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GVK Power & Infrastructure
Overweight
GVKP.BO, GVKP IN
3Q lacks power; balance sheet could look stretched on further capex
• As expected, GVK posted PAT of Rs419MM (down 8.6% YoY): The
weak performance was on the back of lower PLF at gas-based power plants
on account of 1) ~15% reduced gas supply from Reliance Industries, and 2)
heavy rainfall resulting in increased offtake of hydro power and lower
demand from agriculture sector in Andra Pradesh. On the earnings call,
concerns centered on regulatory issues and capex pursuits, but management
commentary was not very different from what was already known.
• Regulatory issues persist across assets: The airport regulator is toying
with the single-till approach to limit Bangalore airport user fees, and also
contemplating using real estate market value to subsidize passengers across
airports – GVK management stated that it would dispute these in court. For
monetizing real estate around the Mumbai airport, management said that the
MMRDA approval is in process and has given a new timeline of 2Q FY12.
Management said that it is still awaiting a high-court decision on the 20%
sale of power from J2 and Gautami plants.
• Overseas growth pursuits - no capex numbers or funding clarity from
management, but our view is that the balance sheet could start to get
stretched. GVK maintained that due diligence would precede Indonesian
airport plans. No comments on the reported bid for the Australian coal mine
(Hancock, US$2B), but GVK confirmed its interest in coal mines for fuel
security. Our views: Consolidated NDER, including proportionate debt in
minority airports, at 1.1x in FY11E and 1.7x in FY12E. Cash flows - we
model Rs157B capex through FY14, of which Rs30B is funded via internal
cash earnings, Rs84B via SPV debt, Rs15B via recent PE, leaving ~Rs26B
of new equity need. But most of this is in FY14, around which time GVK
wants to IPO its power vertical. However, further acquisitions / greenfield
debt could begin to stretch the balance sheet and advance / increase the need
to dilute equity.
• GVK’s stock price appears to be factoring in a lack of regulatory
clarity: However, growth aspirations seem large relative to the market cap,
and could be equity dilutive, which would be a risk to our PT. We stay OW
with a Mar-12 PT of Rs53, which includes Rs17 from core airport
operations, Rs12 from Mumbai real estate, and Rs21 for power (post money)
including Rs3 for 1.6GW of brownfield gas expansions
3Q FY11 result highlights
• GVK reported PAT of Rs419MM, in line with our estimate of Rs412MM.
PAT declined 2.1% qoq and 8.6% yoy, mainly on account of a decline in power
segment revenues (down 4% yoy and 10% qoq) due to lower PLFs at the
company’s gas based plants. Management cited reduced gas supply and Gautami
in our view because of reduced gas supply and lower demand in the state of
Andhra Pradesh due to heavy rainfall.
• Top line for the road segment was up 10% yoy, in line with estimates on
account of an increase in toll rates.
• Profits from associates i.e. Mumbai and Bangalore airports were up 39% qoq
to Rs307MM well ahead of our estimate of Rs247MM.
• GVK recorded a tax credit in the quarter on account of exercising MAT credit,
benefiting the bottom line.
• On the earnings call, concerns centered on regulatory issues and capex pursuits,
but management commentary was not very different from what was already
known.
Mumbai Airport
• MIAL reported PAT of Rs498MM, up 19% yoy and 14% qoq, on the back of
increased traffic and improved margins.
• At 13% yoy growth in passenger traffic YTD to 21.6MM, PAX traffic is tracking
ahead of our estimate of 27.9MM for FY11 (+9% yoy), driving improved
operating leverage with margins up ~675bp yoy.
• Management indicated that it is on track to complete the expansion on time with
~46% of the capex being incurred to date.
• On the monetization of real estate, which is a potential key stock catalyst, in our
view, management indicated that the approval process for the same has begun
and that we could see some land parcels being sold in 2QFY12.
Bangalore airport
• BIAL reported adjusted PAT of Rs431M more than double of Rs200M reported
in 2QFY11 with margins increasing ~600bps qoq on account of reduced
operating expenses and economies of scale with increased traffic.
• At 18% yoy growth in passenger traffic YTD to 8.7mn, PAX traffic is tracking
ahead of our estimate of 11mn for FY11 (+11% yoy).
• GVK has refinanced Rs6.8B of acquisition debt for the airport which is on the
balance sheet of GVKPIL and extended the term by 1 year to Dec-11.
Management expects to repay the loan from the proceeds of a PE deal which they
expect to conclude in the interim.
• On the regulatory uncertainty regarding the application of the single till model as
per the order issued by AERA on Jan 12th, management indicated that they
would appeal to the courts against the same. In our view a single till model
would be negative for BIAL and management would instead look to cash out on
real estate earlier than expected.
Power segment
• On the conference call management indicated that PLFs were to the tune of ~80%
in 3Q on account of 1) ~15% reduction in eligible gas supply from Reliance
Industries, 2) increased supply from hydro power plants in Andhra Pradesh due to
heavy rains, and 3) a better monsoon resulting in reduced demand from the
agriculture sector.
• As a result of the low PLF plus continued maintenance expenses and JI, both J1
&J2 reported a combined loss of Rs50MM in the quarter.
• Overall, the power segment recorded a 12% qoq reduction in EBITDA on
account of partial operations and PAT declining by 53% qoq to Rs132MM with
flat fixed costs weighing on profitability.
• Partial operations resulted in negative incentives on account of higher heat rate
and replacement of blades impacted profitability by Rs125MM.
Road segment
• An increase in the toll rate in July 2010 resulted in a 10% yoy growth in the top
line, whereas traffic growth was muted on account of 1) heavy rains, and 2)
convergence of truck traffic to multi axle.
• PAT was up 22% yoy but declined by 13% qoq to Rs215MM on account of
increased operating expenses. The bottom line benefited on account of a lower
tax rate in the quarter
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
GVK Power & Infrastructure
Overweight
GVKP.BO, GVKP IN
3Q lacks power; balance sheet could look stretched on further capex
• As expected, GVK posted PAT of Rs419MM (down 8.6% YoY): The
weak performance was on the back of lower PLF at gas-based power plants
on account of 1) ~15% reduced gas supply from Reliance Industries, and 2)
heavy rainfall resulting in increased offtake of hydro power and lower
demand from agriculture sector in Andra Pradesh. On the earnings call,
concerns centered on regulatory issues and capex pursuits, but management
commentary was not very different from what was already known.
• Regulatory issues persist across assets: The airport regulator is toying
with the single-till approach to limit Bangalore airport user fees, and also
contemplating using real estate market value to subsidize passengers across
airports – GVK management stated that it would dispute these in court. For
monetizing real estate around the Mumbai airport, management said that the
MMRDA approval is in process and has given a new timeline of 2Q FY12.
Management said that it is still awaiting a high-court decision on the 20%
sale of power from J2 and Gautami plants.
• Overseas growth pursuits - no capex numbers or funding clarity from
management, but our view is that the balance sheet could start to get
stretched. GVK maintained that due diligence would precede Indonesian
airport plans. No comments on the reported bid for the Australian coal mine
(Hancock, US$2B), but GVK confirmed its interest in coal mines for fuel
security. Our views: Consolidated NDER, including proportionate debt in
minority airports, at 1.1x in FY11E and 1.7x in FY12E. Cash flows - we
model Rs157B capex through FY14, of which Rs30B is funded via internal
cash earnings, Rs84B via SPV debt, Rs15B via recent PE, leaving ~Rs26B
of new equity need. But most of this is in FY14, around which time GVK
wants to IPO its power vertical. However, further acquisitions / greenfield
debt could begin to stretch the balance sheet and advance / increase the need
to dilute equity.
• GVK’s stock price appears to be factoring in a lack of regulatory
clarity: However, growth aspirations seem large relative to the market cap,
and could be equity dilutive, which would be a risk to our PT. We stay OW
with a Mar-12 PT of Rs53, which includes Rs17 from core airport
operations, Rs12 from Mumbai real estate, and Rs21 for power (post money)
including Rs3 for 1.6GW of brownfield gas expansions
3Q FY11 result highlights
• GVK reported PAT of Rs419MM, in line with our estimate of Rs412MM.
PAT declined 2.1% qoq and 8.6% yoy, mainly on account of a decline in power
segment revenues (down 4% yoy and 10% qoq) due to lower PLFs at the
company’s gas based plants. Management cited reduced gas supply and Gautami
in our view because of reduced gas supply and lower demand in the state of
Andhra Pradesh due to heavy rainfall.
• Top line for the road segment was up 10% yoy, in line with estimates on
account of an increase in toll rates.
• Profits from associates i.e. Mumbai and Bangalore airports were up 39% qoq
to Rs307MM well ahead of our estimate of Rs247MM.
• GVK recorded a tax credit in the quarter on account of exercising MAT credit,
benefiting the bottom line.
• On the earnings call, concerns centered on regulatory issues and capex pursuits,
but management commentary was not very different from what was already
known.
Mumbai Airport
• MIAL reported PAT of Rs498MM, up 19% yoy and 14% qoq, on the back of
increased traffic and improved margins.
• At 13% yoy growth in passenger traffic YTD to 21.6MM, PAX traffic is tracking
ahead of our estimate of 27.9MM for FY11 (+9% yoy), driving improved
operating leverage with margins up ~675bp yoy.
• Management indicated that it is on track to complete the expansion on time with
~46% of the capex being incurred to date.
• On the monetization of real estate, which is a potential key stock catalyst, in our
view, management indicated that the approval process for the same has begun
and that we could see some land parcels being sold in 2QFY12.
Bangalore airport
• BIAL reported adjusted PAT of Rs431M more than double of Rs200M reported
in 2QFY11 with margins increasing ~600bps qoq on account of reduced
operating expenses and economies of scale with increased traffic.
• At 18% yoy growth in passenger traffic YTD to 8.7mn, PAX traffic is tracking
ahead of our estimate of 11mn for FY11 (+11% yoy).
• GVK has refinanced Rs6.8B of acquisition debt for the airport which is on the
balance sheet of GVKPIL and extended the term by 1 year to Dec-11.
Management expects to repay the loan from the proceeds of a PE deal which they
expect to conclude in the interim.
• On the regulatory uncertainty regarding the application of the single till model as
per the order issued by AERA on Jan 12th, management indicated that they
would appeal to the courts against the same. In our view a single till model
would be negative for BIAL and management would instead look to cash out on
real estate earlier than expected.
Power segment
• On the conference call management indicated that PLFs were to the tune of ~80%
in 3Q on account of 1) ~15% reduction in eligible gas supply from Reliance
Industries, 2) increased supply from hydro power plants in Andhra Pradesh due to
heavy rains, and 3) a better monsoon resulting in reduced demand from the
agriculture sector.
• As a result of the low PLF plus continued maintenance expenses and JI, both J1
&J2 reported a combined loss of Rs50MM in the quarter.
• Overall, the power segment recorded a 12% qoq reduction in EBITDA on
account of partial operations and PAT declining by 53% qoq to Rs132MM with
flat fixed costs weighing on profitability.
• Partial operations resulted in negative incentives on account of higher heat rate
and replacement of blades impacted profitability by Rs125MM.
Road segment
• An increase in the toll rate in July 2010 resulted in a 10% yoy growth in the top
line, whereas traffic growth was muted on account of 1) heavy rains, and 2)
convergence of truck traffic to multi axle.
• PAT was up 22% yoy but declined by 13% qoq to Rs215MM on account of
increased operating expenses. The bottom line benefited on account of a lower
tax rate in the quarter
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