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GVK Power & Infrastructure Overweight
GVKP.BO, GVKP IN
Bid to hike stake in MIAL to 50.5% at rich valuations
• GVK to increase stake in MIAL to 50.5%: The company has signed a
share purchase agreement with its South African partner (Bidvest) in
MIAL to buy 13.5% stake. The transaction is subject to regulatory
approvals and management expects to conclude the deal in ~6months.
Post deal, GVK's shareholding will increase from 37% to 50.5%,
Bidvest holding will reduce to 13.5%, AAI 26%, and ACSA Global of
Mauritius balance 10%.
• Deal dynamics: According to management total consideration for
13.5% stake in MIAL is US$280mn. They are in talks with Standard
Chartered bank to fund the transaction. According to the potential
arrangement, GVK would be required to make the payment over a 3 year
period and US$280mn will include ~US$50mn funding cost. The
implied equity value GVK would pay for the core airport and associated
real estate is ~US$1.7bn [(=280-50)/13.5%], as per our calculation.
• Deal factors-in value for MIAL real estate, while markets don't seem
to be doing so: Markets seem to be heavily discounting value for MIAL,
especially real estate owing to- (a) regulatory uncertainty prevailing
around core airport operations, (b) nil progress on airport land
monetization owing to delays in securing MMRDA approval, and (c)
uncertainty around timeframe required to get clear title of ~100acres
planned for developmental activities over ~10 years. Amidst these
concerns, we estimate the deal implies value of ~US$850mn for GVK's
50.5% stake vs. current market cap of US$933mn. The deal signals
management confidence in MIAL development plans, though
investment sentiment may get a boost only on announcement of a
meaningful RE transaction, in our view.
• The rationale for stake hike appears weak: Post deal GVK will be
able to consolidate MIAL financials and according to management they
would have more control in the decision making process. In our view,
post-deal consolidated net-debt/equity would deteriorate from 0.8x FY13
(est.) to 2.65x. We estimate MIAL to make loss in FY13 and FY14 in its
core operations owing to high capital costs. We foresee possibility of
cost overruns in Rs98bn capex est. for MIAL, DIAL saw ~30% overrun
during construction.
• GVK needs to align ambition with size of balance sheet: ~2.65x peak
net debt-equity is palatable and does not expose GVK to risk of equity
dilution. However, big-ticket overseas growth pursuits (e.g. Indonesian
airports, large coal mine in Australia) could stretch the balance sheet,
advance need to dilute equity and postpone FCF generation by a few
years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GVK Power & Infrastructure Overweight
GVKP.BO, GVKP IN
Bid to hike stake in MIAL to 50.5% at rich valuations
• GVK to increase stake in MIAL to 50.5%: The company has signed a
share purchase agreement with its South African partner (Bidvest) in
MIAL to buy 13.5% stake. The transaction is subject to regulatory
approvals and management expects to conclude the deal in ~6months.
Post deal, GVK's shareholding will increase from 37% to 50.5%,
Bidvest holding will reduce to 13.5%, AAI 26%, and ACSA Global of
Mauritius balance 10%.
• Deal dynamics: According to management total consideration for
13.5% stake in MIAL is US$280mn. They are in talks with Standard
Chartered bank to fund the transaction. According to the potential
arrangement, GVK would be required to make the payment over a 3 year
period and US$280mn will include ~US$50mn funding cost. The
implied equity value GVK would pay for the core airport and associated
real estate is ~US$1.7bn [(=280-50)/13.5%], as per our calculation.
• Deal factors-in value for MIAL real estate, while markets don't seem
to be doing so: Markets seem to be heavily discounting value for MIAL,
especially real estate owing to- (a) regulatory uncertainty prevailing
around core airport operations, (b) nil progress on airport land
monetization owing to delays in securing MMRDA approval, and (c)
uncertainty around timeframe required to get clear title of ~100acres
planned for developmental activities over ~10 years. Amidst these
concerns, we estimate the deal implies value of ~US$850mn for GVK's
50.5% stake vs. current market cap of US$933mn. The deal signals
management confidence in MIAL development plans, though
investment sentiment may get a boost only on announcement of a
meaningful RE transaction, in our view.
• The rationale for stake hike appears weak: Post deal GVK will be
able to consolidate MIAL financials and according to management they
would have more control in the decision making process. In our view,
post-deal consolidated net-debt/equity would deteriorate from 0.8x FY13
(est.) to 2.65x. We estimate MIAL to make loss in FY13 and FY14 in its
core operations owing to high capital costs. We foresee possibility of
cost overruns in Rs98bn capex est. for MIAL, DIAL saw ~30% overrun
during construction.
• GVK needs to align ambition with size of balance sheet: ~2.65x peak
net debt-equity is palatable and does not expose GVK to risk of equity
dilution. However, big-ticket overseas growth pursuits (e.g. Indonesian
airports, large coal mine in Australia) could stretch the balance sheet,
advance need to dilute equity and postpone FCF generation by a few
years.
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