Company background:
GVK is a diversified business entity with its primary focus on urban infrastructure projects. The company also has a significant presence in the hospitality, services and manufacturing sector. In the Indian growth story, GVK has realised the need for infrastructure development and embraced this challenge to create world class infrastructure, particularly in power, airports and roads. The company has an asset base of close to Rs 50 billion (US$1.22 billion) and an order book worth around Rs 150 billion (US$3.66 billion). GVK also has the strength of 7,000 technical professionals with the required capabilities.
GVK Power has two power plants, the 220 MW Jegurupadu-II and 464 MW Gautami plant. These are lying idle due to non availability of gas. Gas availability is expected to commence from October 2008. This should help to increase its revenues in its power division. With projects ranging from power, infrastructure, realty, coal mines and expected oil and gas blocks, GVK Power is expected to put up a good performance in the coming year and post good numbers. Also GVK Power may announce commercial production in next 6 months.
Financials:
- As the company has an exposure towards airports, any unforeseen event like terrorist attacks can impact the arrival of passengers, thereby impacting revenues.
- GVK also has exposure to real estate with respect to areas around the airport. A slowdown in real estate can significantly affect revenues from this segment. Slowdown in
- The Q1FY09 revenues increased by 10.8% yoy, driven by a 6.2% and 14.6% yoy increase in revenues of the power and roads divisions, respectively. EBITDA grew slower than sales at 3.2% yoy, as EBIT margins of the power division dropped by 570 bps yoy due to major maintenance expenses on one turbine of the J-I power plant.
- Interest cost (-54% yoy) came in lower than expected due to repayment of loans of the J-I power plant. Other income fell 18.6% yoy due to investment of cash surplus in SPVs. GVK provided tax at 9.6% in Q1FY09 as compared to 22.9% in Q1FY08 and estimates of 20%, mainly due to lower other income.
- GVK's share of profits from MIAL increased by 39.1% yoy to Rs 12.3 crore, driven mainly by a 67% yoy increase in non-aero revenues at the Mumbai airport. Consequently, PAT post minorities and after adding share of income from associates, jumped 88% to Rs 40.5 crore.
Valuation:
- GVK pure play on infrastructure: I believe that with the government expected to spend $494 billion on infrastructure spending during the Eleventh Five Year Plan, the company will be on a roll as it will provide ample opportunities for companies like GVK to grow substantially. GVK, with its diverse business mix including airport projects will definitely benefit the company.
- With a diverse portfolio of infrastructure projects and revenue visibility on key projects over the next couple of quarters, GVK is strongly poised to benefit from the huge infrastructure rollout planned in
- GVK is currently trading at 34x FY10E earnings. I maintain a strong Buy call on this stock with a target price of Rs 49 over next 3-6 months.
