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).

Technicals-Jindal Saw, JSW Energy, GVK, KPIT , CESC, Castrol, Unitech :: Business Line

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IFCI, GVK, Navin Fluorine, Jindal Saw, ICICI Bank, Kappac, Tide Water Oil:: Business Line

Query Corner: HDFC Bank, Tata communications, UFLEX, GVK, Everonn, Claris, Ambuja Cements :: Business Line

Buy GVK Power & Infrastructure; Target : | 18 :: ICICI Securities, report

Hancock’s regulatory clearance progress…
We met GVK Power & Infrastructure’s group company GVK Natural
Resources Pte Ltd to understand the development made in the Hancock
Projects and its way ahead. As per the company, significant progress has
been made on the Hancock project approval process. The company is
well poised to achieve financial closure (FC) for the project in the next five
or six months possibly through ECA and begin construction on the
project from Q2CY13. In terms of funding, the project D/E is expected to
be 75-80% with majority of debt in the form of ECA funding from various
countries. It is also confident of funding its entire equity requirement
through minority equity dilution to various stakeholders (prospective
clients - mine, rail & port, equipment  supplier, EPC contractor, rail/port
operator, etc.)

Buy GVK Power; Target : Rs 28 :ICICI Securities, PDF link

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http://content.icicidirect.com/mailimages/ICICIdirect_GVKInfrastructure_ManagementMeetUpdate.pdf


M I A L   r e a l   e s t a t e   m o n e t i s a t i o n   h o l d s   k e y …
We met the management of GVK Power (GVK) to take a look at
developments across various verticals. The key takeaway are: - GVK
sounded confident on monetisation  of MIAL real estate and expects
approval for the same in the next two months. Secondly, it is also looking
for a private equity deal in the airports (the decision on which is getting
delayed due to lack of clarity on policies) and roads division in order to
raise funds. However, lack of clarity remains on the funding of escalated
cost for MIAL and Alaknanda. We highlight that any positive development
on real estate monetisation or PE deal in the road or airport division could
hold the key for the stock performance, going ahead. We maintain our
BUY recommendation purely on valuation though issues across verticals
persist.

Technicals: Future Capital Holdings, Subex, Jaiprakash Associates, Lanco Infratech, Havells, Axis Bank, GVK ::Business Line

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Please let me know the outlook for Future Capital Holdings and Subex.

N. Gopalakrishnan

Future Capital Holdings (Rs 127.2): This stock has not really gone anywhere over the last three years. It is vacillating in the band between Rs 100 and Rs 300 since March 2009. This range is likely to shackle the stock in the months ahead also and provide a lucrative trading band within which short-term investors can play around.

Future Capital Holdings is currently close to the floor of its long-term trading range at Rs 100; it has been trying to stabilise above this level over the last couple of months. Investors with a greater penchant for risk can buy the stock at current levels with stop at Rs 95. Those holding the stock can also continue to do so with the same stop-loss. The stock could move higher to Rs 180 or Rs 198 where investors with medium-term perspective can offload some holdings.

Targets on move beyond Rs 198 are Rs 230 and Rs 302. Long-term outlook for the stock will turn positive only on strong weekly close above Rs 302. Next long-term target would be Rs 520.

GVK Power & Infrastructure Ltd:Acquisition costs hit bottomline …: MSFL Research

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GVK Power & Infrastructure Q3FY12 result, not comparable on a YoY basis due to consolidation of MIAL, disappointed on operational as well as net profit front. On the operational front power division recorded lower PLF’s due to reduced gas supply from RIL while the pax traffic growth in airports moderated to sub-8% levels. Higher fixed costs & forex losses affected operating profits for both the divisions. The net profit was lower on account of interest cost on debt used for funding the 13% stake acquisition in MIAL. The company booked an additional interest cost of ` 0.5bln in Q3FY12. Improvement in global sentiment, decline in risk aversion has supported the recent buoyancy in capital markets and has seen the stock price almost doubling from its recent lows. We believe the current price factors in a lot of positives, the most important being raising of capital in the airports division and consequent de-leveraging of the balance sheet supporting future cash flow and profitability. However, the run-up in stock price is not expected to be supported by any improvement on the operational front given that the gas production from RIL is expected to further decline and the COD of under construction power plants has been delayed by at least a year. Escalation in project costs and the funding of the same of an already stretched balance sheet has cast shadow on the airports division. Significant project cost escalations, possibility of further delay in execution due to shortfall in finance, lack of clarity on regulations and delay in real estate monetization undermine the company’s ability to complete the projects within the stated timelines. In addition, the contingent risk of Hancock acquisition still remains. We roll over our target price to FY13 & continue to maintain Sell with a price target of ` 13. A significant reduction in the final cost escalation est., real estate monetization and equity infusion in airports vertical pose upside risks.
Debt funding of MIAL stake acquisition hits bottomline …
GVK increased its stake in MIAL by acquiring 13.5% stake from Bidvest. The transaction cost ` 11.5bln was entirely funded through debt. A part of the debt of ` 6.5bln was raised through securitization of Jaipur-Kishangarh expressway at an interest of 12.98% while the rest ` 5bln was raised as a corporate loan at 13.9% taking the total acquisition debt to ` 24bln for consolidation of its stake in BIAL & MIAL. This translated into an interest outgo of ` 820mln and a net loss for the company.
Valuation: price factoring in lot of positives, risks remain
We believe the current market price factors in a lot of positives for the company while the risks still remain. Significant cost escalations, further delay due to shortfall in financing the escalation, regulatory approvals and the contingent risk of Hancock acquisition pose significant risk. We roll over our target price to FY13 and continue to maintain Sell with a price target of ` 13.

GVK POWER AND INFRA Growth pangs :: Edelweiss

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GVK Power and Infrastructure (GVK) reported Q3FY12 loss of INR145mn
against our expectations of INR530mn profits. The fall in earnings is
largely due to INR820mn interest costs on restructured leveraged loan
(for BIAL and MIAL stake acquisition). While capacity additions in power
and accretion to road projects are couple of years away, the highly
leveraged greenfield Hancock coal asset acquisition would be the key
overhang on the stock. Maintain `HOLD/SU’.
Interest costs of INR820mn impact earnings
GVK’s Q3FY12 earnings were impacted due to INR820mn in interest costs from loans
taken to fund BIAL and MIAL stake acquisition. The management indicated that due to
non‐approval from the RBI, the company had shelved its plan to borrow USD231mn
debt for MIAL stake acquisition. Instead, it resorted to domestic borrowings of INR15bn
(at 13.95% rate). In addition, by securitizing JKEL receivables, it further borrowed
INR6bn (at 12.98% interest rate).
Operational parameters of roads, airports intact, power PLFs dip
Road revenues grew 21% YoY (equally contributed by traffic growth and fare hike)
while pax growth for BIAL was 8.5% YoY and for MIAL, it was 3.5%. Non‐aero revenues
for both airports grew by 17% YoY. PLFs of JP1, JP2 and Gautami power projects fell to
76%, 68% and 69% respectively during Q3FY12 compared to 80%, 87% and 79% in
Q3FY11 mainly due to lower gas availability.
Outlook and valuation: Consolidation to hurt; maintain HOLD
In addition to the impact from leveraged debt funding, fixed costs (post the completion
of MIAL capex) and capex/financing expenses of Hancock coal assets as well as road
projects would affect consolidated earnings going forward. While the management
believes that the proposed private equity fund raising across its various asset verticals
would ease the strain, cash flows and the balance sheet would remain stretched. We
maintain ‘HOLD/UP’ based on our SOTP based target price of INR17/share.

Buy GVK Power; Target :Rs 28 ::ICICI Securities

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I n t e r e s t   o n   ac q u i s i t i o n   d e b t   d e n t s   b o t t oml i n e…
GVK Power’s (GVK) Q3FY12 performance was below our expectation
mainly on account of higher interest expenses on account of debt for
acquisition of additional stake in MIAL and BIAL. The company incurred
additional interest cost of | 82 crore in Q3FY12 vs. | 31 crore booked in
Q2FY12 for the same and they booked forex loss of | 9 crore in the power
segment during the quarter. The power segment also continued to report
lower PLF on account of restricted gas supply. We maintain BUY with a
revised SOTP price of | 28/share.
ƒ Higher interest cost leads to poor bottomline show…
GVK consolidated its MIAL revenues in Q3FY12. Consequently, the
topline came at | 744.6 crore vs. |  477.5 crore in Q2FY12. The EBITDA
margin at 28.3% was lower than our estimates mainly due to lower
margins in the power segment. The company reported a loss of | 14.5
crore in Q3FY12 vs. our estimate of profit of | 34.7 crore due to lower
margins and higher interest cost. GVK incurred an additional interest cost
of | 82 crore in Q3FY12 on debt for acquisition of an additional stake in
airports vs. | 31 crore booked in Q2FY12 for the same.
ƒ Funding for airport acquisition done through debt…
GVK completed the acquisition of an additional 13.5% stake in MIAL and a
14% stake in BIAL in Q3FY12. For the acquisition of the same and earlier
stake buy in BIAL, total debt of ~| 2400 crore has been raised (including
| 650 raised through securitisation of JKEL toll revenues to raise debt for
additional stake in MIAL). The average cost of the debt is ~13-13.5%.
While we believe these acquisitions are strategic in nature, these would
be earnings dilutive in the near term as incremental earnings from a rise
in stake is likely to be more than offset by higher interest on debt raised
for acquiring the stake.
V a l u a t i o n
At the CMP of | 19, the stock is trading at 0.8x FY13 P/BV. We highlight
that uncertainty over AERA guidelines, gas supply constraints, delay in
the real estate monetisation, lack of clarity over the Hancock deal and on
funding gap across projects and ADF  issue still remain. However, any
development on these fronts would be a key trigger for the stock. We
maintain BUY puerly on valuation  and revise our SOTP price  to
| 28/share to account for incremental stake buy and borrowings in BIAL

Query Answered: Dabur, Oil India, Ester Ind, Kilburn, Jyoti Structures, Surya Roshni, Meghmani, GVK, :: Business Line

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 I hold Dabur India purchased at Rs 100 and Oil India at Rs 1,150. What is technical view on these stocks?

R.N B Rao

Dabur (Rs 97.5): You seem to have purchased the stock recently since it is still trading close to your cost. The long-term trend in the stock is up since 2003 and it is still going strong. If you are in the stock for the long-haul, the level that you need to watch is at Rs 70. The healthy long-term view will be under threat only if this level is breached.

If the stock manages to hold above Rs 90 in the months ahead, it we can assume that the bulls continue to have the upper hand in this counter.

It can then spend few months moving in a sideways band between Rs 90 and Rs 120 before breaking higher. Break-out targets are Rs 142 and Rs 175. These will, however, be achieved over the long-term, that is in the next two to five years.

Investors who have a shorter perspective can hold with stop-loss at Rs 90. Next supports are at Rs 80 and Rs 70.

Oil India (Rs 1,156.9): Oil India does not have a long trading history, so it is not possible to give a long-term view on this stock. The stock is moving in a wide band between Rs 1,100 and Rs 1,600 over the last two years.

Since it has moved close to the lower end of its long-term trading range, you have bought the stock at the apt juncture. The stock can reverse higher from here to move on to Rs 1,310 or even Rs 1,372 and Rs 1,435.

Long-term trend will turn positive on a rally above Rs 1,435.

Next target is Rs 1,600.

Investors can hold the stock with stop at Rs 1,050. It would be best to divest your holding on a move below this level since it is hard to pin-point where the next halt can be given the stock's short history.

Please let me know the prospects of Ester Industries and Kilburn Engineering.

Amol

GVK POWER & INFRA Stake sale in GVK Airports: Edelweiss

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News reports suggest that Singapore's Changi Airports is likely to buy a
26% stake in GVK Airports, the airport holding company of GVK Power &
Infrastructure (GVK). Reports indicate a deal size of INR20bn‐22bn for a
26% stake in GVK Airports. However, the GVK management as well as
Changi airports have not confirmed the same.
Deal specifics: GVK Airports is the holding company for GVK Group airports business.
GVK currently holds a 50.5% stake in Mumbai Airport (MIAL) and a 43% stake in
Bengaluru Airport (BIAL). News articles suggest that the money raised will be used to
repay the debt taken by GVK for buying a 17% stake in BIAL from L&T for INR6.86bn, a
12% stake from Zurich Airport in BIAL for INR4.84bn, a 14% stake in BIAL from Siemens
for INR6.14bn, and a 13.5% stake in MIAL from Bidvest (for which it needs to pay
USD287mn). It would also help GVK meet its equity commitment for the MIAL
development as well as for further capex in BIAL.
Impact on valuations: We had valued the airport portfolio of GVK at INR36.6bn
whereas the current deal values the same at ~ INR77bn (assuming a 26% stake for
INR20bn), implying a sizeable premium to our valuation. Adjusting for the stake sale to
Changi and reducing the debt required to be paid, our SOTP for GVK will rise from the
current value of INR16 to INR22.
More than the upside to valuations, we believe the deal will be important from a
funding point of view. GVK had been witnessing significant pressures on the balance
sheet due to the back ended earnings profile of all assets and the ‘leverage funded’
acquisition of the incremental 13.5% stake acquisition in MIAL and 14% stake in BIAL.
GVK Airports also had a debt of INR7.5bn (as at FY11 end) related to the earlier
acquisition of the 29% stake in BIAL. The increasing cost and time overruns in MIAL
expansion project along with the uncertainty surrounding the airport regulatory
framework had created concerns amongst investors regarding the airport portfolio. The
deal is likely to help GVK reduce the stress on its balance sheet and provide comfort to
investors.
However, it looks like the funds raised can be used only for the airports business and
not at the parent company level. The parent company still has significant fund
requirement for development of three road projects and the acquisition as well as
subsequent capex at Hancock. We believe this will continue to remain as an overhang
on the stock.
We await the confirmation from the management including details like the exact
structure of the deal before making any changes to our SOTP value.

GVK Power (GVPWF, Buy) BofA Merrill Lynch,

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GVK Power (GVPWF, Buy)
Bear case: What can go wrong?
􀂄 Postponement of the monetization (leasing) of the real estate (130 acres) at
the Mumbai airport by a year to FY14E onwards, as it faces regulatory
challenges and at 25% lower realization.
􀂄 Fall in airport revenues on lower non-aero income by 25%.
􀂄 Fall in revenues from roads on lower traffic / WPI inflation (100bps fall).
􀂄 Power plant operating at lower efficiency vs norms and PLF falls by 500 bps
in FY13/14E. All power plants are 100% regulated implying, fixed RoE (14-
15.5%) with fuel cost / interest fluctuation recoverable in tariffs.
􀂄 Write-off Rs2.5bn incurred on 1.6GW brownfield expansion projects, which
are currently suspended owing to uncertainty on gas supplies.
􀂄 Interest rate rise by 50bps and rupee depreciate to 52 /USD for FY12/13E.
􀂄 Consequently, we estimate earnings decline of 47% in FY13E to Rs973mn in
our bear case scenario.
Base case: Regulatory play on infrastructure
􀂄 Realty monetization (18% of SoTP) to commence in FY13E (vs 2HFY12E
earlier), post the regulatory approval at realization of Rs10,000/sq ft.
􀂄 Costs overrun at Mumbai airport (by 25%) and Alaknanda hydro project (by
44%) is assumed to be approved by regulator and hence recoverable in tariff.
Power volume surges by 1.6x from FY13E to FY14E as 870MW power plants
become operational over 4QFY13-1QFY14E. Revised earnings to Rs1.85bn
in FY13E (3% cut). Lower PO to Rs23 (earlier Rs25).
Risk-reward: Balanced, lack near-term catalyst
􀂄 In our bear case, we expect the stock to trade at Rs9/share (P/BV of 0.3x
FY13E). In our base case, we expect stock to trade at Rs23/share (P/BV of
0.8xFY13E).
􀂄 Overall, the risk-reward appears balanced, but the stock lacks near-term
catalysts, potential equity dilution risk and strain on cash flow in interim
period owing to cost overruns. Potential private equity infusion at
airport/transport/energy vertical would be a deleveraging catalyst.

GVK Power & Infrastructure -Aggressive bidding weigh on Shivpuri-Dewas highway 􀂄BofA Merrill Lynch,

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GVK Power & Infrastructure Ltd.
Aggressive bidding weigh on
Shivpuri-Dewas highway
􀂄 Incorporating the SD highway, Cut PO, Retain Buy
GVK’s Shivpuri – Dewas (SD) highway (332 km length) is now estimated to yield
an NPV value of Rs(5.1)bn at 16% CoE. Accordingly, we have cut our PO to Rs25
(vs Rs28 earlier). Our channel checks suggest average revenue of Rs10mn/day in
FY16E (first year of tolling). PE infusion at airport/transportation/power vertical
would be key deleveraging catalyst. Buy particularly on Mumbai realty
monetization, 2x power capacity by FY14E with coal cost recoverable and cheap
valuation (P/BV 0.4x).
Traffic: mainly perishable/consumer/petroleum products
Channel checks suggest that the perishable items, consumer products, chemical
/petroleum products and crops are the key commodities transported, largely by
commercial vehicles. Traffic dispersion is average along Dewas end / middle of
the corridor, drops sharply at an intermediate plaza on diversion but rises sharply
than average towards Shivpuri. Our revenue est. of Rs10mn/day is based on avg.
traffic of 22,500 PCU, looks reasonable vs nearby concessions (vs 35,000 PCUs
at Dewas for Indore-Dewas, 21,300 PCUs at Shivpuri for Shivpuri-Gwalior).
SD road: 29% of Mumbai-Agra road, 2nd largest concession
The SD highway is a (a) 332 km stretch in Madhya Pradesh (central India), (b) 2nd
largest highway concession awarded by NHAI (c) covers ~ 29% of Mumbai-Agra
highway, (d) has 5 toll plazas, (e) involves 2 to 4-laning (f) is estimated to cost
Rs32bn (D:E 70:30) and (g) annual toll hike linked to fixed 3% + 40% of Dec’ level
WPI. GVK’s bid at revenue share of Rs1.8bn was 64% / 79% higher vs 2nd/3rd
bidders. Concession agreement and financial closure is assumed by 1QFY13E.
Execution, traffic, debt terms are key upside risk
Upside risk to our NPV value: higher traffic growth (a 100 bps rise in traffic growth
raise NPV to Rs5.3bn), attractive debt terms (a 100 bps lower interest rate raise
NPV to Rs(3.4)bn), faster execution (<3 years)and lower O&M expenses.

GVK POWER & INFRA : Flying kites in a storm: BNP Paribas

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Background of Hancock acquisition
GVK Coal Developers (Singapore) Pte (GVKCDPL), a step-down subsidiary of GVK Natural Resources Pte
(GVKNRPL), (a GVK promoter group company), in a joint venture with GVK Power and Infrastructure
(GVKPIL, the listed company) will acquire certain affiliated entities of Hancock Prospecting Pty for a total
consideration of USD1.26b (refer to Exhibit 1 for details of assets). GVKNRPL will hold a 90% stake and
GVKPIL will hold a 10% stake. USD500m will be paid at the time of deal closure followed by USD200m after
one year of the closure. The remaining USD560m will be paid when financial closure is achieved or within
three years of closing, whichever is earlier. About USD1.0b debt will be raised from a consortium of banks
(at 3-month LIBOR + 500bp). GVKPIL (the listed entity) has the option to increase its stake to 49% at a
discount to market value. Total planned capex in the first phase is around USD10b (USD5b for the mines +
USD5b for the railway line and port).


Funding the acquisition cost
The acquisition cost of USD1.26b will be funded through USD1b of debt and USD260m of equity. Repayment
of the debt is to start after 5½ year: interest will have to be paid meanwhile at LIBOR + 5.0% (approximately
8.5% pa interest including hedging costs). The security for the loan consists of the acquired assets and
guarantees by GVKNRPL and GVKPIL. GVKNRPL will guarantee 51% of the outstanding facility and GVKPIL
will provide a corporate guarantee for 49% of the outstanding facility. GVKPIL will also pledge the shares of
GVK Energy Ltd and GVK Transportation Ltd to secure the equity requirements of the project including debt
service requirements. In addition, GVK Energy Ltd, GVK Airport Developers Private Ltd and GVK
Transportation Private Ltd, subsidiaries of GVKPIL, intend to provide undertakings in relation to acquisition
financing to be availed by GVKCDPL. Essentially almost all businesses of GVKPIL will provide back-up for
raising debt required for the acquisition.
Unfavourable balance of risk for GVKPIL minority shareholders
Essentially GVKPIL is only a 10% owner of the acquired asset, but has guaranteed 49% of the debt required
for the acquisition. Although GVKPIL has an option to increase its stake to 49%, we believe the additional
stake will not be acquired for free. The company also has an option to purchase 20m tonnes per annum of
coal to fuel its thermal power generation capacity. This assurance depends on the success of the project
coming in on a timely basis, which in our view is a highly optimistic assumption.
Option value
Fuel availability has been a major hurdle in setting up of thermal power plants in the current environment.
With a successful development of its coal mines, GVK could remove this hurdle with a view to expand its
power portfolio. We are expecting the first year of production to be in 2016 with 10m tonnes, gradually
ramping up to a full capacity of 84m tonnes by 2022. GVK has an option to enter into a long-term contract
for 20m tonnes per annum that could support 7,500MW of generation.
Is the coal acquisition viable?
The viability of the coal business itself depends on international coal prices. The current market price for
coal of similar quality is USD110/tonne. Assuming USD63/tonne of operational expenditure, long-term
inflation of 2.5% and timely execution and funding of capex, the project would break-even at a long-term
coal price of USD82/tonne. Our house estimates for the long-term coal price is USD95/tonne, which results
in a contribution of INR9 per GVKPIL share for its 10% stake.

GVK Power and Infra Multi-billion dollar risky venture ::Macquarie Research,

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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.

G VK group to acquire Hancock mines 􀂄 UBS

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G VK group to acquire Hancock mines
􀂄 Event: GVKPIL to hold 10% in the JV having mines and associated infra
The GVK group will acquire three coal mines in Australia (combined resources of
7.9bn tons; GCV of 5,800-600 kcal/kg and low ash/sulphur content) and associated
infrastructure (rail and port) for US$1.26bn (to be paid in phases; initial funding
tied-up with banks). Production is expected to commence from 2014-end (first
phase production of 30mt; eventually ~80mt). GVKPIL (the listed entity), will hold
10% stake in the project, with an option to increase it to 49%.
􀂄 Impact: Long term fuel supply contracts of up to 20mtpa
GVKPIL has an option to enter into long-term coal supply contracts of up to
20mtpa (capable of fuelling 7,500MW). Having visibility on fuel supply, GVKPIL
will now scout for opportunities to set-up coal-based power projects over the next
few years (GVKPIL would require to arrange funding for such expansions). It also
has the option to take the lead role in infrastructure (port and rail) development.
􀂄 Action: Funding given large-size, execution in new area are key challenges
Securing funding for the large-sized investment (US$10bn) would be a key
challenge- US$3bn of equity at 70:30 D/E (though management indicated that it
has already seen significant interest from various strategic/financial investors).
GVKPIL might need to infuse ~US$300m of equity over next 3-4yrs for its stake.
Also, this would be the group’s largest project, across relatively new businesses of
coal mining/port/rail in a new geography that could pose its own set of challenges.
􀂄 Valuation: Buy rating
We have a Buy rating on GVK with an SOTP-based price target of Rs36 (was
Rs39)


􀁑 GVK Power and Infrastructure
GVK Power and Infrastructure is a leading and diversified infrastructure
developer. Its asset portfolio (attributable) includes: 1) about 2,000MW of
power capacity (including 1,240MW under construction; an additional
2,300MW is planned); 2) two airports (Mumbai and Bengaluru) with maximum
passenger throughput of about 33m; 3) one 90km BOT road project; 4) coal
mines (for captive purposes) with reserves of about110m tons; 5) one 2,900-acre
Special Economic Zone; and 6) about 220 acres of real estate near Mumbai and
Bengaluru airports.
􀁑 Statement of Risk
In our view the key risks for GVK with regard to airport projects are: a)
execution delays; b) regulatory risks related to revenue; and c) traffic risks. With
regard to power projects, we believe the key risks are: a) shortages in fuel
supply; and b) collection risks. For road projects: a) traffic; and b) collection are
key risks. All of GVK’s projects face interest rate-related risk.

Buy GVK- Target : Rs 32:: ICICI Securities,

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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.

JPMorgan, GVK - Hancock transaction: A good deal, we believe, provided promoter 'assertion' comes true

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 The Hancock deal structure. GVK Coal Developers (GVKCD), a GVK
group company (and step down subsidiary of GVKNRPL), has stated it
plans to acquire coal resources of ~7.9bn MT (as per JORC, 5800-
6000Kcal/kg) from Hancock Prospecting, in Galilee Basin, Queensland,
Australia. GVK Coal Infrastructure, a step down subsidiary of GVKNRPL
will have 100% ownership of (a) the proposed 495km rail project
connecting to Abbot Point, and (b) the proposed port expansion project (to
60MTPA) at Abbot Point. The listed GVKPIL will own 10% of GVKCD,
with an option to raise its stake to 49%. They will have an option to take a
‘lead role’ in GVK Coal Infra Pte Ltd (which owns the rail and port
project), on mutually agreed terms with GVKNRPL. GVKPIL will also
have an option to enter into LT coal purchase contracts of up to 20MTPA.
Please see figure on deal structure (Figure 1).
 Deal funding: The cost of acquisition is around US$1.26bn, payable in a
phased manner to the Hancock Group with US$500mn (tied up, 3month
Libor+500bps) payable at Closing (~end-Sep-11). Of the balance amounts,
US$200mn will be paid one year from Closing and US$560mn will be paid
on financial close for the project (anticipated to be in 2012) but in any event,
no later than three years from Closing. GVKPIL is to provide a Corporate
Guarantee for 49% of the outstanding facility amount and pledge shares of
its energy and transportation subsidiaries.
 Risks for GVKPIL: In a conference call held on Saturday, management
clarified that GVKPIL’s liability is limited to their equity exposure in
GVKCD, i.e. 10%. The investment by GVKPIL does not obligate it to
commit equity for development of assets in future, which could have
resulted in dilution in the listed company. The Corporate Guarantee to the
extent of 49% provided by GVKPIL is a security against acquisition lending
taken at group level. With GVKP IN market cap of ~US$575mn, the
guarantee is less than 1x (US$1.26bn*0.49=US$617mn). GVKPIL will have
to bear a quarterly interest obligation of just US$0.7mn initially
(=US$500mn payment via debt at closing*5.5% interest rate*10% GVKP’s
share*1/4 for each quarter).
 A good deal, we believe, provided the Promoter 'assertion' comes true:
Mr. GV Sanjay Reddy, Vice Chairman, asserted that there is a significant
amount of interest from financial investors, coal traders, IPPs and
infrastructure companies to pick up a minority stake in the coal/rail and port
development projects. As per management, Phase-I for development of
30MTPA production capacity at Alpha (capex of ~US$5bn), and rail + port
infrastructure (~US$5bn) will require total capex of US$10bn. The
Promoter ‘assertion’ is that they will be able to raise at least US$1bn
over the next 3-6 months from interested parties in GVKCD.
 BOTTOMLINE: Subject to promoter’s ability to raise equity in the coal
projects to part fund the acquisition and kick start development, we see the
overall deal in a positive light for GVK Power and Infrastructure.