Unlocking value, improving growth visibility

GVK’s recent equity deals will ease funding concerns in its power projects and should lead to the stock’s re-rating.

A series of fund-raising initiatives by GVK Power & Infrastructure (GVK) have seen its stock outperform the broader markets recently, which is not surprising considering these deals value the company’s power assets at a significant premium over the valuations estimated by analysts.

In two separate deals since mid-November, the company has raised Rs 1,498 crore by selling 24.97 per cent of its stake in its power subsidiary, GVK Energy, to three private equity players, namely, 3i Infrastructure Fund, Actis Advisors and an affiliate of the Government of Singapore Investment Corporation. These deals peg the market value of GVK Energy at Rs 6,000 crore — the value of GVK’s three-fourth holding works out to be Rs 4,500 crore or Rs 28.50 a share. On the other hand, the market is valuing GVK, which has interests in airports and roads in its portfolio, at just Rs 6,450 crore or about Rs 41 a share.
 

TAKING OFF
In Rs crore	FY10	FY11E	FY12E
Revenue	1,787	1,952	2,085
PAT	155	195	330
RoNW (%)	4.70	5.90	9.00
NPM (%)	8.70	10.00	15.80
Ebitda (%)	26.20	29.20	35.20
EPS (Rs)	1.00	1.20	2.10
PE (x)	40.30	32.10	19.00
EV/Ebitda (x)	22.70	18.00	16.70
E: Analysts estimates

Given the conservative stock valuations and also that many of GVK’s businesses hold good prospects, long-term investors could consider the stock for decent returns.

Powering ahead 
GVK Power and Infrastructure holds its power assets under the subsidiary GVK Energy. The company targets increasing its power generation capacity fivefold to 4,400 Mw. It currently has 901 Mw of operational capacity while 3,530 Mw of capacity is in various stages of development and planning. On the back of this expansion, analysts earlier estimated that the company could need equity investments of Rs 2,400 crore over the next three years. But, thanks to the recent fund infusion, it will now only need about Rs 1,000 crore, which analysts believe could be funded from internal accruals.

“It (the deal) is definitely a positive development for the company as it has led to re-rating on account of better valuations. Also, after the fund raising, the company is in a better position to conclude the financial closure (of its power projects). It seems the company now does not need equity for the next two years,” says an analyst with a leading domestic broking house.

While concerns over the funding of projects have eased, the valuation (of GVK’s stake in GVK Energy) as per the recent deals is also significantly higher compared with analysts’ earlier estimates of Rs 16-18 a share. All these should lead to an improvement in GVK’s overall valuations, which along with the progress on ongoing projects should rub off positively on its stock.

Additional boost
The other major contributors to GVK’s stock valuation are its airport assets in two key metros, Mumbai and Bangalore, which are in profit. Both the airports have real estate attached to them, and together are currently valued at Rs 27 a share by analysts. The key trigger in this segment could come from the company’s near-term plans to develop the real estate properties.

The company has plans to monetise 20 million square feet of land over the next eight-ten years. This includes one million square feet by 2011-12 at Mumbai Airport, for which the company is planning to launch the bidding process for developing hospitality projects.

Among the monitorables is the development regarding the Navi Mumbai airport. While the initial approvals are in place for the new international airport at Navi Mumbai, wherein the company has the right to first refusal, it will be interesting to see how GVK scores on this front whenever the project comes up for bidding.

Meanwhile, apart from its presence in the airport and power sector, the company also has one operational road project (90.4 km) while another 83-km road project is in the development stage. According to analysts, the operational road project contributes almost 40 per cent of the consolidated net profit. They value both these assets at Rs 8-10 a share of GVK.

The company has a good mix of assets, which individually have their own advantages, generate cash and also have a promising future. Analysts have conservatively valued GVK’s stock at Rs 50-54 a share as they seek further clarity on the recent deals in the power business. Nevertheless, investors with a long-term perspective could earn better returns from the current prices.