL) airports reported a strong
growth in passenger traffic levels driving the revenue growth in the quarter
Slow power business leads to yoy decline in revenues; margins broadly in line
GVK reported 3QFY11 results of Rs4.6 bn, down 3% yoy and about 10% below our
estimate of Rs5.1 bn. The yoy revenue decline was primarily led by the power segment
(reported 8.7% drop in revenues) while the roads segment recorded a 10% yoy growth.
EBITDA declined by about 160 bps yoy to 28.1% from 29.7% in 1QFY10—broadly in line
with our estimates. The company reported a negative income tax payment of Rs9 mn in the
quarter attributed to availing of MAT credit during the quarter. The negative income tax and
higher-than-expected contribution from share of profit of associates led to a net PAT of
Rs419 bn, about 12% ahead of our estimate.
For the nine months ending December 31, 2010, GVK reported revenues of Rs14.5 bn, up
12% yoy. Margin at 27.6% was about 210 bps down on a yoy basis. Margin decline, high
interest cost and lower other income led to a net income decline of 4% yoy to Rs1.2 bn.
Lower gas availability mars power sector performance
The yoy decline in power segment revenues was primarily due to lower gas availability at the
GVKIL I & II gas-based power plants. This is reflected in lower load factor of about 80% both
in Jegurupadu phase I and II versus PLFs of 93% for Jegurupadu - I and 97% for Jegurupadu
- II in 3QFY10. Partial load operations for a power plant lead to lower efficiencies—reflected
in higher heat rates and auxiliary consumption.
The lower efficiencies led to lower profitability during the quarter—EBITDA margin for GVK
Industries (Jegurupadu I & II) declined to 15.1% in 3QFY11 from 22.4% in 3QFY10 and
18.3% in the previous quarter. GVK Industries reported a net loss of Rs50 mn during the
quarter versus a profit of Rs62 mn in 3QFY10.
Roads sector growth primarily on toll hike; traffic remains flat on yoy basis
The 10% yoy growth in the road segment was primarily led by a toll rate hike in the Jaipur-
Kishangarh expressway while traffic remained relatively flat on a yoy basis. This is post a
strong 14% traffic growth witnessed in FY2010 and a long-term average growth rate of
about 9.5% over FY2006-10.
JKEL reported 3QFY11 revenue of Rs487 mn, up 10% yoy. EBITDA margin was significantly
higher at 72.7% versus 67.2% in 3QFY10. This is versus 2QFY11 margin of 76.6%; the
margin expansion was likely due to absence of periodic maintenance expenses. Strong
margin expansion led to a net PAT of Rs215 mn in 3QFY11, up 22% yoy.
Airport business—performance boosted by strong traffic growth
Both Mumbai (MIAL) as well as the Bangalore (BIAL) airports reported a strong growth in
passenger traffic levels driving the revenue growth in the quarter. Mumbai airport passenger
traffic demonstrated a yoy growth of about 10% in 3QFY11 (13% in 9MFY11)—note that
this is over a 23% growth in passenger traffic witnessed in 3QFY10. The Bangalore airport
also recorded a strong passenger traffic growth of 17% yoy led by the international
passenger traffic (up 21% yoy). For the nine-month period BIAL has recorded an 18% yoy
growth in passenger traffic.
Both the airport recorded a strong growth in revenues on the back of traffic growth. MIAL
reported revenue of Rs3 bn for 3QFY11, up 15% yoy. EBITDA grew at 28.9% yoy on
account of lower other expenses (15% of sales in 3QFY11 versus 19.9% in 3QFY10)
potentially due to operating leverage. PAT for MIAL airport for 3QFY11 was Rs498 mn, up
19.5% yoy, despite higher depreciation and interest expense.
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