GVK Power & Infrastructure

Buy

Price: Rs 44 Target Price (Mar 10): Rs 50

Land+Power = next leg…..

PAT boost in coming quarters: GVK Power & Infrastructure (GVK) declared a 19% YoY decline in profits during 1Q FY10, primarily due to higher interest and depreciation given commissioning of the Jegurupadu Phase-II and Gautami power plants. These plants, which commenced operations during 1Q FY10, will see significant operational contribution in the coming quarters. Broadly, PAT came ahead of expectations at Rs327 mn (19% YoY decline), v/s Rs259 mn (36% YoY decline) given lower than anticipated interest costs.

Sales sees sharp rise: GVK’s sales during the quarter have risen by 150% YoY, given commissioning of the Jegurupadu Phase-II (220 MW, 100% owned) and Gautami (464 MW, 51% owned) power plants. Contribution of sales from the company’s power division has risen YoY from 72% to 87% in 1Q FY10 (See Exhibit 1). Given GVK owns 37% stake in the Mumbai airport (which has quarterly revenues of around Rs2.4 bn), the company is not consolidating the airport financials lineby- line. Hence, revenue mix is partially misleading, given airport contributes over 50% to GVK’s valuations. Given this, management indicated they are in discussion with auditors to consolidate airports business in its financials through the JV accounting standard. However, it must be noted this will not impact our attributed valuations to GVK.

EBITDA partly impacted by one-offs: During the quarter, GVK’s EBITDA came in lower than expectations (Rs944 mn v/s Rs1.4 bn). The management indicated that during the quarter certain one-time expenditures have impacted the company’s profitability. These include Rs50 mn maintenance expenditure for Jegurupadu Phase-I power plant and around Rs25 mn of political donations. Additionally, around Rs32.5 mn periodic maintenance cost at the Jaipur-Kishangarh road project has been booked during the quarter. In the coming quarters, as the recently commissioned power plants stabilize and sell power on a
merchant basis EBITDA levels of the company are expected to improve significantly.

Higher MAT accounted for, merchant power awaited: In the Union Budget of 2009-10, Minimum Alternate Tax (MAT) has been raised from 10% to 15%. We have adjusted our valuations to factor in the higher MAT rate. However, GVK’s valuations has seen a negligible impact, given the airport asset which pays full tax accounts for over 50% of the value and MAT being available for only 10 years of a project and not over its life. Although, GVK’s power plants have fired up, merchant power sales are yet to commence. This is on account of the Andhra Pradesh government issuing directives to power companies to temporarily divert its power at PPA rates to the Andhra Pradesh SEB. Management has indicated that merchant power sales should begin in the coming quarter.

QIP issue eases funding concerns: During the quarter, GVK has successfully raised Rs7 bn through a QIP issue at Rs41.35/share. Given the same has eased funding concerns, management remains upbeat on the future prospects for the company. Going forward, a couple of aspects being highlighted are increasing its stake in MIAL from 37% to over 50% and in Gautami from 51% to around 60%, by buying out stake from its partners. Additionally, management also indicated that given aggressive bidding continues for prospective power projects, it may look to acquire stakes in under construction power plants, only at reasonable valuations, from companies which require equity infusion.

SEZ and new power projects progressing fairly well: GVK has been planning a 3,184 acre SEZ at Perambalur, Tamil Nadu which is expected to be commissioned by 2012. While 2,882 acres of land has been acquired already, Board of Approval (Government entity) has approved the SEZ project with notification expected soon (notification is only a formality now). The estimated project cost is Rs8.5 bn and given plans are yet to firmly materialize, we have only valued GVK’s sunk in equity investment of Rs1 bn at 2x P/BV (DLF and Unitech are trading close to 3x P/BV). Alaknanda and Goindwal Sahib are progressing as per schedule with Alaknanda expected to be commissioned in FY12 and the PPA for Goindwal Sahib being signed with the Punjab SEB. Given the progress, we have revised our valuation for GVK’s sunk in equity investments in these plants to 1.5x P/BV v/s 1x earlier.

Retain buy: Going forward, cash flows from GVK’s recently commissioned power plants will give a fillip to the company’s balance sheet strength. Additionally, the company is looking to monetize its land assets by developing a holistic real estate plan for the property. Similar to GMR, GVK is also looking to benefit from the receipt of interest free deposits to finance airport modernization. We have revised our airport valuations positively, factoring in interest free deposits, v/s assumption of a 39% revenue share to AAI on property development earlier. Additionally, we have revised our land valuations upwards to Rs800 mn/acre (Rs600 mn/acre earlier), which is 50-60% premium to land valuations received by GMR around the Delhi airport (given Mumbai location commands a premium over Delhi, and Delhi airport land is in the outskirts, while Mumbai land is in the heart of the city). Given our revised target price of Rs50/share, we retain our Buy recommendation on the stock.

For More Benefits Visit : http://www.insighttechnical.net

Email : contact@insighttechnical.net

Contact : +91 9822226867