Can GVK pull-off a jumbo coal mine buy?

The GVK group, promoters of GVK Power and Infrastructure that constructs power plants and airports, is in focus as analysts and investors weigh pros and cons on the company's probable buy of two Australian coal mines from Hancock Prospecting.

For the pay-out, the Hyderabad-based GVK group is said to be arranging funds to the tune of USD 1.3 billion. In comparison, the market capital of GVK Power as on Tuesday was USD 938 million and the debt on books closer to USD 1.1 billion.

Can GVK Power pull off such a large acquisition?

The stock has declined 4.8% since late March, when the news gained currency that it is a contender for Hancock mines. In comparison, the benchmark index has gained 3.2%.

In 2011 thus far, the stock has lost about 38% compared with the benchmark index's 5.8%. The stock is at 16.2 times the estimated price-to-earnings ratio for FY12, as per Thomson Reuters Knowledge.

Buy - Acquisition unlikely via GVK Power

Of 18 brokerages that cover the stock, eight have "strong buy" recommendation on it, and 6 have "buy", according to I/B/E/S estimates.

"The acquisition will not be through the listed entity, that is the indication we get, and there would not be much impact on the listed firm's stock prices," said an analyst with a Mumbai-based brokerage, who has "outperform" rating on the stock.

"We believe that the acquisition would be through a group firm," said the analyst, who did not want to be identified as he is not authorised to speak to the media.

If the acquisition is through it, GVK Power would have to own up an additional capex and working capital burden of USD 7 billion, spread over five to six years.

"It is just the scale of this acquisition which will make people go into a wait and watch mode," said Vijaykumar Bupathy, Chennai-based analyst at Spark Capital.

"But if they can pull off an acquisition like this over the long term, I definitely think it can pay off. It could be a risky bet but is a high value bet," said Bupathy who has a "buy" on the stock due to his weightage on factors other than those of power and coal.

"The resource (coal) is in short supply, there is a huge market for it," he said.

Neutral - Strain likely on financials

Three out of 18 brokerages have rated the stock as "hold" and one has ascribed a "sell" rating, according to I/B/E/S estimates.

"GVK has in mind growth proposals for which the equity requirement could be more than its current market capitalisation. Large growth aspirations could pressure leverage and dilution risk would be enhanced," Deepika Belani, analyst at JP Morgan told Reuters.

"The market is treating these developments negatively," she said, resulting in the brokerage downgrading the stock in April to "Neutral" from "Overweight".

GVK Power would go in for an acquisition only if the funding is in place, and "if the funding is in place, then what is the problem?" asks a Mumbai-based analyst, who declined to be identified.

Her brokerage, which had put the company "Under Review" a month ago from "Buy", is awaiting clarity from airport regulator on aeronautical charges and looking at how the company will monetise its airport land before re-rating the stock.