Accumulate GVK Power; target of Rs 21: A C Choksi

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Accumulate GVK Power; target of Rs 21: A C Choksi

A C Choksi is bullish on GVK Power and has recommended accumulate rating on the stock with a target of Rs 21 in its August 26, 2011 research report.

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A C Choksi is bullish on GVK Power and has recommended accumulate rating on the stock with a target of Rs 21 in its August 26, 2011 research report.

"GVK is a Hyderabad based company the operates in the Power, Road and Airport segment. GVK's energy portfolio currently features six power projects which are being developed across several states in the country. Currently power projects are present in the states of Andhra Pradesh, Jammu Kashmir, Punjab and Uttarakhand. Together, these power projects are set to exceed over 5,000 MW capacities. In Q1FY12 the company's Power and Airport segments reported robust performance, while the roads segment was a little sluggish."

"Consolidated revenues grew 25% Y-o-Y as the power segment saw strong results owing to better fuel availability. Higher fuel cost of RLNG led margins to fall by 190bps Y-o-Y. Higher interest income helped profits grow 76.5% Y-o-Y. Airports reported revenue and net profit growth of 18.1% Y-o-Y and 65.6% Y-o-Y, respectively, due to 50% Y-o-Y growth in cargo revenues and higher EBITDA margins (up ~300bps Y-o-Y). Both MIAL and BIAL reported strong revenues (up 15-20% Y-o-Y) on traffic and cargo volume growth. However, real estate monetization remains slow at MIAL, lacking full approvals."

"In the current economic scenario the infrastructure sector is heavily pressurized by high interest costs and high input costs. The profitability of the sector has been greatly impacted with decline in order intakes and high raw material costs. We believe that this sector will only pick up speed in H2FY12 with the softening of interest rates ,decline in commodity prices and pick up in capex. GVK's Q1FY12 performance was above the market's expectations mainly due to rise in tariff hikes in its road segment and temporary RLNG supply from APGENCO to its power plants which lead to the plants operating at a PLF of 83-90%. Increase in traffic and cargo volume growth at its airports (MIAL & BIAL) also boosted its airport segment revenue. GVK plans to increase its stake at MIAL by 13.5% (from 37% - 50.5%) by raising funds through private equity. It has also bought an additonal 14% stake from Siemens in BIAL at a price of roughly Rs 614 crores. GVK PIL is a highly leveraged company owing to the nature of its business. It also plans to acquire the Hancock coal mines in Australia for a price of Rs 15,300 crores.We believe that its recent efforts to raise more capital to acquire assets will only impact its near future earnings."

"We believe its road segment will benefit from the recent spur in road development projects issued by the NHAI and its additional stakes in MIAL & BIAL will help increase its revenue from the airport segment. We see its power segment taking a hit in the coming quarters owing to uncertainty related to gas supply to its power plants. Their deal with the Hancock mines has gone through with the company buying two of its coal mines for a value of $2.2 billion (9900 crores)."

"We also expect a further rate hike in the coming monetary policy meeting next month which might result in a further correction in the sector which has already corrected by over 12.61% in the last 45 days. We propose a cautious outlook towards the sector in the coming quarters. For a long term investment horizon of 1.5 years we recommend an "Accumulate on decline" call on the stock from its current price level," says A C Choksi research report.

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