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GVK Power and Infra
Multi-billion dollar risky venture
Event
GVK group has acquired stakes in Hancock’s coal mines in Australia for an
initial purchase price of US$1.26bn – 90% stake was acquired via a promoter
entity and 10% through the listed entity, with 49% of the guarantees provided
through the listed entity. We are reviewing our investment thesis following
such a big acquisition.
Impact
Debt-funded deal with promoters owning majority stake: The US$1.26bn
Hancock deal has been funded entirely by debt and is 90% owned by the
promoter entity and 10% by listed entity GVKPIL.
Huge equity requirement for project development, contingent on
potential PE deals: US$10bn in project costs for mine development, rail and
port projects would entail an equity requirement of US$2.5–3bn over the next
3–4 years. Management is hopeful of raising PE funds to fund the equity
requirement for the project.
Balance sheet exposure creates risks for minority shareholders: GVKPIL
has provided corporate guarantees for 49% of the acquisition debt and has
pledged its shares in its road projects and Energy vertical to secure the equity
requirements of the debt and debt guarantees. We remain concerned with the
significant guarantees provided by the listed entity in return for an option to
purchase 20m tonnes of coal annually at a 10% discount to the market price.
Is GVK falling into a debt trap? GVKPIL is in the process of raising/has
raised debt of Rs26bn to fund its increased airport stakes. Additionally, it has
an equity shortfall of ~Rs8bn in its road projects under construction over the
next 2–3 years. The company has been trying to raise private equity money
for its airport vertical, which has been delayed due to uncertainty in
regulations. Only GVK Energy currently seems to be well placed in its equity
requirements mainly due to private equity funds of US$300m raised in FY11.
Management bandwidth can get stretched: GVKPIL has not advanced
much on pending issues like real estate monetisation at the Mumbai airport,
gas allocation for its expansion projects and settlement of merchant sales
from its operational gas power plants. With such a large coal acquisition, top
management’s focus is likely to shift from India to Australia.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs43.00 based on a Sum of Parts methodology.
Catalyst: Fund raising in coal SPV, airport tariff regulation and gas allocation
Action and recommendation
Growing bigger than its shoes: With asset purchases and stake increases
funded entirely by borrowings, GVKPIL is running high on debt. Corporate
guarantees in this recent asset purchase expose the listed company to
considerable balance sheet risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GVK Power and Infra
Multi-billion dollar risky venture
Event
GVK group has acquired stakes in Hancock’s coal mines in Australia for an
initial purchase price of US$1.26bn – 90% stake was acquired via a promoter
entity and 10% through the listed entity, with 49% of the guarantees provided
through the listed entity. We are reviewing our investment thesis following
such a big acquisition.
Impact
Debt-funded deal with promoters owning majority stake: The US$1.26bn
Hancock deal has been funded entirely by debt and is 90% owned by the
promoter entity and 10% by listed entity GVKPIL.
Huge equity requirement for project development, contingent on
potential PE deals: US$10bn in project costs for mine development, rail and
port projects would entail an equity requirement of US$2.5–3bn over the next
3–4 years. Management is hopeful of raising PE funds to fund the equity
requirement for the project.
Balance sheet exposure creates risks for minority shareholders: GVKPIL
has provided corporate guarantees for 49% of the acquisition debt and has
pledged its shares in its road projects and Energy vertical to secure the equity
requirements of the debt and debt guarantees. We remain concerned with the
significant guarantees provided by the listed entity in return for an option to
purchase 20m tonnes of coal annually at a 10% discount to the market price.
Is GVK falling into a debt trap? GVKPIL is in the process of raising/has
raised debt of Rs26bn to fund its increased airport stakes. Additionally, it has
an equity shortfall of ~Rs8bn in its road projects under construction over the
next 2–3 years. The company has been trying to raise private equity money
for its airport vertical, which has been delayed due to uncertainty in
regulations. Only GVK Energy currently seems to be well placed in its equity
requirements mainly due to private equity funds of US$300m raised in FY11.
Management bandwidth can get stretched: GVKPIL has not advanced
much on pending issues like real estate monetisation at the Mumbai airport,
gas allocation for its expansion projects and settlement of merchant sales
from its operational gas power plants. With such a large coal acquisition, top
management’s focus is likely to shift from India to Australia.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs43.00 based on a Sum of Parts methodology.
Catalyst: Fund raising in coal SPV, airport tariff regulation and gas allocation
Action and recommendation
Growing bigger than its shoes: With asset purchases and stake increases
funded entirely by borrowings, GVKPIL is running high on debt. Corporate
guarantees in this recent asset purchase expose the listed company to
considerable balance sheet risks.
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