GVK Power & Infra may raise debt to fund Australia’s Hancock buy…

As flagged by Spark earlier, GVK Power and Infrastructure, which will acquire two coal mines from Australia's Hancock Prospecting for about $2.2 billion, could likely fund the acquisition by raising debt without much strain on key financial parameters as the Hyderabad-based company's leverage is comfortably below industry peers.

The board of GVK is expected to meet soon to take a formal decision on the transaction that has also been approved by its lead banker,

ICICI Bank.

 
The board meet may focus on the route to be adopted to fund the acquisition. According to information available with the Economic Times Intelligence Group, GVK Power's debt:equity ratio - which typically denotes the ability of the company to raise loans - is favorably placed compared to its competitors such as GMR Infrastructure and Lanco Infratech, who have also acquired coal mines in the recent past to feed their power plants.

GVK Power and Infrastructure's current debt-equity ratio is 1.2 which is much lower than GMR's 2.6 and Lanco's 2.7. As on March 31, 2011, GVK's net debt was Rs 5,548 crore, while its equity stood at Rs 4,540 crore. Power companies typically have a large debt-equity ratio due to the high cost of setting up the projects where large loans are contracted.

 
In this industry, the ratio typically goes up to 2.5 to 3. The special purpose vehicle route, where a newly-formed company would take on the debt, is the most preferred option for power companies. Even if the company were to raise debt of about Rs 4,500 crore for the Hancock transaction, the debt equity of GVK Power will still be lower than its peers, at 2.2, according to an analysis by ETIG