Gvk Power & Infrastructure - Initiating Coverage 11aug09

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Initiating Coverage

Initiating Coverage

11 August 2009

Infrastructure – Positive

GVK Power & Infrastructure

CMP

TARGET

RATING

RISK

Rs 44

Rs 50

BUY

HIGH

Future is bright ™

™

™

™

™

™

Power – the prolific cash cow: Power assets will be the immediate value driver for GVK Power & Infrastructure (GVKPIL), with three plants totalling 901MW currently operational and enjoying gas feedstock availability of 100%. The 20% merchant sale clause for the JP-II and Gautami plants further enhances the project dynamics. GVKPIL has three more plants under implementation with 1,240MW of capacity scheduled for commissioning over 2012–15. Fuel connectivity has been secured by two coal blocks with estimated reserves of 119mmt. Driven by power assets, cash from consolidated operations is expected to increase from Rs 1.5bn in FY09 to Rs 2.9bn in FY10 and Rs 4bn in FY11. We value the three plants at Rs 18.2bn based on DCF (1.5x P/BV on FY11E). MIAL – a long-term value multiplier: The GVK-led Mumbai International Airport (MIAL), which operates India’s busiest airport, will substantially drive the company’s value over the long term. The possibility of a further increase in aeronautical charges by 10% (we have factored in a 5% annual escalation) or a shift to regulated WACC-based aero revenue would enhance value for shareholders in the immediate term. We value the project at Rs 59.4bn i.e., Rs 14/share for GVKPIL’s shareholders. Real estate – a goldmine waiting to happen: MIAL has the right over 198 acres of prime land adjoining the Mumbai airport project. The real estate master plan will be unveiled shortly and would greatly enhance feasibility of the airport project and potentially transform it from a utility model to an abnormal profitability play. We have assigned a conservative valuation of Rs 6.7bn (Rs 4.3/share) to the real estate assets and await unveiling of the master plan. Road projects – steady growth: Road projects are expected to maintain an ROE of 15.4% assuming 3% long-term traffic growth. We value GVKPIL’s BOT expressway project at Rs 7.9bn using DCF, i.e., a P/BV of 1.5x on FY11E. New ventures – adding another dimension: GVK has other business interests including oil & gas blocks and SEZs (2,882 acres of land in hand), which could enhance shareholder value in the longer run. At present, we value these ventures to the extent of equity infused in the respective projects, i.e., at Rs 248mn or Rs 0.2/share and Rs 1.9bn or Rs 1.2/share respectively. SOTP target of Rs 50 – Buy: We value GVKPIL on an SOTP basis at Rs 50 with various projects pegged at Rs 43/share and net cash of Rs 10.3bn at Rs 6.5/share, which is expected to be infused partly towards new projects and partly to elevate the equity interest in existing businesses. We initiate coverage on the stock with a Buy recommendation.

Financial highlights

BSE

NSE

BLOOMBERG

532708

GVKPIL

GVKP IN

Company data Market cap (Rs mn / US$ mn)

68,933 / 1,441

Outstanding equity shares (mn)

1,579

Free float (%)

33.0

Dividend yield (%)

-

52-week high/low (Rs)

51 / 10 23,018,930

2-month average daily volume

Stock performance Returns (%)

CMP

1-mth

3-mth

6-mth

44

24.4

72.1

119.0

2,844

9.3

33.2

56.3

15,075

11.6

29.0

56.7

GVKPIL BSE Power Sensex

P/E comparison (x)

GVK P o wer & Infrastructure

80 60

58.2

50.9

42.4

40

24.8

23.4

0 FY09

FY10E

(x)

FY08

FY09

FY10E

FY11E

P/E @ CMP

42.4

58.2

50.9

30.0

P/E @ Target

48.1

66.1

57.9

34.1

EV/EBITDA @ CMP

52.1

55.4

18.2

13.6

RHH vs consensus FY10E

Parameter Sales (Rs mn) EPS (Rs)

FY11E

RHH

Cons

RHH

Cons

20,745

20,720

23,134

23,062

0.9

1.2

1.5

1.8

Profitability and return ratios FY09

FY10E

FY11E

Revenue

4,700

5,138

20,745

23,134

17.9

9.3

303.8

11.5

Adj net income

1,355

1,064

1,364

2,318

Growth (%)

124.7

(21.5)

28.3

69.9

ROE

9.7

1.0

0.8

0.9

1.5

ROIC

3.2

61.9

(27.2)

14.2

69.9

ROCE

6.1

3.1

Growth (%)

FY11E

Valuation matrix

FY08

FDEPS (Rs)

21.4

20

(Rs mn) Growth (%)

Industry

Vinod Nair

Bandish Mehta

(91-22) 6766 3443

(91-22) 6766 3454

[email protected]

[email protected]

(%)

FY08

FY09

FY10E

FY11E

EBITDA margin

39.9

34.3

25.9

31.1

EBIT margin

23.4

19.1

16.1

21.6

Adj PAT margin

28.8

20.7

6.6

10.0

4.7

5.0

7.0

3.0

4.1

5.4

5.1

5.4

RHH: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008”

1 “Honourable Mention” in Institutional Investor 2009 RHH Research is also available on Bloomberg FTIS and Thomson First Call

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

SOTP valuation of Rs 50/share We initiate coverage on GVK Power & Infrastructure (GVKPIL) with a Buy rating and a target price of Rs 50/share based on a sum-of-the-parts (SOTP) valuation of the company’s individual assets. Fig 1 - SOTP valuation of GVKPIL GVK’s stake

Value of GVK’s stake

(%) Power

Comments

(Rs mn)

(Rs/share)

29,609

18.7

Jegurupadu-I

100

6,889

4.4

Valuation of 1.0x FY11E book value

Jegurupadu-II

100

5,450

3.5

Valuation of 3.3x FY11E book value

51

5,852

3.7

Valuation of 1.5x FY11E book value

Alaknanda

100

7,727

4.9

Valuation of 1.4x on project equity

Goindwal Coal

100

3,335

2.1

Equity investment by GVKPIL till 31st March’09

Goriganga Hydro

100

295

0.2

Equity investment by GVKPIL till 31st March’09

Tokisud Coal Mine

100

62

0.0

Equity investment by GVKPIL till 31st March’09

Seregarha Mines

44.5

0.2

0.0

Equity investment by GVKPIL till 31st March’09

Gautami

Mumbai Airport

18.1

Core

36.6

21,744

13.8

Real Estate

36.6

6,765

4.3

Based on DCF, 19x EV/EBITDA on FY11 Based on NAV

100

7,920

5.0

Valuation of 1.5x FY10E book value

2,120

1.3

Roads Jaipur Expressway Others Oil and gas

100

248

0.2

Equity investment by GVKPIL till 31st March’09

Perambalur SEZ

100

1,872

1.2

Equity investment by GVKPIL till 31st March’09

Net cash in hand

10,250

6.5

Grand total

49,805

50

Valuation of 36.5x FY10E Earnings

Source: RHH

Fig 2 - WACC assumptions Assets

Cost of Equity (%)

Cost of Debt (%)

WACC (%)

Valuation methodology

Power Jegurupadu-I

14.00

-

14.00

FCFF

Jegurupadu-II

14.00

7.66

8.42

FCFF

Gautami

14.00

11.00

12.05

FCFF

Alaknanda

14.00

8.04

10.84

FCFF

Core

15.40

7.37

9.78

FCFE

Real Estate

15.00

-

15.00

NPV

14.00

9.09

10.6

FCFE

Mumbai Airport

Roads Jaipur Expressway Source: RHH

2

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Investment rationale Power: Immediate cash flow driver Power assets to deliver 69% of cash flows in FY10 and 73% in FY11

From among GVKPIL’s entire portfolio of majority-owned businesses, we believe its power assets would take the lead in cash flow generation over the next two years. Commissioning of the Jegurupadu-II and Gautami power plants in Q1FY10 will augment the company’s cash pile over the next two years. We estimate consolidated operating cash flows of Rs 2.9bn and Rs 4bn for FY10 and FY11 respectively. This is a substantial leap from the reported figures of Rs 448mn and Rs 1.6bn in FY08 and FY09 respectively. We estimate that power assets would generate 69% of cash flows in FY10 and 73% in FY11. Fig 3 - Power assets to be major cash flow driver over next two years (Rs mn) O&M Business

Operating cash flows

% of total cash flows

FY10E

FY10E

FY11E

FY11E

100

146

3.4

3.6

2,024

2,970

69.3

73.4

JP1

679

679

23.2

16.8

JP2

612

910

20.9

22.5

Gautami

734

1,381

25.1

34.1

Power

Jaipur Expressway GVKPIL (Consolidated) Ex-MIAL

798

928

27.3

22.9

2,923

4,044

100.0

100.0

Source: RHH

Expanding generation capacity from 900MW to 2,100MW over the next six years

Mega expansion drive GVKPIL has three operational gas/high speed diesel-based power plants aggregating to 901MW of capacity. These are Jegurupadu Phase I (217MW), Jegurupadu Phase II (220MW) and Gautami (464MW, 51% interest). Apart from these, the company is constructing three more power projects with a cumulative capacity of 1,240MW – Alaknanda (330MW hydro power), Goindwal Sahib (540MW coal-based thermal power) and Goriganga (370MW hydro power). Post completion of its under-construction works, GVKPIL will boast a generation capacity aggregating to over 2,100MW and power plants across diverse geographical locations, fuel types and fuel sources.

Fig 4 - Power assets summary Power Projects

Jegurupadu-I

Jegurupadu-II

Gautami

Alaknanda

Goindwal Sahib

Goriganga

Fuel Type

Natural Gas & Naphtha

Natural Gas & HSD

Natural Gas & HSD

Hydro

Coal

Hydro

Location

East Godavari District, AP

East Godavari District, AP

Peddapuram, AP

Shrinagar, Uttarakhand

Goindwal Sahib, Punjab

Pithoragarh, Uttrakhand

Capacity (MW)

217

220

464

330

540

370

Ownership Interest (%)

100

100

51

100

100

100

Date of commercial operation

Aug-96

Apr-09

Jun-09

Mar-12

Dec-13

Mar-15**

Project Cost (Rs mn)

10,252

9,640

19,350

26,980

29,640

22,750*

Project D/E

70:30^

88:12

65:35

80:20

80:20

-

18 years

15 years for 80% of capacity

15 years for 80% of capacity

30+20 years for 88% of capacity

25 Years

NA

NA

20% of the capacity

20% of the capacity

12% free power to Uttrakhand

NA

NA

PPA Merchant Sale Source: RHH, Company

*Awaiting financial closure ** Estimated

^ Debt entirely repaid

3

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Power projects on fire Jegurupadu Phase I (217MW) – A debt-free mature power asset Jegurupadu Phase I (JP-I) is a 217MW mixed fuel (runs on natural gas or naphtha or a mix of both) combined-cycle power plant, situated at Jegurupadu in the East Godavari district of Andhra Pradesh. The plant commenced operations in August ’96 and was among the first independent power projects (IPP) in India. The entire debt (Rs 7.2bn) of the project, which cost Rs 10.3bn, was repaid in July ’07.

JP-I’s 18-year PPA with APDISCOM assures a 16% post-tax ROE

Assured ROE, incentive-based tariff structure to generate steady cash flows The plant has an 18-year PPA with APDISCOM (possible extension for another 15 years by mutual consent) which expires in June ’15, along with fuel supply agreements with GAIL and Reliance Industries (RIL) for natural gas and with BPCL for naphtha. The twopart tariff structure under the PPA covers fixed costs of operating the plant, interest, depreciation and a 16% post-tax ROE on invested equity. Since the plant is debt-free, the fixed cost does not include the debt interest burden. The variable portion includes fuel cost which is a pass-through. The PPA also provides incentives and penalties for plant operations above or below the threshold PLF of 68.49%. Although the amount of fixed charges payable by APDISCOM will progressively decrease, fixed ROE and incentives throughout the term of the PPA would bring in steady cash flows.

RIL’s KG basin gas supply from April ’09 to ensure high PLF-based incentives

Gas supply from RIL to shore up plant utilisation On account of inadequate gas supply from GAIL, JP-I has been operating at a lower PLF over the past couple of years, making it ineligible for PLF-based incentives. In FY09, the plant operated at a PLF of 68.72%, which is close to the threshold limit, to avoid penalties. With the supply of RIL’s KG basin gas from April ’09, the operating dynamics of JP-I have changed dramatically. In Q1FY10, the plant scaled up operations to 88.31%. We have factored in 88% PLF for FY10 and FY11 which would further increase to 90% from FY12 onwards. We believe a higher PLF would translate to better incentives, thereby increasing profitability. Fig 5 - Key financials of Jegurupadu – I Particulars

FY09

FY10E

FY11E

FY12E

FY13E

FY14E

Total installed capacity (MW)

217

217

217

217

217

217

PLF (%)

68.7

88.0

88.0

90.0

90.0

90.0

Units produced (mn kwh)

1,300

1,673

1,673

1,711

1,711

1,711

Units sold (mn kwh)

1,266

1,623

1,623

1,660

1,660

1,660

Fuel cost per unit (Rs)

1.9

1.5

1.5

1.5

1.5

1.5

Tariff per unit (Rs)

2.8

2.4

2.4

2.5

2.5

2.5

Revenue (Rs mn)

3,125

3,922

3,954

4,080

4,111

4,142

EBITDA (Rs mn)

652

784

788

825

826

827

EBITDA Margin (%)

20.9

20.0

19.9

20.2

20.1

20.0

EBIT (Rs mn)

505

289

294

330

331

332

PAT (Rs mn)

(53)

184

184

209

209

209

-

630

701

714

728

728

Free cash flow to firm – FCFF (Rs mn) Source: RHH

Valuation based on FCFF upto FY22 discounted by 14% cost of capital

Equity valued at Rs 6.9bn or Rs 4.4/share We have valued JP-I based on the FCFF approach, considering free cash flows to the firm upto FY22 – the estimated decommissioning year of the plant. The PPA with APDISCOM ends in June ’15; however we have assumed renewal of PPA post-expiry. Hence, we have discounted cash flows upto the life of the project. Since the plant is debt-free, we have employed a higher cost of capital of 14% and valued JP-I at Rs 6.9bn or Rs 4.4/share.

4

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Jegurupadu Phase II (220MW) and Gautami (464MW) – Merchant sales add glitter Jegurupadu Phase II (JP-II), a dual-fuel combined-cycle power plant, is basically an extension of JP-I. The plant is located within the premises of the existing JP-I facility and shares certain infrastructure facilities, thereby saving on costs. Gautami Power, a 51%owned subsidiary of GVKPIL, is similar to JP-II in terms of fuel type, generation method and PPA. The balance share of 49% in Gautami is being held by IJM Corporation, Malaysia (20%), Nagarjuna Construction Co (10%) and Maytas Infra (17%).

JP-II and Gautami allowed to sell 20% of output on merchant basis

Fixed tariff, incentive and merchant sales appear lucrative JP-II and Gautami have identical tariff structures consisting of capacity and energy charges. Capacity charge is composed of a foreign debt service charge (FDSC – fixed at US$ 0.006 per unit of electricity) and other fixed charge (Rs 0.669 per unit). Under the amended PPA for both JP-II and Gautami, the two power plants would be allowed to sell the balance 20% output on merchant basis after the 80% earmarked for APDISCOM. However, the merchant sale is subject to approval from APERC. We have factored in merchant sales for the two plants from FY11 onwards. Fig 6 - Key financials of Jegurupadu – II Particulars

FY10E

FY11E

FY12E

FY13E

FY14E

220

220

220

220

220

90

95

95

93

92

Units produced (mn kwh)

1,663

1,831

1,831

1,792

1,773

Units sold (mn kwh)

Total installed capacity (MW) PLF (%)

1,613

1,776

1,776

1,739

1,720

Fuel cost per unit (Rs)

1.9

1.9

1.9

1.9

1.9

Tariff for SEB (Rs)

2.9

2.9

2.9

2.9

2.9

-

4.5

4.5

4.5

4.5

Revenue (Rs mn)

4,629

5,487

5,487

5,317

5,232

EBITDA (Rs mn)

Tariff for Merchant Sale (Rs)

1,261

1,630

1,630

1,539

1,493

EBITDA Margin (%)

27.2

29.7

29.7

28.9

28.5

EBIT (Rs mn)

749

1,118

1,118

1,027

981

PAT (Rs mn)

100

399

424

391

402

Free cash flow to firm – FCFF (Rs mn)

478

1,480

1,543

1,479

1,421

Source: RHH

PLF for both plants to remain above 90%

Stable fuel supply to sustain higher plant utilisation Commissioning of the JP-II and Gautami power plants was delayed by over two years due to non-availability of natural gas from GAIL, with whom a fuel supply agreement was signed. However, the two units entered into a fuel supply agreement with RIL & Niko in April and May ’09 respectively. With natural gas supply from RIL commencing in April ’09, the two plants have become operational. JP-II was fired in April and Gautami followed suit in June. We believe that a stable, sustainable supply of gas would lead to higher PLFs for both projects, thereby uplifting realisations. In Q1FY10, JP-II and Gautami operated at PLFs of 99.77% and 97.44% respectively. For JP-II, we have factored in a PLF of 90% for FY10, which would ramp up to 95% FY11 onwards. For Gautami, we estimate a constant PLF of 95%.

5

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Fig 7 - Key financials of Gautami Particulars Total installed capacity (MW) PLF (%)

FY10E

FY11E

FY12E

FY13E

FY14E

464

464

464

464

464

95

95

95

95

95

Units produced (mn kwh)

3,861

3,861

3,861

3,861

3,861

Units sold (mn kwh)

3,746

3,746

3,746

3,746

3,746

Fuel cost per unit (Rs)

1.8

1.8

1.8

1.8

1.8

Tariff for SEB (Rs)

2.8

2.8

2.8

2.8

2.8

Tariff for Merchant Sale (Rs)

-

4.5

4.5

4.5

4.5

Revenue (Rs mn)

10,375

11,701

11,701

11,701

11,701

EBITDA (Rs mn)

2,204

3,524

3,517

3,510

3,502

21.2

30.1

30.0

30.0

29.9

EBIT (Rs mn)

1,426

2,590

2,584

2,577

2,569

PAT (Rs mn)

(87)

876

907

960

1,022

Free cash flow to firm – FCFF (Rs mn)

524

3,235

3,331

3,313

3,292

EBITDA Margin (%)

Source: RHH

Valuation based on FCFF upto FY33 discounted at cost of capital of 8.4% and 12% respectively for JP-II and Gautami

JP-II valued at Rs 5.5bn or Rs 3.5/share; Gautami stake at Rs 3.7/share We have valued both plants based on the FCFF approach, considering free cash flows to the firm upto FY33 – the estimated decommissioning year. The PPA with APDISCOM for both projects is for 15 years from the date of operations; however we have assumed renewal post-expiry. Hence, we have discounted cash flows upto the life of the projects. We value JP-II and Gautami at Rs 5.5bn (Rs 3.5/share) and Rs 5.9bn (Rs 3.7/share – GVKPIL’s share) respectively. Alaknanda Hydro Power Co (330MW) – Foray into hydropower generation In a strategic bid to diversify its power portfolio, GVKPIL through its wholly-owned subsidiary Alaknanda Hydro Power Co (AHPCL) has forayed into hydropower generation. AHPCL is currently developing a 330MW run-of-the-river Shrinagar hydroelectric plant (acquired from Tata Power) on the Alaknanda river in the state of Uttrakhand. The project is in the construction phase with the civil works being in advance stages. It is expected to become operational by March ’12 at a cost of Rs 26.98bn, of which 80% will be financed via debt.

AHPCL’s 30-year PPA with UPPCL assures a 14% post-tax ROE

Attractive tariff, post-tax ROE of 14% to generate superior returns AHPCL has a PPA with Uttar Pradesh Power Corporation (UPPCL) for 30 years from the commercial date of operation, with an option to extend the agreement by another 20 years. As per the PPA, AHPCL will be able to sell 88% of the electricity generated on merchant basis while the balance 12% shall be supplied free of cost to the state of Uttrakhand. The tariff structure is designed to cover the fixed cost (depreciation, interest cost, tax and O&M expenses) plus a guaranteed post-tax ROE of 14%.

6

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Fig 8 - Key financials of Alaknanda Particulars Total installed capacity (MW) PLF (%) Units produced (mn kwh) Free power to Uttarakhand (mn kwh)

FY13E

FY14E

FY15E

FY16E

FY17E

330

330

330

330

330

40

40

40

40

40

1,156

1,156

1,156

1,156

1,156

139

139

139

139

139

1,006

1,006

1,006

1,006

1,006

5.4

5.2

5.1

5.0

4.8

Revenue (Rs mn)

5,383

5,252

5,121

4,991

4,862

EBITDA (Rs mn)

4,979

4,831

4,684

4,536

4,389

Units sold (mn kwh) Tariff per unit (Rs)

EBITDA Margin (%)

92.5

92.0

91.5

90.9

90.3

EBIT (Rs mn)

3,937

3,790

3,642

3,495

3,347

PAT (Rs mn)

1,468

1,465

1,463

1,460

1,458

Free cash flow to firm – FCFF (Rs mn)

3,342

4,552

4,404

4,257

4,110

Source: RHH

Equity valued at Rs 7.7bn or Rs 4.9/share Employing the FCFF model, we have valued AHPCL’s equity at Rs 7.7bn (Rs 4.9/share) over the term of the PPA, discounting the cash flows with a cost of capital of 10.8%. The project has made substantial progress in construction and hence we have factored in March ’12 as the completion date. Any delay in completion could be a key downside to our valuation as this would attract a penalty of Rs 103,000/day for the first three months and Rs 1.03mn/day thereafter.

Valuation based on FCFF upto FY42 discounted by 10.8% cost of capital

Fig 9 - Key financials of the Power business (Rs mn)

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY17E

Revenues

18,927

21,142

21,268

26,513

26,328

26,060

25,964

25,871

Fuel costs

13,096

13,407

13,461

13,389

13,353

13,282

13,282

13,282

Gen & admin expenses

1,582

1,793

1,835

2,270

2,321

2,372

2,433

2,497

EBITDA

4,249

5,942

5,972

10,854

10,653

10,406

10,249

10,092

Depreciation

1,784

1,940

1,940

2,981

2,981

2,981

2,981

2,981

EBIT

2,464

4,002

4,032

7,872

7,672

7,425

7,268

7,111

Interest & Finance expenses

2,224

2,280

2,207

4,255

3,969

3,684

3,399

3,115

Other income

60

80

80

80

80

80

80

80

PBT

301

1,803

1,905

3,697

3,782

3,821

3,949

4,076

Taxations

103

344

366

671

685

692

713

814

Minority interest

(42)

429

444

470

501

531

560

589

PAT

240

1,030

1,095

2,557

2,597

2,599

2,676

2,673

Source: RHH

Power projects in the pipeline Goindwal’s 25-year PPA with PSEB assures a 14% post-tax ROE

Goindwal Sahib (540MW thermal power plant) – Financial closure by end-Q2FY10 In order to further diversify its thermal power portfolio from natural gas to coal-based power generation, GVKPIL is in the process of setting up a 540MW coal-fired power plant at Goindwal Sahib in Punjab, which was allotted by the state government following an international competitive bidding process. The project is expected to cost Rs 29.6bn (debt/equity of 80:20) and become operational by December ’13. It has been dogged by significant delays related to land acquisition, fuel allocation and terms of the PPA signed with Punjab State Electricity Board (PSEB) in April ’00.

7

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Now, these issues have been resolved and the project is scheduled to achieve financial closure by September ’09. Under the restated PPA signed in May ’09, power will be sold to PSEB for a period of 25 years. Thereafter, PSEB will have the right to buy the plant at depreciated replacement cost. The project has a two-part tariff with an assured post-tax ROE of 14% plus incentives. Coal (2mmtpa) for the plant will be sourced from GVKPIL’s two captive coal mines in Jharkhand – Tokisud (mineable reserves of 52mmt) and Seregarha (mineable reserves of 67mmt). The company has appointed BHEL and Punj Lloyd as the BTG and BOP contractors respectively. Currently, it has started basic construction activity like grading and leveling of the land. It expects to start full-fledged construction of the plant post financial closure. Equity investment valued at Rs 2.1/share Since financial closure is awaited, we have included only the equity investment made by GVKPIL in our valuation. The company has infused Rs 3.3bn into the project which translates to a value of Rs 2.1/share.

88% of Goriganga hydropower capacity likely to be sold on merchant basis

Goriganga Hydro Power (370MW) – In the embryonic stage GVKPIL has won the rights to develop the 370MW Goriganga project (combination of the 200MW Sirkari and 170MW Mapang hydro units) in Uttaranchal through competitive bidding. Output from this run-of-the-river plant located on the Goriganga river would be directed largely towards merchant sales. The management pegs the total cost at Rs 22.8bn with likely completion by FY15. Under the development agreement, GVKPIL has assured 12% free power to the state. The company is likely to sell the remaining 88% in the merchant market. The Detailed Project Report (DPR) is currently under preparation and regulatory approvals are awaited. Equity investment valued at Rs 0.2/share As the exact project configuration and cost will only be available after the approval of DPR and financial closure, we have not included this plant in our cash flow estimates. However, we have valued GVKPIL’s equity investment of Rs 295mn at Rs 0.2/share.

Coal mines: Backward integration GVKPIL has ventured into captive coal mining to support the fuel requirements of the Goindwal Sahib power project and has two mines under development in Jharkhand. Mines to commence from FY11 – excluded from our estimates for now

Tokisud mines (52mmt mineable reserves) GVK Coal Co Pvt Ltd, a wholly owned subsidiary of GVKPIL, has been allocated the Tokisud open-cast mining block, located 50km north-west of Ranchi. The mine has reserves of 52mmt and the project cost is estimated at Rs 3.4bn, to be funded via debt/equity of 80:20. The management expects production from the mine to commence from FY11, with the rated output of 2mmtpa being achieved by FY13. The output of the mine will be supplied to the Goindwal Sahib power project. However, until this plant becomes operational, the company is allowed to sell the coal to PSEB. Currently, land acquisition and infrastructure development for the mine is in progress. Seregarha mines (GVKPIL’s share at 66.7mmt of mineable reserves) GVKPIL has entered into a joint venture (called Seregarha Mines) with Arcelor-Mittal for a greenfield coal project in Latehar, Jharkhand. It has a 44.5% interest which gives it a share of 66.7mmt for mineable reserves and Rs 2.9bn for project cost. The company has applied for a prospecting license and expects production to start from October ’13. The estimated 1mmtpa output from this mine is also expected to be supplied to the Goindwal Sahib plant. Since the JV is in a nascent stage we have not included it in our estimates.

8

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

New businesses hold promise Awarded 7 deepwater blocks under NELP VII jointly with BHP

Oil and Gas exploration – A promising, high-potential business GVKPIL has recently forayed into oil & gas exploration through a JV with BHP Billiton for the exploration and development of seven deepwater blocks. Located off the west coast of India, these blocks were awarded under the New Exploration Licensing Policy (NELP) VII. GVKPIL’s share in the JV (GVK Oil & Gas) is at 74% with the balance 26% coming in from BHP Billiton. The company estimates a capital outlay of Rs 2.2bn for the venture over the next three years. Equity investment valued at Rs 0.16/share The seven oil and gas blocks are spread over a total area of ~34,000sq km. The company is presently involved in studying the existing data, mapping the new data points, identifying technical staff resources needed, and drafting a plan of action for engaging vessels that will gather seismic data. As of March ’09, it has invested Rs 248mn as capex and plans to incur an additional Rs 900mn by March ’10. We have valued only the equity investment of Rs 248mn made by GVKPIL, translating to Rs 0.16/share.

Formal approval received for a 2,800acre SEZ in Tamil Nadu

SEZ in Tamil Nadu – Riding the SEZ mania GVKPIL plans to ride the SEZ wave which has swept across India. It has entered into a joint collaboration with TIDCO, an undertaking of the Tamil Nadu government, to develop a 2,882-acre multi-product SEZ in the Perambalur district of the state at a cost of Rs 8.3bn. GVKPIL, through its wholly owned subsidiary GVKPSPL, will hold ~89% stake and TIDCO ~11%, in the venture. The company has already received formal approval from the Ministry of Commerce and Industry, and operations are scheduled to commence by the end of FY12. The SEZ plans to target industries such as leather tanneries, textile and garments, engineering goods, fertilisers, chemicals, petrochemicals, iron & steel, engineering, electronics & communication, pharmaceuticals and power. Perambalur is located at a distance of ~225km from the Chennai Airport and 75km from Trichy Airport and lies along the Chennai-Trichy-Madurai highway. It is well connected to the ports of Chennai, Tuticorin and Cuddalore, by road and rail. Fig 10 - Location of Perambular SEZ

Source: Google Maps

9

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Land acquisition concluded The company has acquired 2,880 acres of land, with the master plan and project clearances in various stages of development. The state of Tamil Nadu has a high concentration of IT/ITES and electronics SEZs but lacks a multi-product zone. Once operational, this will be the largest multi-product SEZ in the state.

SEZ land acquisition complete

Fig 11 - Operational SEZs in Tamil Nadu SN

Developer

Location

Type

1

Tata Consultancy Services

Siruseri and Egattur, Chennai

IT/ITES

2

ETL Infrastructure Services

Tambaram Taluk, Kancheepuram

IT/ITES

3

DLF Infocity Developers

Manapakkam & Mulivakkam, Kancheepuram

IT/ITES

4

Arun Excello Infrastructure Pvt Ltd

Vallncheri and Potheri villages, Kancheepuram

IT/ITES

5

ETA Techno park Pvt Ltd

Old Mahabalipuram Road, Kancheepuram

IT/ITES

6

Electronics Corporation of Tamil Nadu

Kancheepuram

IT/ITES

7

Coimbatore Hitech Infrastructure Pvt Ltd

Coimbatore

IT/ITES

8

Flextronics Technologies (India) Pvt Ltd

Sriperumbudur, Kancheepuram

Electronics hardware and related services

9

State Industries Promotion Corp

SIPCOT Industrial area, Sriperumbudur

Electronics hardware and related services

10

State Industries Promotion Corp

Oragadam

Electronic hardware

11

Suzlon Infrastrucutre

Coimbatore

Hi-tech engineering products

12

Cheyyar SEZ

Cheeyar

Footwear

Source: RHH, Ministry of Commerce & Industry

Equity valued at Rs 1.2/share

Equity investment in SEZ valued at Rs 1.2/share Since the project has not achieved financial closure we have valued only the equity component of Rs 1.9bn infused by GVKPIL. This yields a value of Rs 1.2/share.

Mumbai airport: A long-term treasure trove 36.6% owner of the prized Mumbai international airport

Mumbai International Airport (MIAL) operates India’s largest airport, handling close to 22% of the country’s passenger traffic. GVKPIL is a 36.6% owner in this strategic asset. The airport is already a profit-making venture, with operational characteristics that offer a strong cushion against risk.

Fig 12 - MIAL – key financials (Rs mn)

FY07

Gross Sales

5,847

Growth (%)

FY08

FY09

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY20E

FY25E

8,529

9,438

10,794

12,832

15,238

17,788

20,631

23,880

42,817

77,433

45.9%

10.7%

14.4%

18.9%

18.7%

16.7%

16.0%

15.7%

12.5%

12.2%

AAI Share

2,283

3,316

3,696

4,200

4,989

5,897

6,884

7,984

9,241

16,570

29,967

EBITDA

1,526

2,139

2,440

3,311

3,874

4,777

5,655

6,768

8,172

15,833

30,694

26.1

25.1

25.9

30.7

30.2

31.3

31.8

32.8

34.2

37.0

39.6

PAT

909

1,099

852

1,316

1,283

1,234

1,153

1,929

(2,265)

5,489

16,917

PAT Margin (%)

15.5

12.9

9.0

12.2

10.0

8.1

6.5

9.4

(-9.5)

12.8

21.8

3,058

9,500

14,701

22,842

29,911

38,887

53,106

62,837

58,293

35,570

12,847

EBITDA Margin (%)

Total Debt Source: RHH

10

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Fig 13 - Mumbai airport – aerial view

Source: Wikimapia

Highly lucrative asset MIAL posted sales of Rs 9.4bn in FY09 with an EBITDA margin of 25.9%

Strong operational backbone MIAL carried 23.4mn passengers in FY09, comprising 15.3mn domestic and 8.1mn international travellers. The company has a healthy sales base of Rs 9.4bn in FY09 with an EBITDA margin of 25.9%, profitability of Rs 852mn and 16.6% ROE. Being a prime gateway to India for international passengers, MIAL has been able to grow its passenger traffic (pax) at a 12% CAGR over the last five years, where international pax has grown at 9% and domestic pax at 14%. Industry-wide growth in domestic passenger traffic has been very robust at 17.4% over this period. 2% pax growth seen in FY10 – CAGR of 10.5% till 2013 During the FY09 slump, India pax registered a de-growth of 7%, whereas MIAL de-grew at 9%. Though we are yet to see a convincing rebound in passenger traffic, the company’s Q1FY10 performance indicates that the slowdown has moderated to some extent. MIAL registered a drop of 7% YoY in Q1FY10 against 14% in Q4FY09, 16% in Q3FY09 and 12% in Q2FY09.

Pax recovery expected over the next three quarters

We are optimistic about a recovery in pax growth over the next three quarters with a return to positive territory in Q3FY10. Accordingly, we factor in a marginal growth of 2% for FY10 with a pick up to 11% in FY11. We also build in a long-term growth rate of 4% till FY24 when passenger traffic is expected to cross 50mn.

Fig 14 - Long-term passenger growth trend at Mumbai International

Domestic

Growth (R)

FY08A FY09A FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E

(mn) 60 50 40 30 20 10 0

Source: RHH, AAI

Fig 15 - Passenger growth at Mumbai – historical trend (%) 20 15 10 5 0 (5) (10) (15)

International Growth - QoQ (R)

(mn) 8

Domestic

(%) 15 10 5 0 (5) (10) (15) (20)

6 4 2 0 Q1

Q2

Q3

FY08

Q4

Q1

Q2

Q3

FY09

Q4

Q1 FY10

Source: RHH, AAI

11

GVK Power & Infrastructure

Non-aero business accounts for 41% of revenues

Initiating Coverage

11 August 2009

Expansion plan to maximise non-aero revenues… MIAL’s current business model fails to maximise non-aeronautical revenue sources (oil throughput, food & beverages, advertising, duty free and ground handling). However, the ongoing expansion plan will optimise both aeronautical and non-aeronautical inflows. Non-aero revenues (excluding cargo handling) currently account for 41% of the total pie. Within this, direct passenger and commercial space-driven inflows comprise a 11% share, and include food & beverages (F&B), advertisement and duty free space. At present, the total developed area for passengers and storage is ~25,000sq ft, which is below potential.

Fig 16 - Segment-wise revenue breakup (Rs mn)

FY08

Mix (%)

FY09

Mix (%)

FY10E

Mix (%)

FY11E

Mix (%)

A) Aeronautical revenue

3,623

42

3,715

39

4,260

39

4,856

38

Landing charges

2,550

30

2,699

29

3,030

28

3,446

27

Aircraft parking charges

130

2

197

2

231

2

263

2

Passenger service fee

900

11

831

9

955

9

1,095

9

43

1

40

0

44

0

53

0

X-ray charges B) Non-aero revenue (Contracted revenue)

3,175

37

3,909

41

4,552

42

5,729

45

Oil throughput (handled by IOC, BPCL & HPCL)

936

11

699

7

769

7

904

7

F&B (such as Baskin Robbins, Café Coffee)

299

4

384

4

461

4

553

4

Advertisement

390

5

518

5

550

5

800

6

Duty free

235

3

746

8

932

9

1,119

9

Ground handling

166

2

256

3

314

3

353

3

Others

1,149

13

1,306

14

1,526

14

2,001

16

C) Cargo handling charges

1,731

20

1,815

19

1,982

18

2,247

18

Total

8,529

100

9,438

100

10,794

100

12,832

100

Source: RHH

Airport expansion to fuel non-aero income

…set for 21% CAGR till 2013 We are factoring in a 21% CAGR in non-aero revenue till 2013. During the economic slowdown in FY09, MIAL managed a 23% growth in this segment. Post-completion of the expansion project, non-aero revenue is expected to register a substantial jump at India’s busiest airport. This will be led by an increase in cargo handling capacity from 0.53mmtpa to 1mmtpa by 2011 and the development of a real estate venture which will house retail, entertainment and commercial complexes, thereby increasing footfalls. MIAL’s passenger capacity will rise from 25mn to 40mn and the integrated terminal is expected to have 400,000sq m of passenger terminal space. Also, non-aero inflows will be more contractual in nature and thus help mitigate project risk. Currently MIAL has awarded the following non-aero contracts: ™

Duty-free shopping to DFS Singapore for 24,541sq ft over three years

™

Advertising rights to Times

™

Other contracts in retail, car parking and F&B

12

GVK Power & Infrastructure

Aero inflows account for 39% of MIAL’s revenue base

Initiating Coverage

11 August 2009

Aero-related revenue – pax plus regulatory changes the key drivers Aero-related business (other than cargo handling) accounts for 39% of MIAL’s total revenue and is directly linked to pax growth, ATM (air traffic movement) and changes in regulated tariff.

Fig 17 - MIAL’s key revenue segments Particulars

FY08

FY09

FY10E

FY11E

Aeronautical (Rs mn)

3,623

3,715

4,260

4,856

Landing charges (Rs mn)

2,550

2,699

3,030

3,446

21,932

23,729

26,102

27,407

<= 21mt

102

102

113

119

<= 100mt

169

169

188

197

Rs 16,900 + 227/mt

Rs 16,900 + 227/mt

Rs 18,788 + 252/mt

Rs 19,730 + 265/mt

NA

NA

NA

NA

Avg realisation landing (Rs) Domestic (Rs/mt)

> 100mt International (Rs/mt) <= 21mt <= 100mt

203

225

250

263

22,500 + 303/mt

22,500 + 303/mt

25,047 + 337/mt

26,300 + 354/mt

130

197

231

263

5,591

8,660

9,959

10,457

733

733

814

855

733 + 9.7/mt

733 + 9.7/mt

814 + 10.8/mt

855 + 11.3/mt

Passenger service fee (Rs mn)

900

831

955

1,095

Average Realisation/Passenger (Rs)

199

203

229

240

MIAL Share/Departing passenger (Rs)

70

71

80

84

X-ray charges (Rs mn)

43

40

44

53

> 100mt Aircraft parking charges (Rs mn) Average realisation housing/aircraft (Rs/mt/hr) <= 100mt > 100mt

Source: RHH

for all aero-related revenue

For FY10, MIAL has won a 10% hike in all aero-related revenue and hence will charge Rs 229 per departing passenger, of which it garners a 35% share. The hike will be a saving grace in this slowdown phase, driving a 15% growth in aero revenues for the fiscal in spite of a mere 2% increase in pax. We have assumed a 5% increase in aerorelated charges for FY11 and FY12. The other important driver of aero revenues is ATM, which dipped 2% in FY09. We expect a 2% growth for FY10 followed by a 9% CAGR over FY11-FY14.

Fig 18 - ATM growth trend ('000) 600

Internataional Growth (R)

Fig 19 - Cargo growth trend Domestic

500

(%) 20 15

400

10

300

5

200

0

100

(5) FY08A FY09A FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E

0

Source: RHH, AAI

('000 MT) 1,200

Internataional Growth (R)

Domestic

(%) 12 10

1,000

8

800

6

600

4

400

2

200

0

0

(2) FY08A FY09A FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E

AAI has permitted a 10% hike to MIAL

Source: RHH, AAI

13

GVK Power & Infrastructure

ADF, a capital receipt that accrues entirely to MIAL, has begun to flow in from FY10

Initiating Coverage

11 August 2009

ADF charge to address funding constraints and aid project completion From FY10 onwards, MIAL is eligible to charge ADF (airport development fee) which is a capital receipt towards completion of the project and hence will flow entirely to the company. This will enhance fund flows for the project and aid timely completion. MIAL will charge Rs 100 per domestic and Rs 600 per international departing passenger for a total of four years starting FY10. We expect this to garner a total sum of Rs 14.5bn between FY10 and FY13. Fig 20 - ADF charges (Rs mn)

FY10E

FY11E

FY12E

FY13E

Total

ADF total collection

3,241

3,433

3,778

4,073

14,525

International

2,460

2,558

2,763

2,957

10,738

781

875

1,015

1,116

3,787

Domestic Source: RHH

Potentially strong upside to aero revenue from regulatory shift As per its agreement with the airport authority (AAI), MIAL is eligible for a WACC-based return on the net capital invested during the year after depreciation – also termed as regulatory base. The total aero revenue that MIAL is eligible to collect (from FY09 onwards) is calculated as 11.6% of the regulatory base plus 90% of O&M cost, depreciation and tax, after deducting 30% of non-aero revenue. AAI is eligible for 38.9% of the aero-related revenue share. However, this WACC-based system of returns has not been implemented so far. WACC-based returns unlikely to be implemented; expect ADF to continue

Implementation would imply a 30% hike in aero-related tariff, placing a significant incremental burden upon passengers and airlines. We believe that such a steep hike is unlikely to materialise in the near term and expect the gap to be bridged, to a large extent, by the continuation of ADF (which is more profitable for MIAL being a capital receipt). We are assuming that ADF will be applicable for the stipulated four-year period with a 5% annual escalation in aero charges till FY14. By the time the capex plan is completed in FY14, the difference between our aero revenue forecast and regulated revenue will be as high as 73% (excluding ADF); including ADF it is just 4% for FY13. Fig 21 - WACC-based model vs RHH estimates (Rs mn)

FY11E

FY12E

FY13E

FY14E

Return on regulatory base

3,834

5,790

7,659

9,565

OM – Efficient operation & maintenance cost

3,572

4,108

4,724

5,291

617

1,022

1,428

1,829

Depreciation Corporate Tax

661

636

594

-

Less: Non-aero revenue

2,393

2,838

3,366

3,995

Targeted WACC-based aero revenue

6,291

8,717

11,039

12,689

RHH aero revenue forecast

4,856

5,780

6,567

7,314

Difference (%)

30

51

68

73

ADF

3,433

3,778

4,073

-

Collection including ADF

8,290

9,558

10,639

7,314

(24)

(9)

4

73

Difference including ADF (%) Source: RHH

14

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Fig 22 - Capex risk mitigated; we expect timely project completion (Rs mn)

FY07

FY08

FY09

FY10E

FY11E

FY12E

FY13E

FY14E

Capex

4,517

5,333

9,707

18,000

20,000

20,000

18,680

Internal Acc.

1,368

904

1,746

3,030

5,195

6,790

4,121

Equity

-

-

2,000

4,000

4,000

-

ADF

-

-

-

3,241

3,433

-

-

2,496

5,201

7,728

4,876

Real Estate Deposits Debt

-

6,443

FY15E

Total

10,250

400

101,970

5,617

1,740

27,403

-

-

-

12,000

3,778

4,073

-

-

14,525

3,328

-

-

-

5,824

6,104

10,487

4,633

(1,340)

45,472

Source: RHH

Debt burden to rise post completion but mitigated by several potential upsides

Heavy debt requirement… The MIAL airport expansion and modernisation is a long-gestation project with a heavy capex requirement, which will require significant debt funding. The current debt/equity ratio stands at 2x, and is expected to average 1.5x over the next five years. We expect the high debt burden to become visible only post completion of the project, with interest cost forecast to increase to Rs 6.7bn, currently interest is amortized …but significant cushion from real estate assets Importantly, our financials do not consider any upside from the attached real estate venture. Real estate assets were not included in the original agreement but citing a revamped high capex programme and funding constraints, the government has recently included real estate sale as part of the project, thus enabling MIAL to capitalise on a prime land bank at the centre of the city. MIAL has 1,976 hectares of land surrounding the Mumbai airport and is eligible to put to use 10% of the land, i.e., 198 acres. If MIAL is able to monetise these real estate assets effectively over the next 2–3 years, our financials are bound to change substantially. Given that revenues from real estate will dramatically improve the feasibility of the project and that GMR has created a benchmark in terms of excellent land asset monetisation at the Delhi International Airport (DIAL), we are building in a deposit receipt of Rs 5.8bn for FY11 and FY12 cumulatively (for leasing out of 17% of the developable sq ft.) In our view, the risk of high leverage on the airport project is mitigated by: a) the long concession period of 30 + 30 years, b) the company’s 61.3% revenue share, c) a comfortable long-term average interest rate of 10% with a moratorium of 7 years, d) upside from real estate monetisation, e) a further upside from shifting to the regulatory WACC-based revenue regime, f) potential regulatory increases in airport charges (ADF, passenger service and aircraft charges), and g) a rebound in volumes from pax, ATM and non-aero revenue.

Gross revenue CAGR of 17% till FY14, with positive cash flow from operations

We expect a 17% CAGR in gross revenue till FY14 Based on our estimated CAGR of 7.5% in ATM, 7.9% in pax, 6.9% in cargo tonnes and 20.4% in non-aero revenue over FY09-FY14, we factor in a 17% CAGR in gross revenue from MIAL. The EBITDA margin is expected to average out to 31% during this period. Net cash rich project With completion of the project and the moratorium period, MIAL would require to flush out cash for interest and loan payments. During the period from FY14 to FY16, its profitability is thus expected to see a lean phase. ROE and ROCE are expected to average at 6% and 4% respectively over the next three years due to fund infusions towards the Rs 98bn capex. At the same time, we would like to highlight that MIAL is a prime asset which is expected to generate positive returns over the long term, akin to high-gestation BOT and power projects. It is bound to be a net cash rich project upon completion. Based on our conservative tariff and pax growth estimates and excluding real estate sales, we expect cash flow from operations to be positive at Rs 1.7bn in FY10.

15

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Valued at Rs 59.4bn or Rs 14/share We value the core MIAL project at Rs 59.4bn, i.e., Rs 14/share for GVKPIL shareholders. This excludes any real estate value and also strips away the realty deposit inflows for FY11 and FY12 (valued separately as part of the real estate assets). We have employed the FCFE valuation model at a WACC of 9.8%, with an aggressive cost of debt of 11% (1-t) and cost of equity of 15.4%.

Ex-real estate, we value the company’s stake in MIAL at Rs 14/share

Fig 23 - Free cash flow to firm (FCFF) (Rs mn)

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY17E

EBIT * (1-t)

1,696

1,856

2,059

2,257

3,321

4,397

5641

6594

882

1,305

2,031

2,757

3,467

3,752

3671

3518

Non Cash WC invested

892

172

196

209

218

249

218

244

FC invested

(18,000)

(20,000)

(20,000)

(18,680)

(10,250)

(400)

(220)

(231)

FCFF

(14,530)

(16,668)

(15,714)

(13,458)

(3,244)

7,998

9,312

10,126

(14,157)

(12,158)

(9,485)

(2,083)

4,677

4,961

4,914

Cost of Equity

15.4%

Cost of Debt (1-t)

7.4%

WACC

9.8%

Discounted FCFF

(13,548)

PV

74,325

Debt

22,842

Value- one year fwd

59,411

GVK stake @ 36.6%

21,744

Per share value

13.8

Source: RHH

Based on our valuation of Rs 59.4bn, MIAL would trade at very high valuations of 40x P/E and 19x EV/EBITDA on FY11E. But given the long-gestation nature of the project, we believe the DCF model captures the true value. Fig 24 - MIAL valuation (x)

FY07

FY08

FY09

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY17E

FY18E

P/E

56.6

46.8

37.0

39.1

40.1

41.7

44.7

26.7

(23)

(99)

55.2

22.3

EV/EBITDA

48.7

34.8

30.5

22.5

19.2

15.6

13.1

11.0

9.1

8.0

7.0

6.1

8.8

6.0

5.5

4.8

4.0

3.4

2.9

2.5

2.2

1.9

1.7

1.5

88.5

64.2

37.5

16.7

10.7

8.8

7.5

7.1

7.6

7.7

7.5

7.1

P/S P/BV Source: RHH

16

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Fig 25 - Global Airports Valuation Companies

Country

P/E (x)

P/BV (x)

CY09E

CY10E

CY11E

CY09E

CY10E

CY11E

Europe Aeroports de Paris

France

18.8

17.3

15.9

1.5

1.4

1.4

Flughafen Wien Ag

Austria

8.7

9.8

12.0

0.7

0.7

0.7

Flughafen Zuerich Ag

Switzerland

14.3

13.5

12.6

1.0

1.0

0.9

Fraport Ag

Germany

19.6

16.6

15.8

1.1

1.1

1.0

Copenhage Airports

Denmark

14.1

12.8

12.0

3.0

2.8

2.8

Save Spa

Italy

16.8

17.0

15.0

1.0

1.0

0.9

15.4

14.5

13.9

1.4

1.3

1.3

19.2

19.4

17.1

1.0

1.0

1.0

Average Asia & Australia-New Zealand Auckland Intl Airport Ltd

New Zealand

Macquarie Airports

Australia

118.4

22.7

20.6

0.6

0.6

0.6

Beijing Capital Intl Airport

China

55.0

34.1

17.3

1.5

1.5

1.4

Guangzhou Baiyun

China

19.7

17.3

14.4

1.7

1.6

1.5

Hainan Meilan Intl Airport

China

10.7

9.8

9.4

1.0

0.9

0.9

Japan Airport Terminal Co

Japan

28.1

31.2

24.7

0.9

0.9

0.9

Malaysia Airports Hldgs Bhd

Malaysia

10.6

9.8

9.2

1.1

1.0

1.0

Shanghai International Airport

China

33.5

25.3

21.4

2.2

2.1

1.9

Singapore Airport Terminal

Singapore

16.0

11.4

12.5

1.6

1.5

1.4

Xiamen International Airport

China

20.7

18.8

17.0

3.7

3.6

3.2

MIAL*

India

39.1

40.1

41.7

16.7

10.7

8.8

33.7

21.8

18.7

2.9

2.3

2.1

27.3

19.2

17.0

2.4

2.0

1.8

Average World Average Source: RHH, Bloomberg

* FY10, FY11 and FY12 figures

MIAL risk parameters Incremental capacity of 15mn passengers at high capex funding

Lower returns on high capex base MIAL’s business model could face the risk of lower returns given that a total of Rs 98bn will be spent to raise passenger capacity from 25mn to 40mn. However, we note that airport capacity can be stretched to 125% of the targeted capacity. This would effectively utilise non-aero revenue potential, which the management expects to grow at a 20% CAGR. Risks to the revenue model There could be delays in implementing the WACC model of regulated aero revenues (not considered in our valuation), while airport charges may be hiked by a lower amount than anticipated. In our view, this risk would be absorbed by a proportionate increase in ADF and real estate monetisation.

Space constraints at Mumbai airport would prevent further expansion

Saturation in the long term owing to expansion constraints Based on our model, MIAL will reach its stipulated capacity by FY17-FY18 and its maximum possible capacity of 50mn by FY22-FY23. Given that there are space constraints precluding further expansion at MIAL, it could face saturation in growth in the long-term unless innovative means to expand capacity are adopted or the company wins the Navi Mumbai airport project bid.

17

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

MIAL’s financials Fig 26 - Income statement Y/E March (Rs mn)

FY08

FY09

FY10E

FY11E

FY12E

FY13E

Aero Revenue

3,623

3,715

4,260

4,856

5,780

6,567

Non Aero Revenue

3,175

3,909

4,552

5,729

6,875

8,250

Cargo

1,731

1,815

1,982

2,247

2,584

2,972

Total Sales

8,529

9,438

10,794

12,832

15,238

17,788

Annual Fees

3,316

3,696

4,200

4,989

5,897

6,884

Op & Admin Exp

3,074

3,302

3,283

3,969

4,564

5,249

2,139

2,440

3,311

3,874

4,777

5,655

25%

26%

31%

30%

31%

32%

EBITDA EBITDA Margin Depreciation EBIT Interest EBT Other income Exceptional Items PBT Tax Adj PAT

254

400

862

1284

2011

2739

1,885

2,040

2,449

2,590

2,766

2,916

197

273

440

633

826

1104

1,688

1,767

2,009

1,957

1,940

1,812

39.8

113.2

60

60

-

-

-

540

-

-

-

-

1,728

1,340

2,069

2,017

1,940

1,812

629

488

753

734

706

660

1,099

1,392

1,316

1,283

1,234

1,153

Source: RHH

Fig 27 - Balance sheet Y/E March (Rs mn)

FY08

FY09

FY10E

FY11E

FY12E

FY13E

Current assets of which

4,350

6,254

6,429

6,757

6,927

11,312

Cash and equivalents

2,007

2,938

3,410

3,167

2,710

6,441

Receivables

1,410

2,168

1,799

2,139

2,514

2,906

Inventory

19

34

30

36

42

49

Other C.A

355

391

450

535

629

726

Loans and advances

559

723

740

880

1,032

1,190

Investments

2,008

426

426

426

426

426

Gross block

4,628

11,551

24,057

42,557

62,557

82,227

371

766

1,628

2,912

4,924

7,663

CWIP

5,221

8,005

13,500

15,000

15,000

14,010

Net Block

9,478

18,790

35,929

54,644

72,633

88,574

Expenses pending allocation

1,027

1,560

-

-

-

-

16,862

27,030

42,783

61,827

79,985

100,312

Current liabilities of which

3,069

4,902

3,936

7,175

11,327

12,189

CL

3,048

4,853

3,898

7,130

11,272

12,119

Acc Depreciation

Total assets

Provisions

21

49

38

45

55

70

9,500

14,701

22,842

29,911

38,887

53,106

285

566

587

607

626

644

Shareholders' funds

4,008

6,861

15,418

24,134

29,146

34,372

Equity

2,000

4,000

8,000

12,000

12,000

12,000

Reserves

2,008

2,861

7,418

12,134

17,146

22,372

16,862

27,030

42,783

61,827

79,985

100,312

Borrowings Deferred tax liability

Total liabilities & equity Source: RHH

18

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Fig 28 - Profitability/Returns/Other ratios Particulars

FY07

FY08

FY09

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY17E

FY18E

OPM (%)

26.1

25.08

25.85

30.67

30.19

31.35

31.79

32.81

34.22

34.76

35.31

35.86

Tax rate (%)

34.2

36.38

36.42

36.40

36.40

36.40

36.40

36.40

36.40

36.40

36.40

36.40

NPM (%)

15.6

12.89

14.75

12.19

10.00

8.10

6.48

9.35

(9.49)

(1.94)

3.10

6.83

ROE (%)

62.5

31.78

15.68

11.81

6.49

4.63

3.63

5.46

(6.44)

(1.54)

2.74

6.54

ROCE (%)

33.1

13.31

9.50

5.87

4.15

3.37

2.90

3.56

4.59

6.28

7.72

9.08

D/E

1.05

2.37

2.14

1.48

1.24

1.33

1.55

1.73

1.71

1.60

1.43

1.23

18.06

9.57

7.47

5.57

4.09

3.35

2.64

2.39

0.66

0.92

1.26

1.70

Receivables (No of days)

49

60

83

60

60

59

59

58

58

57

56

56

Inventories (No of days)

1.2

0.8

1.3

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

Sales/Gross Block

1.9

1.8

0.8

0.4

0.3

0.2

0.2

0.2

0.2

0.3

0.3

0.3

Sales/Net Block

1.3

0.9

0.5

0.3

0.2

0.2

0.2

0.2

0.3

0.3

0.4

0.4

Sales/Total Asset

1.5

0.7

0.4

0.3

0.2

0.2

0.2

0.2

0.2

0.3

0.3

0.3

CA/CL

1.9

1.4

1.3

1.6

0.9

0.6

0.9

1.3

1.0

0.9

0.9

0.9

Interest coverage

Source: RHH

Real estate: Prime location, high potential With real estate sales being included as part of the airport project, MIAL has been handed a prime land bank in the heart of Mumbai. As per the agreement, MIAL is eligible to use 10% of the land surrounding the airport, i.e., 198 acres. The master plan for development is complete (charted out in consultation with HVS, HOK and Cushman Wakefield) and should be unveiled during the latter half of the year. First monetisation is expected in FY11, covering 1mn sq ft (msf). MIAL to develop 20msf of airport land over the next 15 years

We also understand that 50 acres of land is free and can be monetised right away, but MIAL appears to be in no hurry as funding concerns have been addressed with the ADF sanction. Moreover, the company is biding time since the market for commercial and retail real estate is yet to show a decent recovery. MIAL is expected to build close to 20msf over the next 15 years.

Fig 29 - MIAL real estate valuation Particulars Deposit linked (msf)

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY22E

1.4

1.8

3.2

3.2

3.2

3.2

3.2

0.6

1.4

2.1

3.2

5.4

3.8

4.6

5.3

6.5

8.7

238

744

1,218

2,032

10,075

(3,210)

(978)

(668)

(136)

5,119

Non deposit linked (msf) Total area (msf) Deposit money (Rs mn)

1.4

1.8

2,496

3,328

Lease revenue (Rs mn) Net cash flow (Rs mn)

2,446

Capitalisation (Rs mn)

94,167

Discount rate NPV – next year (Rs mn) FD shares outstanding of GVK (mn) Per share value (Rs)

3,261

15% 18,467 1,579 10.2

GVK per share value (Rs)

3.7

Fair value per share next year (Rs)

4.3

Source: RHH

19

GVK Power & Infrastructure

GMR-DIAL sets healthy precedent for airport land bank valuations

We assume a mix of land lease with deposit and lease with own construction for MIAL

Initiating Coverage

11 August 2009

Valued at Rs 4.3/share, benchmarked on GMR-DIAL deal We have valued the real estate venture very conservatively at Rs 4.3/share for GVKPIL, basing our assumptions on land sales achieved by the GMR-led DIAL (Delhi International Airport). The GMR-DIAL deal was highly lucrative and offers a window into the potential for Mumbai assets, as outlined below: ™

GMR was able to put on the block six pieces of land of different sizes for competitive bidding. In total, DIAL received 60 bids, which when finalised covered a total area of 17.01 acres for a built-up area of 2.1msf. The bids were based upon an annual licence fee, which allowed DIAL to garner an upfront deposit of Rs 6.95bn (including a refundable portion of Rs 4.7bn and an infrastructure development deposit of Rs 2.3bn).

™

We understand that for the aforesaid plots, GMR would be charging an average lease rental of ~Rs 70–75psf/month over the stipulated 30-year period post construction.

A mix of land leasing and own construction the best option As far as MIAL is concerned, we have noted that the management is not in a hurry to monetise the real estate assets, though the project master plan is complete. This is because the ADF sanction has eased funding constraints and the anticipated improvement in pax and ATM volumes by FY11, along with lower commodity prices will aid smooth completion of the project. Also, given that Rs 50bn of debt has been tied up, MIAL may not opt purely for land leasing as in the case of DIAL. In our view, it will most likely opt for a mix of land lease, own development and commercial land sales. We conservatively value the real estate project at Rs 18.5bn (Rs 4.3/share) based on a mix of land lease with deposit and lease with own construction. Our valuation is based on a low-deposit, high-lease rental model for the first phase of monetisation. Here, we expect it to lease out land with a developable area of 3.2msf over the first two years starting FY11 and collect a deposit of Rs 5.8bn. Initial lease rental realisations are pegged at Rs 55psf/month, escalating at 5% p.a.

Our project execution cycle is 3.2msf by 2017 and 19msf by 2025

We estimate that MIAL will build a total of 19.3msf over the next 15 years and lease this out at a starting rate of Rs 120psf/month. We are building in an average construction cost of Rs 1,900psf. Our project execution cycle assumes the completion of 3.2msf by 2017 and the entire 19msf by 2025, which we believe is conservative. We have employed a discount rate of 15%. For one-time deposit funds, we have assumed a rate of Rs 1,800psf against Rs 2,285psf in the case of DIAL.

Key risks to real estate project Execution risk HDIL is tasked with the rehabilitation of slum dwellers occupying airport land. The first phase is to be completed by January ’10, with 20,000 slum unit dwellers to be relocated. This is one-fourth of the estimated 80,000-plus units, though the government pegs the figure at closer to 65,000 units. Delays in land clearance can impact execution. Funding risk Though we expect MIAL to initially adopt the refundable deposit method to finance its airport capex and real estate opex requirement, much of the future growth is dependent on own construction for which equity investment and debt financing have to be cleared.

20

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Roads: Steady revenue generator Operates the six-lane, 90km JaipurKishangarh expressway on BOT basis

Jaipur-Kishangarh Expressway – First BOT project in India GVKPIL wholly owns the SPV (GVK Jaipur Expressway Private Limited – GJEPL) that has built India’s first toll-based BOT project. The company now operates the six-lane, 90km stretch of the Jaipur-Kishangarh expressway, which forms a part of National Highway No. 8 (NH8) connecting Delhi and Mumbai. As per the project concession agreement, GJEPL will share with NHAI the excess revenue over the projected revenue that it receives in any accounting year (to the extent of 40% on an equal share basis). Fig 30 - Key project details and assumptions Project details

Assumptions

Length of road (km)

90.4

Equity stake (%)

100

Traffic increase - From FY09 to FY20

3%

6,230

Toll increase (every year)

4%

- Debt

4,361

Interest cost

- Equity

1,869

- Government grant

2,110

Total project cost (Rs mn)

Total concession period (years)

9.09%

20

Start date of toll

01-Apr-05

End date of toll

28-Mar-23

Construction period (months)

24

Source: RHH, Company

20-year concession period ends Mar ’23

The project has a 20-year concession period, which will end in March ’23. It was completed six months ahead of schedule, and commercial operations commenced from April ’05, from which time GJEPL has been collecting toll. Fig 31 - Jaipur–Kishangarh Expressway

Part of a busy traffic corridor connecting Delhi to Mumbai

Source: Google Maps

9.3% CAGR in bottomline over FY06FY09

Expressway belongs to a high-traffic corridor leading to steady revenues The expressway being a part of NH8, which is a busy traffic corridor connecting Delhi to Mumbai, has been highly profitable due to faster-than-expected traffic growth. The NH8 connects the major commercial cities of Mumbai, Surat, Vadodara, Ahmedabad and Jaipur with the capital and hence witnesses heavy vehicular traffic. Over the past three years, it has posted a 9.3% CAGR in bottomline.

21

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Traffic witnessed a marginal growth of 1.9% in FY09 on account of the economic slowdown. However, with the economy picking up, traffic on the expressway witnessed an 8% YoY growth in Q1FY10. Also, revenues grew by 14%, of which 8% was attributable to vehicular volume growth and the remaining 6% to toll growth. We, however, expect a conservative 3% increase in vehicular traffic every year going forward. Fig 32 - Income statement Income Statement

FY07

FY08

FY09

FY10E

FY11E

FY12E

Revenue

1,157

1,369

1,459

1,562

1,674

1,793

27

29

35

57

83

123

1,184

1,397

1,494

1,619

1,758

1,916

Other income Total revenues O & M Expenses Periodical Routine

-

-

11

11

11

11

106

130

95

300

300

100

29

22

29

31

33

36

Employee cost NHAI’s share of toll fee

20

78

77

87

85

95

Admin exp

39

62

73

78

84

90

Total O&M expenses

193

293

284

507

513

331

EBIDTA

991

1,106

1,105

1,112

1,245

1,585

84

79

74

69

71

83

Interest

260

252

217

192

168

144

Depreciation

293

262

266

266

266

266

PBT

EBITDA Margin (%)

438

593

622

654

810

1,174

Taxation

90

156

106

111

138

200

Net Profit

348

437

535

542

673

975

Source: RHH

Traffic mix biased towards high-toll multi-axle vehicles Being an industrial corridor, the Mumbai–Delhi route is dominated by multi-axle vehicles and trucks. In FY09, multi-axle vehicles accounted for 41.3% of the total vehicular traffic. The average toll rate for such vehicles is 6.5x that of a passenger car. We believe this predominance of high-toll multi-axle vehicles on the expressway would drive future revenues for the project.

Multi-axle average toll rate 6.5x that of a passenger car

Fig 33 - Vehicular mix (Average daily volume) (Mn)

Cars

LCVs

Buses

Trucks

Fig 34 - Vehicular toll rates

Multi-axle

50

(Rs)

9.6

7.7

5.8

6.4

6.6

6.8

7.0

7.2

7.5

FY14E

9.3 2.8

FY13E

9.0 2.7

FY12E

8.3 2.5

8.8 2.7

FY11E

8.0 2.4

8.5 2.6

FY10E

0

8.0 2.8

22.2

22.8

19.7

21.5

FY09

10

19.1

20.9

FY08

20

18.8

20.3

FY15E

40 30

Cars Trucks Multi-axle Average toll rate

PCU

Source: Company, RHH

2.9

600

LCVs Buses Heavy 545

500 400 434 300 324

407 244

200 200 100 0

122 63

99 50 FY08

FY09

FY10E

FY11E

FY12E

FY13E

Source: Company, RHH

Valued at Rs 7.9bn or Rs 5/share

22

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

We have valued the Jaipur-Kishangarh expressway using the FCFE approach and discounted the cash flows at 14% cost of equity. We value the road project at Rs 7.9bn or Rs 5/share.

Valuation based on FCFE discounted by 14% cost of equity

Fig 35 - Key financials and Valuation (Rs mn)

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY17E

FY18E

FY19E

Revenue

1,562

1,674

1,793

1,921

2,057

2,204

2,360

2,529

2,709

2,901

EBIDTA

1,112

1,245

1,585

1,739

1,904

2,095

2,297

2,514

2,754

3,024

Tax

(111)

(138)

(200)

(230)

(262)

(299)

(337)

(378)

(423)

(469)

Interest

(192)

(168)

(144)

(120)

(96)

(72)

(48)

(24)

-

-

Working capital

1

1

1

1

1

1

1

1

1

1

Capex

-

-

-

-

-

-

-

-

-

-

(265)

(265)

(265)

(265)

(265)

(265)

(265)

(265)

(265)

-

FCFE

544

675

977

1,125

1,282

1,460

1,648

1,848

2,067

2,556

NPV

6,948

NPV (one-year fwd)

7,920

Change in debt

Value per share

5

Source: RHH

Financial overview Consolidated revenues to clock robust CAGR of 112% over the next two years

Power business to light up future revenues We expect GVKPIL’s consolidated revenues to log a robust CAGR of 112% over the next two years. The strong growth will arise from commencement of the JP-II and Gautami power plants in Q1FY10. In FY08 and FY09, revenues from the power segment accounted for ~71% of the topline while the balance 29% came from the roads segment. We expect power to account for 93% of GVKPIL’s consolidated revenues over FY10E-FY11E. Consolidated revenues do not include MIAL since it is treated as an associate of the company and hence consolidated at the PAT level. Fig 36 - Segmental revenues (Rs Mn)

Power

Road

25,000 1,674

20,000

1,562

15,000 10,000 5,000

19,182

1,369

1,459

3,331

3,679

FY08

FY09

21,460

0 FY10E

FY11E

  Source: RHH

Margin crunch in FY10 as new power plants become operational – to ease in FY11

But margins would be squeezed We expect a compression in EBITDA and net profit margins for GVKPIL in FY10 owing to the commencement of two new power plants and periodic maintenance of turbines at JP-I. The EBITDA margin is projected to dip from 34.3% in FY09 to 25.9% in FY10, while the net profit margin would drop from 20.7% to 6.5%. The fall in net income margin would be sharper on account of higher depreciation and interest costs. However, we see margins improving from FY11 onwards.

23

GVK Power & Infrastructure

Initiating Coverage

Fig 37 - EBITDA margin trend (Rs Mn)

EBITDA

8,000

4,000

5,380 25.9

1,875

(%)

7,199

39.9

6,000

2,000

Fig 38 - Adjusted net income margin trend EBITDA Margin (R)

34.3

31.1

1,763

0 FY08

FY09

11 August 2009

FY10E

45 40 35 30 25 20 15 10 5 0

(Rs Mn) 2,500

Adj net income margin (R) 2,318

35 30

1,355

20.7

25

1,364

20

1,064

1,000 500

15 6.5

10.0

0

FY11E

Source: RHH, Company

(%)

28.8

2,000 1,500

Adj net income

10 5 0

FY08

FY09

FY10E

FY11E

Source: RHH, Company

Company profile The GVK Group has businesses in the power, infrastructure, paper, hospitality, and biotechnology sectors. GVKPIL is the holding company of the group’s infrastructure business and operates diversified infrastructure assets under three broad verticals: energy, transportation and urban infrastructure. Under the energy vertical, the company is engaged in power generation, coal mining and oil & gas exploration. In the transportation vertical, it is into airport management & development and operations of roads & expressways. The urban infrastructure vertical comprises SEZ development. Fig 39 - GVKPIL’s structure GVK Power & Infrastructure Ltd.

ENERGY

TRANSPORTATION

URBAN INFRASTRUCTURE

GVK Industries Ltd. (217 + 220 MW)

Mumbai International Airport Ltd. (36.63%)

GVK Perambalur (SEZ) Pvt Ltd.

Gautami Power Ltd. (464 MW)

GVK Jaipur Expressway Pvt Ltd.

Alaknanda Hydro Power Co Ltd. (330 MW) Goriganga Hydro Power Pvt Ltd. (370 MW)

Holding Company

GVK Power (Goindwal Sahib) Ltd. (540 MW)

100% Subsidiary

GVK Coal (Tokisud) Co Pvt Ltd. (52 MT)

Associate

Seregarha Mines Ltd. (67 MT) (44.45%) GVK Oil & Gas Ltd. (7 Deepwater Blocks)

  Source: RHH, Company

24

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

GVKPIL (formerly known as Jegurupadu Operating & Maintenance Company) was incorporated in December ’94. Initially, it was a holding company for certain power projects of the GVK Group, and also an operations and maintenance service provider to such power assets. GVKPIL’s current focus area is the development, management, operation and maintenance of various infrastructure assets, while the construction portion is outsourced. During FY07 and FY08, the company undertook substantial corporate restructuring, bringing many of the promoter-owned companies under GVKPIL as subsidiaries. Fig 40 - Equity history Event February ’06: IPO

May ’07: QIP

February ’08: Share split July ’09: QIP

Amount raised Rs 2.6bn

Rs 12.2bn

Rs 7.2bn

Comment 8.27mn shares at a face value of Rs 10 with a premium of Rs 300/share 37.57mn shares of Rs 10 each with a premium of Rs 315/share Equity share of Rs 10 face value split into 10 shares of Re 1 face value each 173.3mn shares priced at Rs 41.35/share

Source: Company, RHH

25

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Consolidated financials Profit and Loss statement

Balance sheet Y/E March (Rs mn)

FY08

FY09

FY10E

FY11E

Cash and cash eq

1,643

1,562

8,345

7,638

Accounts receivable

652

643

1,659

1,834

Inventories

227

442

1,503

1,519

Other current assets

2,356

1,579

5,649

6,583

Investments

7,068

3,214

6,155

6,619

10,367

12,535

44,695

44,697

4,727

6,360

36,470

34,265

Y/E March (Rs mn)

FY08

FY09

FY10E

FY11E

Revenues

4,700

5,138

20,745

23,134

17.9

9.3

303.8

11.5

1,875

1,763

5,380

7,199

(7.8)

(6.0)

205.2

33.8

776

780

2,051

2,206

EBIT

1,099

983

3,330

4,992

Gross fixed assets

Growth (%)

(10.4)

(10.5)

238.6

49.9

Growth (%) EBITDA Growth (%) Depreciation & amortisation

Interest

431

334

2,418

2,450

Other income

619

202

187

247

1,287

851

1,098

2,789

Income taxes

239

100

259

511

Effective tax rate (%)

18.5

11.8

23.6

18.3

-

12

-

-

508

319

440

899

1,355

1,076

1,364

2,318

EBT

Extraordinary items Min into / inc from associates Reported net income Adjustments

-

12

-

-

Adjusted net income

1,355

1,064

1,364

2,318

Growth (%)

124.7

(21.5)

28.3

69.9

Shares outstanding (mn)

Net fixed assets CWIP

13,501

38,502

17,012

32,012

Intangible assets

7,548

7,230

6,853

6,476

Deferred tax assets, net

(886)

(880)

(874)

(867)

Other assets

-

-

-

-

Total assets

36,837

58,651

82,772

96,079

193

350

1,364

1,426

Other current liabilities

77

953

3,183

3,327

Provisions

28

36

124

139

Accounts payable

Debt funds

12,910

29,798

42,213

52,669

Other liabilities

1,764

4,285

4,125

4,438

Equity capital

1,406

1,406

1,579

1,579

Reserves & surplus

20,460

21,823

30,182

32,501

Shareholder's funds

21,866

23,229

31,761

34,080

Total liabilities

36,837

58,651

82,772

96,079

15.6

16.5

20.1

21.6

FY08

FY09

FY10E

FY11E

1,405.8

1,405.8

1,579.1

1,579.1

1.0

0.8

0.9

1.5

61.9

(27.2)

14.2

69.9

-

-

-

-

Y/E March (Rs mn)

FY08

FY09

FY10E

FY11E

Y/E March

Net income + Depreciation

2,130

1,855

3,415

4,525

Profitability & Return ratios (%)

Non-cash adjustments

(4,049)

(7,285)

(691)

265

EBITDA margin

39.9

34.3

25.9

31.1

Changes in working capital

(1,313)

(32)

(2,815)

(904)

EBIT margin

23.4

19.1

16.1

21.6

Cash flow from operations

(3,232)

(5,462)

(91)

3,886

Net profit margin

Capital expenditure

(2,099)

(2,294)

(10,294)

(14,625)

(41)

(1,673)

(2,941)

(464)

(0)

(50)

525

40

Cash flow from investing

(2,140)

(4,017)

(12,711)

(15,048)

Issue of equity

11,981

-

7,168

-

Issue/repay debt

(2,428)

6,679

12,415

(96)

-

-

FDEPS (Rs) (adj) Growth (%) DPS (Rs)

Cash flow statement

Change in investments Other investing cash flow

Dividends paid

BVPS (Rs)

Financial ratios

28.8

20.7

6.6

10.0

ROE

9.7

4.7

5.0

7.0

ROCE

6.1

3.1

5.1

5.4

Receivables (days)

49

46

20

28

Inventory (days)

54

49

27

41

10,456

Payables (days)

43

40

10

127

-

Current ratio (x)

18.1

3.2

3.8

3.7

Quick ratio (x)

8.1

1.6

0.4

0.4

Working Capital & Liquidity ratios

Other financing cash flow

(293)

275

-

-

Change in cash & cash eq

3,792

(2,526)

6,783

(706)

Turnover & Leverage ratios (x)

Closing cash & cash eq

1,643

1,562

8,345

7,638

Gross asset turnover

0.5

0.4

0.7

0.5

Total asset turnover

0.1

0.1

0.3

0.3

Interest coverage ratio

2.5

2.9

1.4

2.0

Adjusted debt/equity

0.6

1.3

1.3

1.5

Economic Value Added (EVA) analysis Y/E March

FY08

FY09

FY10E

FY11E

WACC (%)

12.6

11.7

11.3

11.3

3.2

2.0

4.1

5.4

EV/Sales

20.8

19.0

4.7

4.2

Invested capital (Rs mn)

31,081

55,111

67,728

82,535

EV/EBITDA

52.1

55.4

18.2

13.6

EVA (Rs mn)

(2,917)

(5,314)

(4,872)

(4,878)

P/E

42.4

58.2

50.9

30.0

(9.4)

(9.6)

(7.2)

(5.9)

2.8

2.7

2.2

2.0

ROIC (%)

EVA spread (%)

Valuation ratios (x)

P/BV

26

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Quarterly trend Particulars

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Revenue (Rs mn)

1,330

1,095

1,043

1,670

3,322

YoY growth (%)

40.5

21.9

1.0

(8.4)

149.8

(27.0)

(17.7)

(4.7)

60.0

99.0

QoQ growth (%) EBITDA (Rs mn)

504

468

432

360

944

EBITDA margin (%)

37.9

42.7

41.4

21.5

28.4

Adj net income (Rs mn)

406

304

223

143

327

YoY growth (%)

207.9

(23.0)

(44.7)

(66.4)

(19.3)

QoQ growth (%)

(4.5)

(24.9)

(26.7)

(36.0)

129.4

DuPont analysis (%)

FY07

FY08

FY09

FY10E

FY11E

Tax burden (Net income/PBT)

71.5

105.2

124.9

124.2

83.1

Interest burden (PBT/EBIT)

68.7

117.1

86.6

33.0

55.9

EBIT margin (EBIT/Revenues)

30.8

23.4

19.1

16.1

21.6

Asset turnover (Revenues/Avg TA)

18.4

14.8

10.8

29.3

25.9

383.0

228.4

211.7

257.2

271.6

10.7

9.7

4.7

5.0

7.0

Leverage (Avg TA/Avg equtiy) Return on equity

Shareholding pattern

Company profile GVKPIL is the holding company of GVK group’s infrastructure

(%)

business and operates diversified infrastructure assets under three broad verticals: energy, transportation and urban infrastructure. Under the energy vertical, the company is engaged in power generation, coal mining and oil & gas exploration. In the transportation

vertical,

it

is

into

airport

management

&

Dec-08

Mar-09

June-09

Promoters

60.9

60.9

60.9

FIIs

19.8

17.8

17.0

6.4

8.6

9.2

12.9

12.7

12.9

Banks & FIs Public

development and operations of roads & expressways. The urban infrastructure vertical comprises SEZ development.

Stock performance

Recommendation history Date

Event

11-Aug-09 Initiating Coverage

Reco price Tgt price 44

50

Reco Buy

60 50

●

Buy

40 30 20 10 Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

27

GVK Power & Infrastructure

Initiating Coverage

11 August 2009

Coverage Profile By recommendation (%) 60 50 40 30 20 10 0

By market cap (US$) (%) 60 50 40 30 20 10 0

53 36 11

Buy

Hold

Sell

55 34 11

> $1bn

$200mn - $1bn

< $200mn

Recommendation interpretation Recommendation

Expected absolute returns (%) over 12 months

Buy

More than 15%

Hold

Between 15% and –5%

Sell

Less than –5% Recommendation structure changed with effect from March 1, 2009

Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for a stock and our recommendation.

Religare Capital Markets Ltd th

4 Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road, Vile Parle (E), Mumbai 400 057.

Disclaimer This document is NOT addressed to or intended for distribution to retail clients (as defined by the FSA). This document is issued by Religare Hichens, Harrison & Co Plc (“Hichens”) in the UK, which is authorised and regulated by the Financial Services Authority in connection with its UK distribution. Hichens is a member of the London Stock Exchange. This material should not be construed as an offer or recommendation to buy or sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action or any other matter. The material in this report is based on information that we consider reliable and accurate at, and share prices are given as at close of business on, the date of this report but we do not warrant or represent (expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. Any opinion expressed (including estimates and forecasts) is given as of the date of this report and may be subject to change without notice. Hichens, and any of its connected or affiliated companies or their directors or employees, may have a position in any of the securities or may have provided corporate finance advice, other investment services in relation to any of the securities or related investments referred to in this document. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this briefing note. Hichens accepts no liability whatsoever for any direct, indirect or consequential loss or damage of any kind arising out of the use of or reliance upon all or any of this material howsoever arising. Investors should make their own investment decisions based upon their own financial objectives and financial resources and it should be noted that investment involves risk, including the risk of capital loss. This document is confidential and is supplied to you for information purposes only. It may not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever. Neither this document, nor any copy of it, may be taken or transmitted into the United States, Canada, Australia, Ireland, South Africa or Japan or into any jurisdiction where it would be unlawful to do so. Any failure to comply with this restriction may constitute a violation of relevant local securities laws. If you have received this document in error please telephone Nicholas Malins-Smith on +44 (0) 20 7382 4479.

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