Not so powerful

PENNY WISE

GVK Power IPO looks a bit streched considering that the benefits will start kicking in only after two years.

GVK Power and Infrastructure Ltd (GVKPIL), a diversified infrastructure company, proposes to hit the capital market with an initial public offering of 82.75 lakh equity shares of Rs 10 each at Rs 260 to Rs 310 per share.

The issue will mop up Rs 215 crore at the lower end and Rs 256 crore at the higher end. The money will be invested in a group company which is undergoing expansion.

The current investment has been planned in line with the company's new focus on the power and infrastructure sectors which have been identified as its core business. GVK's other interests include road, urban infrastructure and hotels.

The main source of revenues for the company are the power plants owned by its subsidiaries like Gautami Power and GVK Industries. Besides this, maintenance and operational fees paid by the plants also contribute to its income.

A major part of the revenue till FY2003 was also from incentive fees. But as client refusal of these fees led to jolt in earnings in subsequent years.

The earnings of the company also depends on the operating efficencies of the plants which have commenced very recently or that are to be commenced in the near future. Hence visiblity of the revenues in the current scenario is difficult to estimate and will be clear in the following years.

The company had inconsistent earnings for the past few years with the total income dropping from Rs 10.04 crore in FY 2002-03 to Rs 7.36 crore in FY 2003-04 and improved marginally to Rs 7.45 crore in FY 2004-05. The bottomline followed the inconsistent earnings slipping from Rs 4.29 crore to Rs 2.55 crore and further to Rs 1.76 crore during the same period. 
 

GVK POWER & INFRASTRUCTURE LTD
(Rs crore)	FY05	FY04	% change
Net sales	7.32	7.13	2.66
Other income	0.13	0.23	-43.48
Total Exp	4.26	3.26	30.67
Operating profit	3.19	4.1	-22.2
OPM (%)	43.58	57.5	-102bps
Net profit	1.76	2.55	-30.98
NPM (%)	24.04	35.76	-0.88bps

Of the funds mobilised through the IPO, the company plans to invest Rs 95.29 crore in the equity of Gautami Power Limited, which is setting up a 464 MW dual fuel combined cycle power project in Peddapuram, and another Rs 60 crore for repayment of bridge finance for funding this equity and thereby increase its equity in GPL to 51 per cent from the current 47.47 per cent.

GVK Industries (GIL) currently has two power plants, the 216 MW Jegurupadu Phase I plant which is operational and the 220 MW Jegurupadu Phase II project which will be commissioned by mid February 2006.

GVK Power holds a 53.96 per cent stake in this company, originally a joint venture between the GVK group and CMS Energy of the U.S. GVK Power will become the holding company once the group restructuring, of which this offer is a part, is put through. It will hold interests in two subsidiaries that generate thermal power "" GPL and GVK Industries (GIL).

Though the company is boastful of its competitive strengths like substantial operating experience and assured revenues from the Andhra Pradesh power distrubution companies and low operating cost, there are concerns over the future revenue flows of the company.

The key concerns for the company arises essentially from the fact that the company is a holding company with equity interests in the companies that operate power plants.

The income for the company will be through dividends paid by these companies and income comprising of operation and maintenance of the plants. The visibility of the dividend income is largely depend on the operational efficiencies of these plants to be commenced in the near future or which have commenced recently. Hence any visiblity of the income will be only after a considerable period of time and further on the capacities of these companies.

The plants are dependent on consistent availability of fuel for operating at full capacity. The inadequacy of gas in Andhra Pradesh will be a key disadvantage in this regard. Gas availability is unlikely to improve dramatically at least for the next three years. The Gas Authority of India (GAIL) has already indicated its inability to supply gas of the agreed quantum.

This can result in loss of revenues as the the power distributor in Andhra Pradesh will not pay for unused capacity, according to the terms of the agreement. Running the plant with high-speed diesel, the only other option, will push up the cost of production for the company, eroding the competitiveness of the company in an extremely price-sensitive industry.

Further the company is currently dependent on just one facility for most of its revenues. Therefore, any delays in implementation of the new projects projects is likely to deprive the company of revenues for a longer period, though the company says it expects revenues to start pouring in from the phase II and from GPL in the near future.

Also the company is relying only on just the distribution companies in Andhra Pradesh for all its revenues. The situation is likely to continue even after the completion of the new projects as both of them are also likely to supply to power to the same customers. Delays or failure in payments by the distribution companies will affect the company's revenues.

The company's business model is also at risk from changes in the regulations governing the generation and distribution of power. The proposed reforms in the state Electricity Act could increase competition for the company.

The valuations, on a price-to-earnings basis, are stretched. The earnings per share of the company stands at Rs 1.16. The premium that the company is commanding is on the higher side, more so when the companies fortunes are likely to be visible only after two years.

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RESEARCH CALLS

Jet Airways
Enam Securities, in its results update, rates Jet Airways as "neutral", relative to the sector. The report states that the company's performance was largely affected by lower load factors and a high operating cost environment. It reported a 22 per cent y-o-y growth in Q3 FY06 revenues to Rs 1480 crore from Rs 1200 crore in Q3 FY04.

While EBITDAR margin declined by 1000 bps to 24.3 per cent, EBITDA margin declined 1360 bps to 16.3 per cent. The change in the domestic passenger booking profile in terms of full fare vs discount fare, has moved in favour of the latter from a ratio of 70:30 to 50:50 during the last four months.

On the contrary the gross passenger yield improved by 5.5 per cent to 6.65 Rs per km on domestic operations. Despite adequate yield management, the intensity of domestic competition has impacted the load factors leading to decline of 370 bps to 72.5 per cent.

Similarly on international route the load factor declined by 180 bps to 62.4 per cent, due to new introductory routes.

Bharat Forge
Enam Securities, in its results update on Bharat Forge, states that despite slowdown in the commercial vehicle industry, which accounts for about 42 per cent of the company's sales, market share gain across the segments aided growth.

The company has declared revenues of Rs 400 crore (28.5 per cent growth y-o-y), EBIDTA of Rs 98.6 crore and adjusted PAT of Rs 53.3 crore Q3 FY06. Sales growth owed to robust domestic sales.

Exports were up marginally by 6.5 per cent, contributing about 40 per cent of net sales due to slowdown in China and delay in launches from global OEM's.

Consolidated margins were impacted due to recent acquisitions of BF Kilsta and BF America. However, it is believed that these will start contributing positively to the margins and profits over the next few quarters. The company has recently signed a JV with FAW Corporation for its forging business.