GVK Power and Infra- Regulatory overhang remains :: Macquarie Research

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GVK Power and Infra
Regulatory overhang remains
Event
 GVKP declared its 4Q and FY11 results which were in line with our
expectations. FY11 PAT at Rs1.5bn was flat YoY. Power plants’ performance
was hit due to lower availability of gas while airports witnessed robust traffic.
 We cut earning estimates for FY12/13 to factor lower tariffs from power plants
(some merchant built in earlier) and delay in commissioning of Alaknanda
hydro project. We cut our target price by 28% to Rs43 (from Rs60) as we
remove gas expansion projects and assign lower value to Bangalore airport.

Impact
 Lower gas availability and delay in merchant sales’ verdict to hurt
earnings in FY12: GVKP’s operational power plants were impacted due to
lower gas availability from KG-D6 basin. We now factor in reduced utilisation
of 85% for the plants in FY12. We remove our earlier expectation of merchant
sales from JP2 and Gautami power plants.
Gas expansion projects in limbo: GVKP had announced its plan to set
up 1.6GW gas-based projects. We remove these projects from our
valuation given the uncertainty on gas availability. GVKP has spent
Rs2bn towards advance to Alstom and land purchases.
 Healthy growth to continue in airports, Mumbai needs clarity on ADF /
tariff issues: Mumbai and Bangalore airports witnessed healthy 14% and
17% traffic growth in FY11. We expect Mumbai and Bangalore airports to post
earnings CAGR of 20% and 50% respectively over FY12-13. Mumbai airport
has approached airport regulator for grant of ADF which is awaited. Further,
there is overhang of tariff structure to be implemented post commissioning.
 Still awaiting final approval for real estate monetisation in Mumbai
airport: MMRDA has completed the process of inviting public objections to
the development plan. However, it is yet to grant the final approval. GVKP
maintains approval should come through in the near term and would be able
to monetise 1.2m sq ft of land parcel in 1HFY12.
 Major disconnect between private and public market valuations: GVKP’s
current market cap is much lower than the value of its power business alone
which was valued at Rs60bn where GVKP now holds 75%. Similarly,
valuations do not reflect the price paid by GVK to acquire 13% stake in
Mumbai airport. We believe the discount is mainly due to uncertainty around
airport regulations and large ticket overseas acquisition overhang.
Earnings and target price revision
 We reduce our FY12-13 EPS by ~55-60%. We introduce FY14 estimates. We
revise our target price to Rs43 (from Rs60 earlier).
Price catalyst
 12-month price target: Rs43.00 based on a Sum of Parts methodology.
 Catalyst: higher gas availability and land monetisation at Mumbai airport.
Action and recommendation
 Triggers need to play out for stock performance: We believe clarity around
gas availability, land monetisation at Mumbai airport, and airport regulations is
needed for the stock to narrow its discount to our estimate of its fair value