Multi Baggers

GVK Power & Infrastructure

GVK Power & Infrastructure Ltd. (GVK) is a leading Indian conglomerate with diversified interests across various sectors including Energy, Resources, Airports, and Transportation. The company has pioneered various infrastructure projects viz. setting up India's first Independent Power Plant (IPP), first six-lane road project and first Brownfield airport under the Public Private Partnership model.

Energy

After setting up India's first Independent Power Plant at Jegurupadu, Andhra Pradesh, GVK has expanded itself to a slew of CCPP - Combined Cycle Power Plant (gas/naphtha based), Thermal (coal based) and Hydro Power Projects across the country. Besides over 900 MW operational power plants, it has over 5000 MW projects under various stages of construction and development. It has over 900 MW operational power plants and around 5000 MW projects under various stages of construction and development.

Airport

GVK led consortium is involved in management & operation of Chatrapapati Shivaji International Airport at Mumbai and Kempegowda International Airport, Bengaluru. GVK also signed a MoU with the Govt of Indonesia for developing an international greenfield airport in Yogyakarta in central Java. Besides, the company has signed an operations and management contract with The Airports Authority of Indonesia to manage non-aeronautical commercial operations at Bali (Denpasar) International Airport under a five-year operations and management contract.

Transportation

GVK currently has four road projects under its transportation vertical, totalling to 2816 lane km. Out of these Jaipur - Kishangarh Project in Rajasthan is operational and the other three viz - Deoli - Kota Project, Bagodara - Vasad Project,  and Shivpuri - Dewas Project, are under implementation.

Resources

GVK has established a significant presence in the energy and resource sectors. The company has ventured into captive coal mining and has also acquired a major stake in Australian Coal Mines, Queensland. The Queensland project is touted as one of the largest thermal coal mining operations in the world when completed. Besides, GVK has a partnership with BHP-Billiton, one of the world's largest diversified natural resource companies for exploring seven deep water oil and gas blocks off the west coast of India.

Conclusion & Investment Rationale

GVK Power has been an ignored stock for the past few years and has traded in single digits for most of the time in last few months. The stock had touched a high of Rs.90 in 2007 and for most part of 2007 & 2008 was traded in the range of Rs.50 to Rs.90 & was touted as a multibagger at that time. That was the time when most projects of the company were at the drawing board/ early implementation stage. The stock is currently available at Rs.9 when most of its projects have been implemented or are at an advanced stage of implementation. The reasons for such a drastic fall in the stock price of GVK Power are  - One, there has been in general a significant derating of the Infrastructure sector; Two, the company carries high debt and ; Three, in the absence of the completed projects being operated at low capacities (especially the power projects), the company is finding it difficult to service the huge debt taken for implementation of these projects. The company's financial performance too has been dismal for the last few quarters - primarily on account of low Plant Load Factor (PLF) for its power plants.

The key challenge for the company is to survive the bad phase while it is facing challenges in getting the feedstocks (Gas/ Coal) to operate its power plants at high PLF. The Energy business of company has the capability of being highly profitable in the event of availability of feedstock to operate power plant - there are however, uncertainties on that account.

If you analyze the latest quarter numbers (Q3 - and for that matter last few quarters) carefully, you will observe that the Power business made a loss of Rs.51 crores whereas the loss on the Consolidated basis is around Rs.45 crores - it is therefore the power business which is pulling the company down, the other businesses less the power business is Profitable even at Net level. The single biggest reason for the loss in the power business is the Power Plants either being non operational or operating at low PLFs on account of non availability of Gas. The other verticals viz - Airport & Transportation are doing better (there is however potential for significant improvement there too)

To tide over the difficult financial situation currently & in an effort to reduce its debt which currently stands at around Rs,21,000 crores, the company may be  contemplating various fund raising options, which include :-

(a) Stake Sale in its Airport subsidiary at Holding Company level.

(b) Monetisation of Land Parcel at GVK Skycity, Mumbai.

(c) Stake sale in one or more Road Projects

(d) Stake Sale in Indonesian Airport operations

Equity Valuation of Airport Business

GVK had in August 2011 purchased 14% stake in Bangalore International Airport Ltd. (BIAL) from Siemens for a consideration of Rs.620 cr. This values BIAL at Rs.4500 crores. Then in October 2011, GVK acquired 13.5% stake in Mumbai International Airport Ltd. (MIAL) for Rs.1150 crores, thereby giving it a valuation of Rs.8500 crores. However, since then there has been substantial developments including additional Capex, completion and start of Terminal 2 at Mumbai Airport & Passenger Growth at both Mumbai & Bangaluru Airports, the valuations would be significantly higher today. GVK holds 50.5% stake in MIAL & 43% stake in BIAL.

The current equity valuation of GVK's Airport holdings could be anywhere between Rs.10000 to Rs.12000 crores (or may be higher) on ball park basis.

Leave aside Power, Transportation & Resources business in India & Australia, even if you consider the Equity Valuation of just the Airport business - as against estimated Equity valuation of Rs.10000 cr for the Airport business, the current market cap of the company is only Rs.1450 crores. This is primarily on account of the high debt which the company has, the current economic scenario and the fact that any major improvement in the PLF at which the power plants are operating looks uncertain. We believe therefore that the pessimism on these counts is built into the stock price.

However, the power business of the company can potentially be highly profitable in the event of the company getting the required supply of Gas/ Coal for operating its power capacity. Moreover, any of the above mentioned value unlocking possibilities materialising & resulting in the company being able to reduce its debt will have a significant improvement in the company's Market Cap. There are opportunities in the Airport business, not just in India but also overseas & the company has the requisite technology, experience & track record to exploit the opportunities.

In the short term (over the next few months), there could be multiple triggers in terms of stake sale in its businesses or monetisation of assets for which the company is actively negotiating with prospective investors - and any positive news on that front can rerate the stock even in the short term.

One must realise that most of the projects which the company has undertaken are long gestation projects - however many of these are annuity businesses & once they stabilise & as conditions become conducive, these could be huge wealth creators for investors. We do believe it's a High Risk investment but it does carry potential to give high returns in the event of the environment becoming conducive.

Clearly, a stock for long term investor with high risk appetite.

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