MultiBagger: GVK Power & Infra

Multi Bagger:GVK Power & Infra
Recommended Price 27.05

Company Profile:
GVK Power and Infrastructure Ltd (GVKPIL) as a pioneer in infrastructure development in India has established a strong presence in areas such as Power, Airports and Roads.

Power:
GVK is developing power projects that are based on coal, gas and hydel resources. The projects are being developed across several states in the country including Andhra Pradesh, Punjab and Uttarakhand.

Airport:
Mumbai International Airport Pvt. Ltd. (MIAL), a joint venture company owned by the GVK led consortium (74%) and Airports Authority of India (26%) was formed in March 2006 to manage and develop CSIA.

Roads:
The Jaipur-Kishangarh BOT project, a segment of the Golden Quadrilateral National Highways Development Project of the Government of India.

Urban Infrastructure:
GVK One - Hyderabad's world-class retail scheme.

SEZ:
GVK has entered into a joint collaboration with Tamil Nadu Industrial Development Corporation Limited (TIDCO), an undertaking of the Government of Tamil Nadu to develop a multi-product Special Economic Zone (SEZ) in Perambalur district. The project is being implemented through a Special Purpose Vehicle (SPV) company, GVK Infratech Pvt. Ltd., a wholly owned subsidiary of GVK Power & Infrastructure Ltd (GVKPIL).

GVK�s Subsidiaries are GVK Airport Developers Pvt.Ltd., GVK Power (Goindwal Sahib) Ltd., GVK Coal (Tokisud) Pvt.Ltd., GVK Industries, GVK Jaipur Expressway Pvt.Ltd., and Alaknanda Hypo Power Co.Ltd.

Financial Position:
The net sales of FY�08 increased by 23.5% to Rs 470 crore from Rs 380.6 crore in FY�07. The EBIDTA declined by 5.93% to Rs 185.5 crore. The net profit showed a strong growth of 127.35% from Rs 59.6 crore to Rs 135.5 crore.

The net sales of third quarter FY�09 decreased by 6.04% on a YoY basis to Rs 104.3 crore. On a QoQ basis, it decreased by 4.75%. The revenues fell on account of lower power segment revenues while there was a slight increase in revenues from the road segment to Rs 36.5 crore. The EBIDTA also showed a decline of Rs 22.58% to Rs 43.2 crore. The EBIT from the power segment fell by 76% YoY and EBIT from the road segment fell by 8% due to flat traffic growth. MIAL (Mumbai Airport International Ltd.) EBITDA also fell due to higher employee and power expenses. The net profit showed a decrease of 49.54% on a YoY basis to Rs 16.3 crore. On a QoQ basis, it decreased by 25.91%. The decline in PAT was due to lower other income and payment of Rs 12.8 crore to the employees of Airport Authority of India on account of 6th pay commission revisions.

In spite of this insipid performance, we are of the view that there are enough triggers in the stock for it to move up strongly in the days to come.

Investment Positives:
Availability of gas from Reliance Industries:
Th start of gas supply of gas from Relaince Krishns-Godavari fields is the biggest trigger for the stock. The govt has granted Reliance permssion to sell gas from KG-D6 with the start of production to third parties. The visibility of gas supply from Reliance Industries will help GVK run its existing plants at peak capacity.

GVK has commissioned the 220 MW Jegurupadu second phase power plant using gas supplied by GAIL through a swap deal with Reliance Industries.

GVK plans to commission its 464-MW Gauthami Power project, thereby taking the company�s installed capacity to 900 MW. This project too was lying idle for want of gas.

This will be the first power plant to fire its turbines with the Reliance�s KG basin gas. Recently, Nagarjuna Fertiliser & Chemicals Ltd became the first fertiliser unit to get gas.

The gas supply follows a swap arrangement between GAIL and Reliance. The gas from the Hazira terminal (regassified liquefied natural gas), to be supplied by GAIL from the west coast to GVK, through pipelines, will be arranged to local consumers in Gujarat and the gas produced in the KG basin here will be delivered through GAIL pipelines to GVK power plants.

In line with the revised PPA, which permits 20% of capacity to be sold on merchant basis, the company has entered into an agreement with Power Trading Corporation (PTC) to sell surplus power for two years at 4.25/ unit.

Approval of Airport Development fees:
The Government has granted approval to Mumbai International Airport Ltd. (MIAL) for charging an Airport Development Fee (ADF) to departing passengers at the Mumbai airport. The ADF is Rs600 from international passengers and Rs100 from domestic passengers. This will be used to fund the gap in the airport development project. Since GVK Power was to take care of funding the gap, the ADF will be a huge boost to the company. The ADF will be charged for a period of four years effective from 1st April 2009 and is inclusive of all taxes.

If the ADF collection exceeds Rs 1543 crore in the four-year period, the excess funds will be monitored by the govt. ADF will be treated as capital receipts and therefore MIAL will not be required to pay the revenue share to Airport Authority of India. MIAL shareholders are required to increase their equity contribution from Rs 600 crore to Rs 1200 crore. If the cost of the project rises above Rs 9802 crore, it would be financed by MIAL.

Divesting stake to raise funds for future growth:
GVK is likely to dilute up to 49% stake in roads and power ventures. GVK is currently holding talks with five companies regarding the stake sale. Some foreign firms have evinced their interest in aligning with GVK. It is currently in advanced stages of negotiations for divesting part of its stake in the Jaipur-Kishangarh road project.

Concerns:

Slow growth in the air traffic:
Slow growth in the air traffic can cause a slowdown in GVK�s earnings. Domestic traffic fell 23% YoY, while international traffic was marginally higher at 1%.

Competition:
The Central Govt has approved the plan to construct a second airport in Navi Mumbai. GVK will also bid for the project but if it loses the bid, the new airport will compete with the old one.

Valuation:
The approval of the Airport Development Fees (ADF) will be a huge boom to GVK�s earnings. The availability of gas from Reliance Industries will help the company run its existing plants at peak capacity. It is expected to have an annualized EPS of around Rs 0.93 per share for FY09. At CMP of Rs 27.05, it trades at a P/E of around 26. This is admittedly high compared to its peers. However given the big triggers in the form of Gas supply from Reliance and the ADF approved for the Mumbai Airport, we expect a quantum jump in earnings in the coming year. We recommend the stock as an excellent investment with a target price of Rs 35.