J.P. Morgan - GVK Power & Infrastructure

Price Target: Rs11.00

PT End Date: 31 Mar 2015

GVK Power & Infrastructure (GVKP IN)

Mar-q loss higher than expected, equity infusion to ease debt burden crucial

· GVK reported Mar-q loss of Rs2.3bn vs. 3QFY14 loss of Rs0.5bn. During the quarter reported interest of Rs3bn was higher than EBITDA of Rs1.6bn. Losses increased because of – (i) higher interest (Rs3.0bn, +53% QoQ) and depreciation (Rs1.6bn, +79% QoQ) post capitalization of T2 at MIAL starting 1st Jan 2014 and capitalization of expansion related capex at BIAL in mid-Feb 2014. As per management current MIAL aero charges allowed by the regulator are inadequate. The truing up process may take up to a year, so MIAL is expected to report PAT loss of ~Rs7bn in FY15 as per management, although there will no cash loss, (ii) One-time tax write back of Rs0.9bn in BIAL.

· Summing up Mar-q performance of operational assets. (i) 2 of the 3 gas based plants continued to remain shut posting a combined loss (before minority interest) of Rs0.8bn vs. 0.7bn in 3Q, (ii) JKEL traffic grew 3% yoy in PCU terms, revenue grew 8% yoy to Rs712mn, while PAT of Rs131mn declined 18% yoy due to higher tax rate (iii) MIAL saw 3% yoy traffic growth in 4Q, however revenue and margin was below expectation as aero tariff needs to be trued up, capital costs were higher than expected with 86% of the asset now capitalized. (iv) BIAL traffic grew by 7% yoy in 4Q and while PBT grew by 44% yoy, the entity reported a loss due to MAT reversal of Rs0.9bn. Interest cost hit on acquisition loan of Rs30bn to increase stake in MIAL/BIAL was Rs5bn in FY14. Adjusted for this interest hit, GVK’s consolidated FY14 loss of Rs3.7bn would be a PAT of Rs1.3bn. Management has been trying to retire this acquisition debt by paring down stake in airport holding company over last few quarters. Land monetization plans at MIAL have not materialized as price bids received were below management expectations. The board has passed an enabling resolution for raising Rs10bn of equity issuance with an Rs5bn green shoe option. As per management GVK would not go ahead with equity dilution at current stock price levels (implied dilution of ~28% for raising Rs10bn at CMP).

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· Management hopeful of commissioning most under construction projects in FY15: (i) Alakhnanda (330MW) – unit 1 CoD is expected by June end and the entire project (all 4 units) by October (ii)Goindwal Sahib (540MW) & Tokisud mine - U1 is ready for commercial operation and U2 will be ready by end June, however the coal requirement which will be met through the Tokisud mine will start in Nov-14, hence by Jan-15 plant should start earning revenue, as per management (iii) Deoli Kota road project: Partial tolling to commence by July and full tolling by August; expected to generate Rs1bn/annum of revenue (iv) Badodara Vasad road project: CoD is expected by May 2015 with annual revenue of Rs1.3bn. (v) Ratle (850MW) hydro: 3.5 – 4 years of construction period pending.

· Support to group investment in Australian coal mines increases: GVK, the listed company has now invested Rs2.21bn via share application money in GVK Coal Developers (a group entity where listed company owns 10% equity) vs. Rs2.5mn as of FY13. However, as per management GVK will be repaid back some of this amount as the coal entity has recently received US$100mn of bank funding to service interest liabilities. GVK has given guarantees and commitments aggregating to Rs67.9bn to GVK Coal Developers.

· FY15 cash flow management will be challenging: No material positive development is expected on domestic gas availability in the near-term which continues to be a drain on cash flows, while materially large projects Goindwal Sahib and Alakhnanda shall commence commercial operations in late FY15. Under construction projects will require additional equity infusion of Rs4.9bn in FY15 (and FY16). Consolidated debt of Rs224bn at end of FY14 implies 3.8x D/E and 3.5x net-D/E. To conclude, efforts to raise capital by asset monetization or dilution are likely to intensify in near-term, in our view.

Table 1: GVKPIL: 4Q and FY14 results review

Rs. in million, year-end March

	4QFY14	4QFY14E	4QFY13	% YoY	3QFY14	% QoQ	FY14	FY13	% YoY
Net Sales	6,944	7,991	5,001	39	7,351	(6)	28,209	26,077	8
Expenditure	(5,353)	(5,386)	(5,230)	2	(4,788)	12	(18,748)	(19,626)	(4)
Employees Cost	(433)	1,276	(388)	12	(451)	(4)	(1,709)	(1,356)	26
Fuel Cost	(644)	(736)	(1,207)	(47)	(720)	(11)	(2,554)	(7,198)	(65)
Other Expenditure	(4,276)	(5,925)	(3,635)	18	(3,617)	18	(14,486)	(11,071)	31
EBITDA	1,592	2,605	(229)	(795)	2,563	(38)	9,461	6,451	47
Depreciation	(1,641)	(1,245)	(911)	80	(915)	79	(4,377)	(3,512)	25
EBIT	(50)	1,360	(1,140)	(96)	1,648	(103)	5,084	2,939	73
Other Income	220	364	350	(37)	343	(36)	1,207	1,361	(11)
Interest	(3,047)	(2,447)	(1,651)	85	(1,989)	53	(9,047)	(7,079)	28
PBT	(2,877)	(723)	(2,442)		2		(2,756)	(2,779)
Tax	219	(216)	(409)		(524)		(1,446)	(1,287)
PAT	(2,658)	(939)	(2,850)		(522)		(4,202)	(4,066)
Minority Interest	673	54	887		(133)		239	197
Profit & Loss of Associates	(369)	198	253		200		276	509
PATAMI	(2,355)	(687)	(1,710)	NM	(454)	NM	(3,687)	(3,360)	NM
Segment Revenue
Power	866	-	(399)	NM	977	(11)	3,670	8,955	(59)
Roads	712	-	657	8	692	3	2,720	2,493	9
Others	31	-	39	(18)	32	(0)	136	164	(17)
Segment EBIT
Power	(478)	-	(2,202)		(382)		(1,406)	(968)
Roads	469	-	363	29	416	13	1,760	1,376	28
Others	44	-	15	199	19	133	98	31	213
EBIT margin (%)
Power	(55.2)	-	552.7		(39.1)		(38.3)	(10.8)
Roads	65.9	-	55.3		60.1		64.7	55.2
Others	138.9	-	37.9		59.4		71.6	19.0

Source: Company reports and J.P. Morgan estimates.

Table 2: GVK: 4Q and FY14 results of key SPVs

Rs. in million, year-end March

MIAL	4QFY14	4QFY14E	4QFY13	% YoY	3QFY14	% QoQ	FY14	FY13	% YoY
PAX (number in millions)	8.2	9.1	8.0	3	8.2	0	32.3	30.2	7
Summary P&L
Net revenue	3,318	3,917	2,847	17	3,347	(1)	13,157	8,937	47
EBITDA	1,543	2,074	1,325	16	1,955	(21)	7,398	4,451	66
EBITDA Margin	46.5	53	46.5		58.4	(20)	56.2	49.8
Other income	90	18	127	(29)	44	105	205	179	14
Interest	1,370	365	187	631	170	707	1,915	666	187
Depreciation	1,154	659	435	165	442	161	2,479	1,665	49
PBT	(891)	1,068	830	NM	1,387	NM	3,209	2,299	40
Tax	(302)	361	272	(211)	472	(164)	1,100	752	46
PAT	(589)	707	557	NM	915	NM	2,110	1,547	36
Power Segment	4QFY14	4QFY14E	4QFY13	% YoY	3QFY14	% QoQ	FY14	FY13	% YoY
PLF
J1	56	-	50		55		52	60
J2	0	-	4		0		0	29
Gautami	0	-	8		0		0	26
Revenue	866	1,185	(383)	(326)	977	(11)	3,664	8,999	(59)
Fuel cost	644	737	1,207	(47)	720	(11)	2,553	7,198	(65)
Opex	230	290	131	75	190	21	838	1,414	(41)
EBITDA	(8)	159	(1,721)	NM	67	NM	273	387	(29)
EBITDA Margin	(0.9)	13	449.2		6.9		7.5	4.3
Other income	88	88	37	140	87	1	348	248	40
Depreciation	432	418	434	(0)	424	2	1,701	1,680	1
Interest	521	545	224	133	454	15	1,880	1,413	33
PBT	(873)	(717)	(2,343)		(724)	21		(2,458)
Tax	(90)	84	3		3	(3,422)		34
PAT	(783)	(801)	(2,345)		(726)	8		(2,491)
Roads	4QFY14	4QFY14E	4QFY13	% YoY	3QFY14	% QoQ	FY14	FY13	% YoY
Traffic (PCU's in '000s)	9,442	-	9,159	3	9,075	4	36,401	35,286	3
Net Revenue	606	599	562	8	596	2	2,352	2,165	9
EBITDA	485	510	466	4	508	(5)	1,964	1,781	10
EBITDA Margin	80	85	83		85	(6)	83	82
Other income	40	30	65	(39)	40	(1)	130	113	15
Interest	320	361	325	(1)	332	(4)	1,317	1,361	(3)
Depreciation	52	45	41	27	48	9	191	163	17
PBT	152	134	165	(8)	168	(10)	586	370	58
Tax	21	9	6	275	11	95	39	30	33
PAT	131	125	159	(18)	157	(17)	546	340	61
BIAL	4QFY14	4QFY14E	4QFY13	% YoY	3QFY14	% QoQ	FY14	FY13	% YoY
PAX (number in millions)	3.1	3.2	2.9	7	3.3	(5)	12.9	12.0	7
Summary P&L
Net revenue	1,565	1,581	1,492	5	1,553	1	6,194	5,862	6
EBITDA	845	938	780	8	982	(14)	3,853	3,373	14
EBITDA Margin	54.0	59	52.3		63.2	(15)	62.2	57.5
Other income	65	84	43	50	71	(9)	288	168	71
Interest	376	224	211	78	228	65	1,056	1,088	(3)
Depreciation	459	351	339	36	345	33	1,489	1,369	9
PBT	269	640	186	44	478	(44)	1,566	1,226	28
Tax	926	-	(268)		-		926	42	NM
PAT	(657)	640	455		478		641	1,184	(46)

Source: Company reports and J.P. Morgan estimates.

 

Investment Thesis

GVK’s operating cash flow performance has been weak owing to uncontrollable factors (domestic gas unavailability, Uttarakhand floods) and chronic delays in commissioning of under-construction projects (540MW Goindwal Sahib). We believe the EBITDA-to-interest cover is likely to be wafer thin over the next two years and could fall below 1.0 if operations disappoint. A turnaround is predicated on: (a) Fruition of stake sale plans in airport portfolio, (b) ramp-up of cash flow generation from power portfolio, (c) group keeps a lid on fresh ambition, (d) lenders nod to defer debt repayment. While the group’s capex phase maybe coming to an end, the turnaround catalysts entail a leap of faith and uncertainties may linger.

Valuation

We have a Mar-15 PT of Rs11. We use a 15% conglomerate discount and value (a) operating airports at Rs15/share; (b) MIAL real estate at Rs4 - monetization has been chronically delayed; (c) Operating power projects Rs1; (d) Under construction power projects at Rs8; (d) Road portfolio at Rs4; (e) Negative contribution of Rs20 for net un-allocable debt (mainly related to stake acquisition at both the airports).

Risks to Rating and Price Target

Upside risks: (1) Increase in gas availability for operational projects (2) equity infusion reducing leverage level and interest burden (3) increased traffic at airports and road projects

Downside risk: (1) Further capex on development pipeline (2) Delay in CoD of Goindwal Sahib and Alaknanda (3) Lower than expected PLF

India Infrastructure, Capital Goods, Power & Construction