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A m b i g u i t y o n p r o j e c t f u n d i n g …
GVK Power & Infrastructure (GVK) along with its group company has
entered into an agreement to acquire Hancock mines aggregating 3.3
billion tonnes reserves (proportionate reserves of 2.88 billion tonnes)
along with infrastructure development rights for US$1.26 billion. To fund
this, US$1 billion debt has been tied up. GVK will have a 10% stake in the
acquisition (with the option of increasing it to 49% subsequently) and
provide corporate guarantee to 49%, which remain a cause for concern
especially considering its leveraged balance sheet. With bear case
valuation of | 13/share and bull case valuation of | 48/ share, we maintain
our BUY recommendation.
Deal details
GVK Coal Developers, a JV between GVK and GVK Natural Resources Pte
Ltd (a GVK group company), has entered into an agreement to acquire
major coal resource aggregating 3.3 billion resources and infrastructure
development projects [Abbot Point port with capacity of 60 million tonnes
(MT) and 495 km rail line] from the Hancock Group. GVK will have 10%
stake in the JV with an option to increase to 49% subsequently. The total
acquisition cost is ~US$1.26 billion for which it has tied up debt of
US$1billion. For this debt, GVK will provide corporate guarantee to 49%
and is likely to pledge the shares of GVK Energy Ltd and GVK
Transportation Ltd, which remain a cause for concern especially
considering its leveraged balance sheet.
Our view
To commence production in 2014, they will have to incur capex of US$10
billion, which would require equity of US$2-3 billion. Though the
management is looking to raise US$1 billion by diluting stake in GVK Coal
Developers, the picture is still hazy for project funding for such massive
capex plans.
V a l u a t i o n
To analyse the situation, we have built up bear case and bull case
valuation for GVK. We get bear case value of | 13/share and bull case
valuation of | 48/share with high sensitivity to key variables (discussed in
valuation section). We maintain our BUY recommendation with an SOTP
price target of | 32. However, lack of clarity on project funding and GVK’s
corporate guarantee remain key risks to our call.
Deal details
ƒ GVK Power & Infrastructure (10% stake with option to increase to
49%) in JV with GVK Natural Resources Pte Ltd (a GVK group
company) has entered into an agreement to acquire major coal
resource (Alpha Coal Project & Alpha West Coal Project – 79% stake
and Kevin’s Corner Coal Project – 100% stake) and infrastructure
development project (Abbot Point port with capacity of 60 MT and
495 km rail line) from the Hancock Group
ƒ Together, these mines have coal resource of 7.9 billion tones (JORC
compliant resource) and 3.3 billion tonnes reserves (proportionate
reserves 2.88 billion tonnes) in measured + indicated categories. At
full production, these coal mines are expected to provide supply of
84 MTPA. Production is expected to start in 2014 with initial
production of 30-35 MT. Additionally, the letters of intent for ~45
MTPA have already been signed or are in the process of finalisation
with major utility companies in China, Japan, Korea, Taiwan and
Vietnam
ƒ The cost of acquisition is ~US$1.26 billion, payable in a phased
manner. The transaction involves payment of US$500 million
initially to Hancock, US$200 million after one year and the remainder
on financial closure of the project, which is expected in 2012. For
this acquisition, debt has already been tied up to the tune of US$1
billion at LIBOR + 500 bps (~5.5%). From GVK’s point of view, this
would lead to debt of US$100 million (10% of the debt tied up)
ƒ Additionally, the first phase of development of the project will
require capex of ~US$10 billion. This would involve the
development of Alpha & Alpha West Coal mine (US$5 billion),
development of port & rail line (US$2.5 billion each). On the capex
front, the management is looking to reduce the cost to US$6-7
billion through cost optimisation and outsourcing
ƒ GVK will initially have a 10% stake with an option to increase it to up
to 49%. However, to tie up debt for US$1 billion for the coal mine,
the corporate guarantee has been provided by GVK (49%) and GVK
Natural Resources Pte Ltd. Additionally, GVK will pledge the shares
of GVK Energy Ltd and GVK Transportation Ltd for debt tied up. In
our view, this would be a key negative from GVKPIL’s shareholders’
perspective
ƒ The deal gives GVK an option to enter into long-term coal purchase
contracts up to 20 MTPA (to supply ~7,500 MW of power
generating capacity) for securing long-term fuel supplies for its
subsidiary GVK Energy Ltd, which would be provided at an agreed
discount from the benchmark prices
ƒ Furthermore, Ms Georgina Hope Rinehart (the Chairman of the
Hancock Group) has been invited to join the board of GVK as a nonexecutive director. However, the management has clarified that no
preferential allotment in GVK will be made to Georgina Hope
Rinehart
Deal implication
ƒ While, looking at the recent M&A deals, the current acquisition may
appear to be on the lower end. However, we highlight that there is
no like-to-like comparison for this deal because Hancock has not
started its production and requires the capex of US$10 billion. On
the other hand, some of the recent acquisitions were operational
and others had done some portion of the capex
Exhibit 2: Recent M&A deals
Coal Acquirer Mine Stake (%) Consideration
Reserves (in
mn tonnes) $/tonne reserves
Lanco Infra Griffin Coal 100% A$ 750 mn 310 A$ 2.42
Adani Galilee Coal 100% US$ 2.7 bn 7.8 US$ 0.35
GMR T Golden Energy 30% US$ 450-550 mn 850 US$ 2.16 *
GVK Hancock Mines 79-100% US$ 1.26 bn 2880 US$ 0.36
Port Acquirer Terminal Consideration Capacity EV/MT(A$ in mn)
Mundra Port Abott Point coal Terminal A$ 1.8 bn 50 MTPA 36.0
Source: Press reports, ICICIdirect.com Research * assumed at consideration of US$ 550 mn
ƒ Secondly, GVK through this deal has secured access to coal to the
extent of 20 MTPA, which would support generation capacity of
7500 MW. This means that GVK will have to aggressively expand its
capacity in thermal power projects, going ahead. Currently, there is
only one thermal power project of 540 MW. Even for that fuel has
been secured through coal mines only in India. This is also in
contrast to power players who had done aggressive capacity
expansion and due to lack of fuel supply scouted for coal mines.
However, GVK has acquired the coal mine first and could possibly
look for aggressive expansion plans on the thermal project. This
could stretch its balance sheet further
ƒ To do the capex of US$10 billion in phase I, the GVK group would
require equity of US$2-3 billion in future. This means the GVK group
is likely to dilute the stake in GVK Coal Developer (coal mine
subsidiary). In line with this, the management has indicated that it is
looking to raise US$1 billion by selling a stake either to the
developers in China or coal traders in Japan and Korea
ƒ In terms of implication in FY12, the initial debt of US$500 million
would entail interest of ~US$13.75 million for the half year implying
GVK’s share of cost of US$1.375 million (~| 6 crore in FY12).
However, we are still not clear if the same will be either charged to
P&L or capitalised
Our view
Though there may be a dearth of coal supply, there is lack of clarity on
the funding of the mining project for capex of US$10 billion. In such a
scenario, GVK’s corporate guarantee to the extent of 49% (for initial
tie up of debt of US$1 billion for acquisition) and its already high
leverage remain a cause for concern.
V a l u a t i o n
We have fine-tuned our net profit estimates taking into account Q1FY12
numbers. However, it did not have any significant impact on our EPS
estimates. In our earning estimates, we have not incorporated interest
expenses for the loan of the abovementioned deal as it still awaits
regulatory approval. The stock has remained under pressure during the
last six months due to concerns such as lack of clarity in AERA regulation,
gas supply shortage and impending concerns over the Hancock deal.
Exhibit 3: Base case SOTP valuation
Basis CoE
Equity Value
(| crore) GVK's stake (%)
Stake Value (|
crore) Per share (|)
Power 1316.0 865.3 5
GVK Industries FCFE 13.0 298.2 75.0 223.6 1
Gautami FCFE 13.0 447 47.8 213.6 1
Goindwal Sahib FCFE 14.0 246.9 75.0 185.2 1
Alaknanda FCFE 14.0 323.8 75.0 242.8 2
Transport 687.4 687.4 4
JKEL FCFE 13.0 665 100.0 665.0 4
Deoli Kota FCFE 14.0 22.4 100.0 22.4 0
Airport 9793.9 4427.8 28
MIAL-Airport FCFE 14.0 2,488 50.5 1256.6 8
MIAL-Real Estate NAV 15.0 4,896 50.5 2472.4 16
BIAL-Airport FCFE 15.0 2,410 29.0 698.8 4
Total 11797.3 5980.5 38
Less: Net Debt 1002.5 6
Target 4978.0 32
Source: Company, ICICIdirect.com Research
In order to analyse the stock more from a risk–reward ratio, we have
analysed it in three scenarios. In the first scenario, we have not built up
any scene for the mining company. In that case, our base case price
target works out to be | 32 per share.
In the second case, we have analysed the bear case scenario. In this
scenario, we have assumed that nothing goes right with the deal and,
hence, corporate guarantee is invoked leading to loss of US$126 million
equity commitment and 49% share of US$1 billion debt. We have also
increased our cost of equity assumptions for power and road projects by
100 bps in this case. In such a scenario, our bear case valuation works out
be | 13 per share.
In the third case, we have analysed the best case scenario. In this
scenario, we assume that everything goes right and GVK’s initial
commitment would be US$126 million while rest of the funding would be
arranged through equity dilution. Consequently, there would be dilution
in GVK’s equity stake. To analyse, we have made a lot of assumptions.
We have also reduced our cost of equity assumptions for power and road
projects by 100 bps in this case and provided only 10% discount to NAV
for MIAL real estate as against 50% discount in base and bear case. We
present the basic valuation assuming coal realisation of US$100/tonne
along with assuming 5% fully diluted equity stake. In such a scenario, our
bull case valuation works out to | 48 per share.
Conclusion
Looking at the three different scenarios, the bear case valuation works out
to | 13 per share while the bull case valuation works out to | 48 per share
with high sensitivity to key variables shown above. At the CMP, the stock
is trading close to bear case valuation while the valuation is attractive at
current levels (0.8x FY12 P/B). Hence, we have maintained our BUY
recommendation on the stock with a price target of | 32 per share.
However, the lack of clarity for the project funding and GVK’s corporate
guarantee remains the key risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A m b i g u i t y o n p r o j e c t f u n d i n g …
GVK Power & Infrastructure (GVK) along with its group company has
entered into an agreement to acquire Hancock mines aggregating 3.3
billion tonnes reserves (proportionate reserves of 2.88 billion tonnes)
along with infrastructure development rights for US$1.26 billion. To fund
this, US$1 billion debt has been tied up. GVK will have a 10% stake in the
acquisition (with the option of increasing it to 49% subsequently) and
provide corporate guarantee to 49%, which remain a cause for concern
especially considering its leveraged balance sheet. With bear case
valuation of | 13/share and bull case valuation of | 48/ share, we maintain
our BUY recommendation.
Deal details
GVK Coal Developers, a JV between GVK and GVK Natural Resources Pte
Ltd (a GVK group company), has entered into an agreement to acquire
major coal resource aggregating 3.3 billion resources and infrastructure
development projects [Abbot Point port with capacity of 60 million tonnes
(MT) and 495 km rail line] from the Hancock Group. GVK will have 10%
stake in the JV with an option to increase to 49% subsequently. The total
acquisition cost is ~US$1.26 billion for which it has tied up debt of
US$1billion. For this debt, GVK will provide corporate guarantee to 49%
and is likely to pledge the shares of GVK Energy Ltd and GVK
Transportation Ltd, which remain a cause for concern especially
considering its leveraged balance sheet.
Our view
To commence production in 2014, they will have to incur capex of US$10
billion, which would require equity of US$2-3 billion. Though the
management is looking to raise US$1 billion by diluting stake in GVK Coal
Developers, the picture is still hazy for project funding for such massive
capex plans.
V a l u a t i o n
To analyse the situation, we have built up bear case and bull case
valuation for GVK. We get bear case value of | 13/share and bull case
valuation of | 48/share with high sensitivity to key variables (discussed in
valuation section). We maintain our BUY recommendation with an SOTP
price target of | 32. However, lack of clarity on project funding and GVK’s
corporate guarantee remain key risks to our call.
Deal details
ƒ GVK Power & Infrastructure (10% stake with option to increase to
49%) in JV with GVK Natural Resources Pte Ltd (a GVK group
company) has entered into an agreement to acquire major coal
resource (Alpha Coal Project & Alpha West Coal Project – 79% stake
and Kevin’s Corner Coal Project – 100% stake) and infrastructure
development project (Abbot Point port with capacity of 60 MT and
495 km rail line) from the Hancock Group
ƒ Together, these mines have coal resource of 7.9 billion tones (JORC
compliant resource) and 3.3 billion tonnes reserves (proportionate
reserves 2.88 billion tonnes) in measured + indicated categories. At
full production, these coal mines are expected to provide supply of
84 MTPA. Production is expected to start in 2014 with initial
production of 30-35 MT. Additionally, the letters of intent for ~45
MTPA have already been signed or are in the process of finalisation
with major utility companies in China, Japan, Korea, Taiwan and
Vietnam
ƒ The cost of acquisition is ~US$1.26 billion, payable in a phased
manner. The transaction involves payment of US$500 million
initially to Hancock, US$200 million after one year and the remainder
on financial closure of the project, which is expected in 2012. For
this acquisition, debt has already been tied up to the tune of US$1
billion at LIBOR + 500 bps (~5.5%). From GVK’s point of view, this
would lead to debt of US$100 million (10% of the debt tied up)
ƒ Additionally, the first phase of development of the project will
require capex of ~US$10 billion. This would involve the
development of Alpha & Alpha West Coal mine (US$5 billion),
development of port & rail line (US$2.5 billion each). On the capex
front, the management is looking to reduce the cost to US$6-7
billion through cost optimisation and outsourcing
ƒ GVK will initially have a 10% stake with an option to increase it to up
to 49%. However, to tie up debt for US$1 billion for the coal mine,
the corporate guarantee has been provided by GVK (49%) and GVK
Natural Resources Pte Ltd. Additionally, GVK will pledge the shares
of GVK Energy Ltd and GVK Transportation Ltd for debt tied up. In
our view, this would be a key negative from GVKPIL’s shareholders’
perspective
ƒ The deal gives GVK an option to enter into long-term coal purchase
contracts up to 20 MTPA (to supply ~7,500 MW of power
generating capacity) for securing long-term fuel supplies for its
subsidiary GVK Energy Ltd, which would be provided at an agreed
discount from the benchmark prices
ƒ Furthermore, Ms Georgina Hope Rinehart (the Chairman of the
Hancock Group) has been invited to join the board of GVK as a nonexecutive director. However, the management has clarified that no
preferential allotment in GVK will be made to Georgina Hope
Rinehart
Deal implication
ƒ While, looking at the recent M&A deals, the current acquisition may
appear to be on the lower end. However, we highlight that there is
no like-to-like comparison for this deal because Hancock has not
started its production and requires the capex of US$10 billion. On
the other hand, some of the recent acquisitions were operational
and others had done some portion of the capex
Exhibit 2: Recent M&A deals
Coal Acquirer Mine Stake (%) Consideration
Reserves (in
mn tonnes) $/tonne reserves
Lanco Infra Griffin Coal 100% A$ 750 mn 310 A$ 2.42
Adani Galilee Coal 100% US$ 2.7 bn 7.8 US$ 0.35
GMR T Golden Energy 30% US$ 450-550 mn 850 US$ 2.16 *
GVK Hancock Mines 79-100% US$ 1.26 bn 2880 US$ 0.36
Port Acquirer Terminal Consideration Capacity EV/MT(A$ in mn)
Mundra Port Abott Point coal Terminal A$ 1.8 bn 50 MTPA 36.0
Source: Press reports, ICICIdirect.com Research * assumed at consideration of US$ 550 mn
ƒ Secondly, GVK through this deal has secured access to coal to the
extent of 20 MTPA, which would support generation capacity of
7500 MW. This means that GVK will have to aggressively expand its
capacity in thermal power projects, going ahead. Currently, there is
only one thermal power project of 540 MW. Even for that fuel has
been secured through coal mines only in India. This is also in
contrast to power players who had done aggressive capacity
expansion and due to lack of fuel supply scouted for coal mines.
However, GVK has acquired the coal mine first and could possibly
look for aggressive expansion plans on the thermal project. This
could stretch its balance sheet further
ƒ To do the capex of US$10 billion in phase I, the GVK group would
require equity of US$2-3 billion in future. This means the GVK group
is likely to dilute the stake in GVK Coal Developer (coal mine
subsidiary). In line with this, the management has indicated that it is
looking to raise US$1 billion by selling a stake either to the
developers in China or coal traders in Japan and Korea
ƒ In terms of implication in FY12, the initial debt of US$500 million
would entail interest of ~US$13.75 million for the half year implying
GVK’s share of cost of US$1.375 million (~| 6 crore in FY12).
However, we are still not clear if the same will be either charged to
P&L or capitalised
Our view
Though there may be a dearth of coal supply, there is lack of clarity on
the funding of the mining project for capex of US$10 billion. In such a
scenario, GVK’s corporate guarantee to the extent of 49% (for initial
tie up of debt of US$1 billion for acquisition) and its already high
leverage remain a cause for concern.
V a l u a t i o n
We have fine-tuned our net profit estimates taking into account Q1FY12
numbers. However, it did not have any significant impact on our EPS
estimates. In our earning estimates, we have not incorporated interest
expenses for the loan of the abovementioned deal as it still awaits
regulatory approval. The stock has remained under pressure during the
last six months due to concerns such as lack of clarity in AERA regulation,
gas supply shortage and impending concerns over the Hancock deal.
Exhibit 3: Base case SOTP valuation
Basis CoE
Equity Value
(| crore) GVK's stake (%)
Stake Value (|
crore) Per share (|)
Power 1316.0 865.3 5
GVK Industries FCFE 13.0 298.2 75.0 223.6 1
Gautami FCFE 13.0 447 47.8 213.6 1
Goindwal Sahib FCFE 14.0 246.9 75.0 185.2 1
Alaknanda FCFE 14.0 323.8 75.0 242.8 2
Transport 687.4 687.4 4
JKEL FCFE 13.0 665 100.0 665.0 4
Deoli Kota FCFE 14.0 22.4 100.0 22.4 0
Airport 9793.9 4427.8 28
MIAL-Airport FCFE 14.0 2,488 50.5 1256.6 8
MIAL-Real Estate NAV 15.0 4,896 50.5 2472.4 16
BIAL-Airport FCFE 15.0 2,410 29.0 698.8 4
Total 11797.3 5980.5 38
Less: Net Debt 1002.5 6
Target 4978.0 32
Source: Company, ICICIdirect.com Research
In order to analyse the stock more from a risk–reward ratio, we have
analysed it in three scenarios. In the first scenario, we have not built up
any scene for the mining company. In that case, our base case price
target works out to be | 32 per share.
In the second case, we have analysed the bear case scenario. In this
scenario, we have assumed that nothing goes right with the deal and,
hence, corporate guarantee is invoked leading to loss of US$126 million
equity commitment and 49% share of US$1 billion debt. We have also
increased our cost of equity assumptions for power and road projects by
100 bps in this case. In such a scenario, our bear case valuation works out
be | 13 per share.
In the third case, we have analysed the best case scenario. In this
scenario, we assume that everything goes right and GVK’s initial
commitment would be US$126 million while rest of the funding would be
arranged through equity dilution. Consequently, there would be dilution
in GVK’s equity stake. To analyse, we have made a lot of assumptions.
We have also reduced our cost of equity assumptions for power and road
projects by 100 bps in this case and provided only 10% discount to NAV
for MIAL real estate as against 50% discount in base and bear case. We
present the basic valuation assuming coal realisation of US$100/tonne
along with assuming 5% fully diluted equity stake. In such a scenario, our
bull case valuation works out to | 48 per share.
Conclusion
Looking at the three different scenarios, the bear case valuation works out
to | 13 per share while the bull case valuation works out to | 48 per share
with high sensitivity to key variables shown above. At the CMP, the stock
is trading close to bear case valuation while the valuation is attractive at
current levels (0.8x FY12 P/B). Hence, we have maintained our BUY
recommendation on the stock with a price target of | 32 per share.
However, the lack of clarity for the project funding and GVK’s corporate
guarantee remains the key risk.
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