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GVK Power & Infrastructure

(GVKP IN, Mkt Cap US$0.9b, CMP Rs.26, Buy)
GVK has announced that GVK Airport Holdings (SPV structure created for Airport operations) has signed share purchase agreement with Bid Services Division Mauritius (BSDM) to buy 13.5% stake in Mumbai Airport (MIAL) at US$280m. Transaction is subject to regulatory approvals (including RBI approval) and both parties have a 90 days window. The deal will thus be concluded in 1QFY12E.

The acquisition cost of USD280m includes financing cost for 3 year LC (Letter of Credit) opened by Standard Chartered Bank, in favour of GVK. We calculate that the acquisition cost, net of financing cost is ~US$240m. Thus, the transaction values Mumbai airport at US$1.7b (vs our current valuation of US$1.4b).

Since LC is a non-fund based limit, the financing costs for GVK is expected at ~1.5-2.0% and we further understand that the same will not be classified as debt in the consolidated books of GVK (but would get reported as contingent liability). This, we believe, would provide: 1) Three year window for GVK to finance the acquisition debt, 2) Consolidated DER would not increase (FY11E consolidated net DER 1.8x) and 3) would not be EPS dilutive (as higher share of profit from MIAL would more than offset the financing charges).

At the CMP of Rs.27, the stock trades at a PER of 18x FY12E and 14x FY13E. We arrive at a SOTP based target price of Rs.41/sh, comprising of Airport (including negative contribution for Bangalore airport) at Rs.13/sh, Roads at Rs7/sh, Power portfolio at Rs.20/sh (post money after PE transaction) and investment in other projects, cash at Rs.2/sh.

We will be reviewing our estimates and price target post further clarity from the management. Maintain Buy.