GVK Power & Infrastructure: Investors advised to exit stock…

Capex commitments in the current high interest rate environment are likely to increase the interest burden of GVK Power &Infrastructure(GVK). Availability of gas for its power plants would be an added concern in the near term.

BUSINESS
GVK Power and Infrastructure (GVK) is a holding company that has assets across various sectors such as power, airports, roads and natural resources through various special purpose vehicles (SPV). GVK operates the Mumbai and Bangalore airports.
In the power division, GVK has three operational gas-fired power plants with a combined operational capacity of 901 MW and has additonal 870 MW capacity under construction.

INVESTMENT RATIONALE
Gas availability for three of GVK's gas-fired power plants is a concern due to the reduction of gas supply from ONGC and Reliance. Lack of clarity on gas availability has forced it to defer expansion of its gas-fired power plants.
GVK's consolidated debt has increased as a result of aggressive expansion. It has expanded its stake in the Mumbai and Bangalore airports, which has consequently increased its debt by approximately Rs 1,800 crore last year. In addition, Mumbai airport has planned capex of Rs 9,800 crore of which Rs 4,200 crore is to be funded by debt. It is perceived that there has been a cost escalation of nearly Rs 3,000 crore from the original estimation.
The company has a 50.5% stake in Mumbai airport. Any unfavourable change in tariff rates by the Airports Economic Regulatory Authority of India, which is currently reviewing the tariff rates at Mumbai airport, would impact earnings from the airport.
GVK recently acquired a 10% stake in Australia's Hancock Prospecting for $1.26 billion. The deal includes acquiring a majority stake in coal resources, railway line and the port infrastructure projects of Hancock Coal. For this, the company would have to incur additional capex.

FINANCIALS & VALUATIONS
GVK's consolidated debt increased by 24% to Rs 6,901 crore in September 2011. This figure is likely to go up as the company has increased its stake in the Bangalore airport to 43% for $231 million in October 2011.
In a high interest rate situation, existing debt as well as additional capital expenditure would substantially increase the company's interest burden in future. This was 46% of its EBIDTA in six months ending September 2011.
A fall in interest rates may provide respite for the company's stock. However, availability of raw materials and capex commitments are likely to curtail its profits in the near term. Investors are advised to exit this stock.