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GVK Power & Infrastructure (GVKP.BO, Neutral)
Aggressive bidding and capital raising may provide new growth opportunities but changes in policy
plus execution risks are high. We maintain our Neutral rating on the stock despite below book
valuation as we are not convinced by the company’s strategy to focus more on growth than returns
Exposure to core infrastructure sectors such as power generation (901 MW operational, 870 MW under
construction, and 2,661 MW under development), airports (37% stake in Mumbai Airport (MIAL), 29% in
Bangalore Airport (BIAL)) – are likely to increase post recent announced transactions (BIAL stake hike and
Hancock coal mine acquisition) – and roads (90km BOT operational).
While both the aero and non-aero revenues at the Mumbai and Bangalore airports continue to grow, current
high finance charges and outstanding policy uncertainty reduces our valuations on these assets. Our
valuation is at a substantial discount to recent transactions undertaken by the company as it tries to increase
its stakes in these assets (50% for Mumbai Airport, 60% for Bangalore Airport).
GVK Power has various regulatory uncertainties surrounding the company in relation to: Airports: MIAL –
treatment of land valuation and BIAL – revenue till structure (separation of aero and non-aero revenues);
Power: The regular availability of gas at a profitable price, the possibility of merchant power sales from
current production, and the company’s ambitious plan to expand further into coal assets (e.g. Reuters
reported on August 26, 2011, bids by the company for two coal mines of Hancock Prospecting, Australia).
Catalyst
Any clarity on the tilling mechanism for BIAL or how the value of the company’s real estate is treated by the
regulator, AERA.
A large part of the value of GVK Power’s airport assets comes through real estate monetization, which has
been delayed. Approvals from the local development authority (MMRDA) – any monetization clearance over
2H FY12 could be a catalyst.
Valuation
At 0.8X FY12E P/B (vs. a 5-year median P/B of 1.9X), GVK Power’s valuations seem reasonable. However, this
is counter balanced to some extent by uncertainty on the regulatory front and high leverage on the
company’s consolidated balance sheet.
We lower our FY12-FY14 EPS estimates by 4%-7% as we incorporate the impact of higher interest expenses
and lower plant load factors (PLFs) on energy business due to an interrupted gas supply in Andhra Pradesh.
We maintain our Neutral rating and 12-month SOTP-based target price of Rs23 on GVK Power as we roll
forward our estimates by 6 months to the average of FY12E-FY13E.
Key risks
Upside: (1) Monetization of Mumbai airport land and (2) more road project wins.
Downside: (1) Prolonged weakness in traffic, (2) further delay in monetization of Mumbai airport real estate,
and (3) inclusion of real estate sales in calculating regulated airport capex by AERA.
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