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GVK Power & Infrastructure
▼ Neutral
Previous: Overweight
GVKP.BO, GVKP IN
Stretching its goals; downgrade to Neutral
• Potential balance sheet and equity dilution risks may limit share price
rally. Despite its sharp underperformance, we downgrade GVK to
Neutral, with Mar-12 PT of Rs31. Our rough capex estimates and equity
requirement for growth proposals (Eg: Indo airports, Australian coal mine,
possibly Navi Mumbai airport if GVK wins the bid, etc) are to the tune of
US$7.4B and US$2.1B, respectively. In the context of the company’s
current market cap, growth aspirations appear large and dilution risk
appears high.
• We would use potential near-term relief rally to exit the stock, given
our longer-term concerns. In our view, stock sentiment could be boosted
by a) possible real estate sale of 2m sft at Mumbai airport in 2QFY12, after
much delay and b) improving market sentiment, generating the view that the
stock is already discounting negative developments so far, including i)
persistent delay in Mumbai real estate sale, ii) lower gas availability
impacting operations and viability of the new gas-based power plants, iii)
roll-back of merchant sales from operating gas-based plants and iv)
regulatory uncertainty on Bangalore airport.
• We reduce FY12/13 net earnings estimates by 49% and 67%
respectively, factoring in a) lower gas-based PLF to 70% avg, b) no
merchant sales (earlier, 137MW). Our steep PT cut of Rs22 is broken down
into a) Rs4 and Rs2 illiquidity discount to Mumbai and Bangalore real
estate, b) Rs7 due to gas project related disappointments and c) Rs8 due to a
20% discount to fair value to account for the funding gap that might arise
due to company’s growth plans.
• Scaling down of capex pursuits or induction of well-capitalised strategic
partner would mitigate our concerns and pose upside to our PT. The
implied value for unmonetised real estate at Mumbai is just ~Rs2,000psf in
our SOP: While the actual land monetization could occur at substantial
premium, we would be wary of extrapolating the value to other parcels,
given chronic issues around slum rehabilitation and congestion.
Stretching goals beyond what B/S can
support?
Our downgrade is based on our view that the impending capex for future projects
could imply substantial cash flow and leverage pressures and possible equity
dilution. In an extreme case if company decides to pursue / win all these projects,
equity requirements (US$2.1B) add up to ~2x current market cap. Additional debt
(US$5.3B) would stress the DER which we expect at 2.17x in FY12E. As current
operating cash flows appear just sufficient to fund ongoing projects (e.g.: Mumbai
airport, Goindwal Saheb power project), dilution risk would be enhanced, in our
view
We foresee a near-term bounceback in GVK (in fact the stock is already up 19%
from its lows) on impending news on Mumbai airport real estate monetization. The
management has set a revised target of 2QFY12 for sale of 2M sft, and this time the
target is backed by better visibility on MMRDA approval. We believe the proceeds
would be used to bridge the airport funding gap, and thus would not ‘add’ to our
SOP. We would be wary of attributing the same value to remaining parcels,
estimated at 13-18M sft, given chronic congestion and slum-related issues. We
would use the rally to exit the stock
Basis for new price target of Rs31
Power segment: no more merchant sales, reduced gas
availability
• Knocking off 1.6GW of brownfield gas based projects, due to lack of clarity on
fuel supply, reduces SOP by Rs2.9/share.
• For operating projects, assuming no merchant sales and reducing PLF to 70-85%
reduces SOP by Rs4.0/share.
Real estate: less value for Mumbai, no value for Bangalore
We assign value of ~Rs2,000psf to 12.6M sft of unmonetised Mumbai real estate.
This assumes 50% discount to the assumed NPV of ~Rs4,000psf for 2.4M sft that we
think will be sold in 2QFY12.
We are knocking off Rs1.9 per share that we had assigned to Bangalore airport real
estate, given potential deferral of plans to lease-out the same.
Higher stake in Mumbai airport (+), corresponding debt (-)
GVK purchased additional 13% stake in Mumbai airport from Bidvest for $280M,
which is funded by $230M parent level debt.
Discount to fair value on account of dilution risks
discussed above
We take a 20% discount to fair value, translating into Rs7.8/share.
Reduction in earnings estimates
Power segment has seen sharp earnings downgrades, as we have reduced PLF
estimates for a) J-1 to 70% from 85%, 2) J2 to 70% from 85%, 3) Gautami to 70%
from 90% and 4) Goindwal Saheb to 85% from 90%. Further, we have knocked off
merchant sales completely from our assumptions; given uncertainties surrounding the
same. These changes have led to 83% and 33% reduction in power segment PAT for
FY12 and 13.
On the whole, consolidated revenue and EBITDA have risen, as, post acquisition of
additional stake in MIAL to 50.5%; we are consolidating the airport line-by-line in
our model. But consolidated PAT (which earlier had associate income from MIAL)
has declined by 49% and 67% respectively, for FY12/13, due to power segment
reductions described above.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GVK Power & Infrastructure
▼ Neutral
Previous: Overweight
GVKP.BO, GVKP IN
Stretching its goals; downgrade to Neutral
• Potential balance sheet and equity dilution risks may limit share price
rally. Despite its sharp underperformance, we downgrade GVK to
Neutral, with Mar-12 PT of Rs31. Our rough capex estimates and equity
requirement for growth proposals (Eg: Indo airports, Australian coal mine,
possibly Navi Mumbai airport if GVK wins the bid, etc) are to the tune of
US$7.4B and US$2.1B, respectively. In the context of the company’s
current market cap, growth aspirations appear large and dilution risk
appears high.
• We would use potential near-term relief rally to exit the stock, given
our longer-term concerns. In our view, stock sentiment could be boosted
by a) possible real estate sale of 2m sft at Mumbai airport in 2QFY12, after
much delay and b) improving market sentiment, generating the view that the
stock is already discounting negative developments so far, including i)
persistent delay in Mumbai real estate sale, ii) lower gas availability
impacting operations and viability of the new gas-based power plants, iii)
roll-back of merchant sales from operating gas-based plants and iv)
regulatory uncertainty on Bangalore airport.
• We reduce FY12/13 net earnings estimates by 49% and 67%
respectively, factoring in a) lower gas-based PLF to 70% avg, b) no
merchant sales (earlier, 137MW). Our steep PT cut of Rs22 is broken down
into a) Rs4 and Rs2 illiquidity discount to Mumbai and Bangalore real
estate, b) Rs7 due to gas project related disappointments and c) Rs8 due to a
20% discount to fair value to account for the funding gap that might arise
due to company’s growth plans.
• Scaling down of capex pursuits or induction of well-capitalised strategic
partner would mitigate our concerns and pose upside to our PT. The
implied value for unmonetised real estate at Mumbai is just ~Rs2,000psf in
our SOP: While the actual land monetization could occur at substantial
premium, we would be wary of extrapolating the value to other parcels,
given chronic issues around slum rehabilitation and congestion.
Stretching goals beyond what B/S can
support?
Our downgrade is based on our view that the impending capex for future projects
could imply substantial cash flow and leverage pressures and possible equity
dilution. In an extreme case if company decides to pursue / win all these projects,
equity requirements (US$2.1B) add up to ~2x current market cap. Additional debt
(US$5.3B) would stress the DER which we expect at 2.17x in FY12E. As current
operating cash flows appear just sufficient to fund ongoing projects (e.g.: Mumbai
airport, Goindwal Saheb power project), dilution risk would be enhanced, in our
view
We foresee a near-term bounceback in GVK (in fact the stock is already up 19%
from its lows) on impending news on Mumbai airport real estate monetization. The
management has set a revised target of 2QFY12 for sale of 2M sft, and this time the
target is backed by better visibility on MMRDA approval. We believe the proceeds
would be used to bridge the airport funding gap, and thus would not ‘add’ to our
SOP. We would be wary of attributing the same value to remaining parcels,
estimated at 13-18M sft, given chronic congestion and slum-related issues. We
would use the rally to exit the stock
Basis for new price target of Rs31
Power segment: no more merchant sales, reduced gas
availability
• Knocking off 1.6GW of brownfield gas based projects, due to lack of clarity on
fuel supply, reduces SOP by Rs2.9/share.
• For operating projects, assuming no merchant sales and reducing PLF to 70-85%
reduces SOP by Rs4.0/share.
Real estate: less value for Mumbai, no value for Bangalore
We assign value of ~Rs2,000psf to 12.6M sft of unmonetised Mumbai real estate.
This assumes 50% discount to the assumed NPV of ~Rs4,000psf for 2.4M sft that we
think will be sold in 2QFY12.
We are knocking off Rs1.9 per share that we had assigned to Bangalore airport real
estate, given potential deferral of plans to lease-out the same.
Higher stake in Mumbai airport (+), corresponding debt (-)
GVK purchased additional 13% stake in Mumbai airport from Bidvest for $280M,
which is funded by $230M parent level debt.
Discount to fair value on account of dilution risks
discussed above
We take a 20% discount to fair value, translating into Rs7.8/share.
Reduction in earnings estimates
Power segment has seen sharp earnings downgrades, as we have reduced PLF
estimates for a) J-1 to 70% from 85%, 2) J2 to 70% from 85%, 3) Gautami to 70%
from 90% and 4) Goindwal Saheb to 85% from 90%. Further, we have knocked off
merchant sales completely from our assumptions; given uncertainties surrounding the
same. These changes have led to 83% and 33% reduction in power segment PAT for
FY12 and 13.
On the whole, consolidated revenue and EBITDA have risen, as, post acquisition of
additional stake in MIAL to 50.5%; we are consolidating the airport line-by-line in
our model. But consolidated PAT (which earlier had associate income from MIAL)
has declined by 49% and 67% respectively, for FY12/13, due to power segment
reductions described above.
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