Strong infrastructure footprint will stand GVK in good stead

GVK Power & Infrastructure Ltd (GVK) is a Secunderabad-based infrastructure player. It is consolidating its infrastructure assets under one roof, making it an integrated infrastructure player. Its interests lie in power generation, roads & expressways, airports, aviation, etc. Power remains its dominant business and its power projects will cross 2000 mw capacity once operational. Prestigious projects in other spaces include operation and renovation of Mumbai International Airport, six-laning of Jaipur-Kishanganj section of NH-8, etc.

Business: Main contributors to revenue are power, roads and airport operations. Power contributed 69.2% to revenues in FY09 while roads contributed 28.39%. The rest came from oter businesses.

GVK Power projects are based on coal, gas and hydel resources. It has the Jegurupadu combined cycle power plants. It has a 44.97% stake in Gautami Power, a 464 mw gas-based project. Alaknanda Hydropower Co, a subsidiary, is developing a 330 mw hydroelectric power plant on Alaknanda river in Uttarakhand.

GVK Power is also developing 540 mw thermal power plant at Goindwal Sahib in Punjab, while Goriganga Hydro is developing a 370 mw hydroelectric plant on the Goriganga river in Pithoragarh, Uttarakhand. Subsidiary company GVK Coal is also developing coalmines at Tokisud in Jharkhand for coal linkages to its power plants.

Mumbai International Airport Ltd (Mial) is a joint venture company led by GVK holding 74% stakes and Airport Authority of India holding the rest. Mial operates the Chhatrapati Shivaji International Airport at Mumbai. The airport is undergoing modernisation that will lead it to handle 40 million passengers and 1 million tonnes of cargo per year once completed.

In the roads construction sector, the company had undertaken conversion of Jaipur-Kishanganj section of NH-8 from two lanes to six. It has a concession period of 20 years including construction time, for operation and charging tolls.

From construction of roads to airports, GVK had diversified into other sectors of transportation as mass rapid transit systems (MRTS), ports, etc. It is a part of Hyderabad MRTS project and was developing 6,25,000 sq feet of Hyderabad retail scheme as well as a 30,000-acre SEZ with Tidco in Tamil Nadu.

Investment rationale: India’s infrastructure development needs are immense — infrastructure development projects are estimated to be worth at Rs 15 lakh crore in next 4-5 years, and the private sector plays an important part.

Power remains a priority area for the government, looking at the demand-supply gap and future requirements. Airport facilities are equally important and government initiatives towards privatisation of Bangalore, Delhi, Hyderabad and Mumbai airports will be followed by others. These two spaces in itself are of significant importance, besides other infrastructure requirements offering grand opportunities for players such as GVK.

GVK was operating Jegurupadu I (217 mw) in FY09 while Jegurupadu II (220 mw) and Gautami (464 mw) plants remained stranded for supply of gas. Plants load factor for operating plants stood at 69% in FY09 due to non-availability of gas. Power plants are now receiving full supplies of gas and GVK has formal agreement with Reliance Industries for gas supplies. Jegurapadu-II has started commercial operations from mid-April this year. This will lead to major upside in revenues from this sector. The new projects are likely to contribute Rs 100-120 crore to revenues in FY10E.

GVK is looking at raising $200 million through stake sale in GVK Oil & Gas (earlier GVK Energy). Four to five term sheets have been received and negotiations will start soon.

The turnover of Mumbai airport stood at Rs 955.1 crore in FY09, though profitability was lower. This was against a backdrop of reduction in traffic and cargo handling as well as increased fuel and power cost. Employee costs also increased with the sixth pay commission recommendations being implemented. Profitability should improve this fiscal.

GVK has reduced exposure to roads in last two years. While there has been no revision in toll rates, maintenance cost is to go down from Rs 65 crore in FY09 to Rs 30 crore in FY10E and further to Rs 20 crore in FY11E. With increasing traffic, toll collections are likely to be higher and that too with lower maintenance costs.

GVK looks at unlocking value in real estate land in Mumbai airport. Contracts for assessing value of airport land assets have been given out and bidding will take place once they are completed. Monetisation of the land, expected to be completed during FY11, would unlock significant values, as the available land bank is 135 acres.

Concerns: GVK’s operational power projects are dependant on gas supplies largely from Reliance’s D6 block in the Krishna-Godavari basin. Any disruption in supplies will adversely affect revenues from power generation.

Valuations: GVK clocked a topline of Rs 513.78 crore in FY09, which grew 43.79% over Rs 469.99 crore in FY08. However, fuel costs grew 43.67% to Rs 249.39 crore, denting operating margins, which declined 571 basis points. Net profit grew 20.6% to Rs 107.56 crore after margins took a beating of 788 basis points.

While energy costs have substantially cooled down, it is the availability of gas which will provide boost to power production and in turn, surge in revenues. This boost from power will be supported by growth from other business verticals and unlocked values from real estate will provide good impetus. The stock, therefore, offers good upside potentials for investors.

Disclosure: The writer does not hold any shares in the company