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Initiating Coverage
Initiating Coverage 11 August 2009

Infrastructure – Positive

CMP TARGET RATING RISK

GVK Power & Infrastructure Rs 44 Rs 50 BUY HIGH

Future is bright
BSE NSE BLOOMBERG
™ Power – the prolific cash cow: Power assets will be the immediate value driver
532708 GVKPIL GVKP IN
for GVK Power & Infrastructure (GVKPIL), with three plants totalling 901MW
currently operational and enjoying gas feedstock availability of 100%. The 20%
Company data
merchant sale clause for the JP-II and Gautami plants further enhances the
project dynamics. GVKPIL has three more plants under implementation with Market cap (Rs mn / US$ mn) 68,933 / 1,441

1,240MW of capacity scheduled for commissioning over 2012–15. Fuel Outstanding equity shares (mn) 1,579
connectivity has been secured by two coal blocks with estimated reserves of Free float (%) 33.0
119mmt. Driven by power assets, cash from consolidated operations is expected Dividend yield (%) -
to increase from Rs 1.5bn in FY09 to Rs 2.9bn in FY10 and Rs 4bn in FY11. We 52-week high/low (Rs) 51 / 10
value the three plants at Rs 18.2bn based on DCF (1.5x P/BV on FY11E). 2-month average daily volume 23,018,930

™ MIAL – a long-term value multiplier: The GVK-led Mumbai International Airport

(MIAL), which operates India’s busiest airport, will substantially drive the Stock performance
company’s value over the long term. The possibility of a further increase in Returns (%) CMP 1-mth 3-mth 6-mth

aeronautical charges by 10% (we have factored in a 5% annual escalation) or a GVKPIL 44 24.4 72.1 119.0
shift to regulated WACC-based aero revenue would enhance value for BSE Power 2,844 9.3 33.2 56.3
shareholders in the immediate term. We value the project at Rs 59.4bn i.e., Sensex 15,075 11.6 29.0 56.7
Rs 14/share for GVKPIL’s shareholders.
P/E comparison
™ Real estate – a goldmine waiting to happen: MIAL has the right over 198 acres
(x) GVK P o wer & Infrastructure Industry
of prime land adjoining the Mumbai airport project. The real estate master
80
plan will be unveiled shortly and would greatly enhance feasibility of the 58.2
50.9
60 42.4
airport project and potentially transform it from a utility model to an abnormal 40 24.8 23.4 21.4
profitability play. We have assigned a conservative valuation of Rs 6.7bn (Rs 20
4.3/share) to the real estate assets and await unveiling of the master plan. 0
FY09 FY10E FY11E
™ 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. Valuation matrix

™ New ventures – adding another dimension: GVK has other business interests (x) FY08 FY09 FY10E FY11E

including oil & gas blocks and SEZs (2,882 acres of land in hand), which P/E @ CMP 42.4 58.2 50.9 30.0

could enhance shareholder value in the longer run. At present, we value these P/E @ Target 48.1 66.1 57.9 34.1
ventures to the extent of equity infused in the respective projects, i.e., at Rs EV/EBITDA @ CMP 52.1 55.4 18.2 13.6
248mn or Rs 0.2/share and Rs 1.9bn or Rs 1.2/share respectively.
RHH vs consensus
™ SOTP target of Rs 50 – Buy: We value GVKPIL on an SOTP basis at Rs 50 with FY10E FY11E
various projects pegged at Rs 43/share and net cash of Rs 10.3bn at Parameter
RHH Cons RHH Cons
Rs 6.5/share, which is expected to be infused partly towards new projects and
Sales (Rs mn) 20,745 20,720 23,134 23,062
partly to elevate the equity interest in existing businesses. We initiate coverage
EPS (Rs) 0.9 1.2 1.5 1.8
on the stock with a Buy recommendation.

Financial highlights Profitability and return ratios

(Rs mn) FY08 FY09 FY10E FY11E (%) FY08 FY09 FY10E FY11E
Revenue 4,700 5,138 20,745 23,134 EBITDA margin 39.9 34.3 25.9 31.1
Growth (%) 17.9 9.3 303.8 11.5 EBIT margin 23.4 19.1 16.1 21.6
Adj net income 1,355 1,064 1,364 2,318 Adj PAT margin 28.8 20.7 6.6 10.0
Growth (%) 124.7 (21.5) 28.3 69.9 ROE 9.7 4.7 5.0 7.0
FDEPS (Rs) 1.0 0.8 0.9 1.5 ROIC 3.2 3.0 4.1 5.4
Growth (%) 61.9 (27.2) 14.2 69.9 ROCE 6.1 3.1 5.1 5.4

Vinod Nair Bandish Mehta RHH: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008”
(91-22) 6766 3443 (91-22) 6766 3454 “Honourable Mention” in Institutional Investor 2009 1
nair.vinod@religare.in bandish.mehta@religare.in RHH Research is also available on Bloomberg FTIS <GO> 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 Comments
(%) (Rs mn) (Rs/share)
Power 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
Gautami 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
Mumbai Airport 18.1
Core 36.6 21,744 13.8 Based on DCF, 19x EV/EBITDA on FY11
Real Estate 36.6 6,765 4.3 Based on NAV
Roads
Jaipur Expressway 100 7,920 5.0 Valuation of 1.5x FY10E book value
Others 2,120 1.3
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
Mumbai Airport
Core 15.40 7.37 9.78 FCFE
Real Estate 15.00 - 15.00 NPV
Roads
Jaipur Expressway 14.00 9.09 10.6 FCFE
Source: RHH

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 GVK Power & Infrastructure Initiating Coverage 11 August 2009

Power assets to deliver 69% of cash
flows in FY10 and 73% in FY11
Investment rationale
Power: Immediate cash flow driver
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
Operating cash flows % of total cash flows
(Rs mn) FY10E FY11E FY10E FY11E
O&M Business 100 146 3.4 3.6
Power 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
Jaipur Expressway 798 928 27.3 22.9
GVKPIL (Consolidated) Ex-MIAL 2,923 4,044 100.0 100.0
Source: RHH

Mega expansion drive

Expanding generation capacity from
900MW to 2,100MW over the next six
years
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
Natural Gas & Natural Gas & Natural Gas &
Fuel Type Hydro Coal Hydro
Naphtha HSD HSD
East Godavari East Godavari Shrinagar, Goindwal Sahib, Pithoragarh,
Location Peddapuram, AP
District, AP District, AP Uttarakhand Punjab Uttrakhand

Capacity (MW) 217 220 464 330 540 370

Ownership Interest (%) 100 100 51 100 100 100

Date of commercial
Aug-96 Apr-09 Jun-09 Mar-12 Dec-13 Mar-15**
operation

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 -

15 years for 80% 15 years for 80% 30+20 years for

PPA 18 years 25 Years NA
of capacity of capacity 88% of capacity

20% of the 20% of the 12% free power

Merchant Sale NA NA NA
capacity capacity to Uttrakhand
Source: RHH, Company *Awaiting financial closure ** Estimated ^ Debt entirely repaid

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 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.

Assured ROE, incentive-based tariff structure to generate steady cash flows

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

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
RIL’s KG basin gas supply from April ’09
penalties. With the supply of RIL’s KG basin gas from April ’09, the operating dynamics
to ensure high PLF-based incentives
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
Free cash flow to firm – FCFF (Rs mn) - 630 701 714 728 728
Source: RHH

Equity valued at Rs 6.9bn or Rs 4.4/share

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

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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%).

Fixed tariff, incentive and merchant sales appear lucrative

JP-II and Gautami allowed to sell 20%
of output on merchant basis
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
Total installed capacity (MW) 220 220 220 220 220
PLF (%) 90 95 95 93 92
Units produced (mn kwh) 1,663 1,831 1,831 1,792 1,773
Units sold (mn kwh) 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
Tariff for Merchant Sale (Rs) - 4.5 4.5 4.5 4.5
Revenue (Rs mn) 4,629 5,487 5,487 5,317 5,232
EBITDA (Rs mn) 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

Stable fuel supply to sustain higher plant utilisation

PLF for both plants to remain above Commissioning of the JP-II and Gautami power plants was delayed by over two years
90% 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%.

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GVK Power & Infrastructure Initiating Coverage 11 August 2009

Fig 7 - Key financials of Gautami

Particulars FY10E FY11E FY12E FY13E FY14E
Total installed capacity (MW) 464 464 464 464 464
PLF (%) 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
EBITDA Margin (%) 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
Source: RHH

JP-II valued at Rs 5.5bn or Rs 3.5/share; Gautami stake at Rs 3.7/share

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

Attractive tariff, post-tax ROE of 14% to generate superior returns

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

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 GVK Power & Infrastructure Initiating Coverage 11 August 2009

Fig 8 - Key financials of Alaknanda

Particulars FY13E FY14E FY15E FY16E FY17E
Total installed capacity (MW) 330 330 330 330 330
PLF (%) 40 40 40 40 40
Units produced (mn kwh) 1,156 1,156 1,156 1,156 1,156
Free power to Uttarakhand (mn kwh) 139 139 139 139 139
Units sold (mn kwh) 1,006 1,006 1,006 1,006 1,006
Tariff per unit (Rs) 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
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

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

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
88% of Goriganga hydropower capacity
likely to be sold on merchant basis
Mines to commence from FY11 –
excluded from our estimates for now
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.
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.
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.
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GVK Power & Infrastructure
Awarded 7 deepwater blocks under
NELP VII jointly with BHP
Formal approval received for a 2,800-
acre SEZ in Tamil Nadu
Initiating Coverage 11 August 2009
New businesses hold promise
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.
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
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 GVK Power & Infrastructure Initiating Coverage 11 August 2009

Land acquisition concluded

SEZ land acquisition complete 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.

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 investment in SEZ valued at Rs 1.2/share

Equity 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 Mumbai International Airport (MIAL) operates India’s largest airport, handling close to
international airport 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 FY08 FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY20E FY25E
Gross Sales 5,847 8,529 9,438 10,794 12,832 15,238 17,788 20,631 23,880 42,817 77,433
Growth (%) 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
EBITDA Margin (%) 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

Total Debt 3,058 9,500 14,701 22,842 29,911 38,887 53,106 62,837 58,293 35,570 12,847
Source: RHH

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 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 We are optimistic about a recovery in pax growth over the next three quarters with a
three quarters 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 Fig 15 - Passenger growth at Mumbai – historical trend

(mn) International Domestic (%) (mn) International Domestic (%)

60 Growth (R) 20 8 Growth - QoQ (R) 15
50 15 10
10 6 5
40 0
5 4
30 (5)
0
20 2 (10)
(5)
10 (15)
(10) 0 (20)
0 (15)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
FY08A
FY09A
FY10E
FY11E
FY12E
FY13E
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY26E
FY27E
FY28E
FY29E
FY30E

FY08 FY09 FY10

Source: RHH, AAI Source: RHH, AAI

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 GVK Power & Infrastructure Initiating Coverage 11 August 2009

Expansion plan to maximise non-aero revenues…

Non-aero business accounts for 41% of MIAL’s current business model fails to maximise non-aeronautical revenue sources (oil
revenues 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
X-ray charges 43 1 40 0 44 0 53 0

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

…set for 21% CAGR till 2013

Airport expansion to fuel non-aero
income
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

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 GVK Power & Infrastructure Initiating Coverage 11 August 2009

Aero-related revenue – pax plus regulatory changes the key drivers

Aero inflows account for 39% of Aero-related business (other than cargo handling) accounts for 39% of MIAL’s total
MIAL’s revenue base 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
Avg realisation landing (Rs) 21,932 23,729 26,102 27,407
Domestic (Rs/mt)
<= 21mt 102 102 113 119
<= 100mt 169 169 188 197
> 100mt Rs 16,900 + 227/mt Rs 16,900 + 227/mt Rs 18,788 + 252/mt Rs 19,730 + 265/mt
International (Rs/mt)
<= 21mt NA NA NA NA
<= 100mt 203 225 250 263
> 100mt 22,500 + 303/mt 22,500 + 303/mt 25,047 + 337/mt 26,300 + 354/mt
Aircraft parking charges (Rs mn) 130 197 231 263
Average realisation housing/aircraft (Rs/mt/hr) 5,591 8,660 9,959 10,457
<= 100mt 733 733 814 855
> 100mt 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
Source: RHH

AAI has permitted a 10% hike to MIAL
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 aero-
related 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 Fig 19 - Cargo growth trend

('000) Internataional Domestic (%) ('000 MT) Internataional Domestic (%)

600 Growth (R) 20 1,200 Growth (R) 12
500 1,000 10
15
8
400 800
10 6
300 600
5 4
200 400
2
100 0 200 0
0 (5) 0 (2)
FY08A
FY09A

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

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

Source: RHH, AAI Source: RHH, AAI

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GVK Power & Infrastructure Initiating Coverage 11 August 2009

ADF charge to address funding constraints and aid project completion

ADF, a capital receipt that accrues
entirely to MIAL, has begun to flow in
from FY10
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
Domestic 781 875 1,015 1,116 3,787
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
Depreciation 617 1,022 1,428 1,829
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
Difference including ADF (%) (24) (9) 4 73
Source: RHH

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 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 FY15E Total
Capex 4,517 5,333 9,707 18,000 20,000 20,000 18,680 10,250 400 101,970
Internal Acc. 1,368 904 1,746 3,030 5,195 6,790 4,121 5,617 1,740 27,403
Equity - - 2,000 4,000 4,000 - - - - 12,000
ADF - - - 3,241 3,433 3,778 4,073 - - 14,525
Real Estate Deposits - - 2,496 3,328 - - - 5,824
Debt - 6,443 5,201 7,728 4,876 6,104 10,487 4,633 (1,340) 45,472
Source: RHH

Heavy debt requirement…

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

We expect a 17% CAGR in gross revenue till FY14

Gross revenue CAGR of 17% till FY14, Based on our estimated CAGR of 7.5% in ATM, 7.9% in pax, 6.9% in cargo tonnes and
with positive cash flow from operations 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.

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 GVK Power & Infrastructure Initiating Coverage 11 August 2009

Valued at Rs 59.4bn or Rs 14/share

Ex-real estate, we value the company’s
stake in MIAL at 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%.

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
Non Cash 882 1,305 2,031 2,757 3,467 3,752 3671 3518
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
Cost of Equity 15.4%
Cost of Debt (1-t) 7.4%
WACC 9.8%
Discounted FCFF (13,548) (14,157) (12,158) (9,485) (2,083) 4,677 4,961 4,914
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
P/S 8.8 6.0 5.5 4.8 4.0 3.4 2.9 2.5 2.2 1.9 1.7 1.5
P/BV 88.5 64.2 37.5 16.7 10.7 8.8 7.5 7.1 7.6 7.7 7.5 7.1
Source: RHH

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 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
Average 15.4 14.5 13.9 1.4 1.3 1.3

Asia & Australia-New Zealand

Auckland Intl Airport Ltd New Zealand 19.2 19.4 17.1 1.0 1.0 1.0
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
Average 33.7 21.8 18.7 2.9 2.3 2.1

World Average 27.3 19.2 17.0 2.4 2.0 1.8

Source: RHH, Bloomberg * FY10, FY11 and FY12 figures

MIAL risk parameters

Incremental capacity of 15mn Lower returns on high capex base

passengers at high capex funding
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.

Saturation in the long term owing to expansion constraints

Space constraints at Mumbai airport
would prevent further expansion
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.

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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
EBITDA 2,139 2,440 3,311 3,874 4,777 5,655
EBITDA Margin 25% 26% 31% 30% 31% 32%
Depreciation 254 400 862 1284 2011 2739
EBIT 1,885 2,040 2,449 2,590 2,766 2,916
Interest 197 273 440 633 826 1104
EBT 1,688 1,767 2,009 1,957 1,940 1,812
Other income 39.8 113.2 60 60 - -
Exceptional Items - 540 - - - -
PBT 1,728 1,340 2,069 2,017 1,940 1,812
Tax 629 488 753 734 706 660
Adj PAT 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
Acc Depreciation 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 - - - -
Total assets 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
Provisions 21 49 38 45 55 70
Borrowings 9,500 14,701 22,842 29,911 38,887 53,106
Deferred tax liability 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
Total liabilities & equity 16,862 27,030 42,783 61,827 79,985 100,312
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
Interest coverage 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
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 FY11E FY12E FY13E FY14E FY15E FY16E FY22E
Deposit linked (msf) 1.4 1.8 3.2 3.2 3.2 3.2 3.2
Non deposit linked (msf) 0.6 1.4 2.1 3.2 5.4
Total area (msf) 1.4 1.8 3.8 4.6 5.3 6.5 8.7
Deposit money (Rs mn) 2,496 3,328
Lease revenue (Rs mn) 238 744 1,218 2,032 10,075
Net cash flow (Rs mn) 2,446 3,261 (3,210) (978) (668) (136) 5,119
Capitalisation (Rs mn) 94,167
Discount rate 15%
NPV – next year (Rs mn) 18,467
FD shares outstanding of GVK (mn) 1,579
Per share value (Rs) 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
Our project execution cycle is 3.2msf
by 2017 and 19msf by 2025
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.
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 Jaipur-
Kishangarh 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 Traffic increase
Equity stake (%) 100 - From FY09 to FY20 3%
Total project cost (Rs mn) 6,230 Toll increase (every year) 4%
- Debt 4,361 Interest cost 9.09%
- Equity 1,869
- Government grant 2,110
Total concession period (years) 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

Expressway belongs to a high-traffic corridor leading to steady revenues

9.3% CAGR in bottomline over FY06- The expressway being a part of NH8, which is a busy traffic corridor connecting Delhi
FY09 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
Other income 27 29 35 57 83 123
Total revenues 1,184 1,397 1,494 1,619 1,758 1,916
O & M Expenses
Periodical - - 11 11 11 11
Routine 106 130 95 300 300 100
Employee cost 29 22 29 31 33 36
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
EBITDA Margin (%) 84 79 74 69 71 83
Interest 260 252 217 192 168 144
Depreciation 293 262 266 266 266 266
PBT 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

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

Fig 33 - Vehicular mix (Average daily volume) Fig 34 - Vehicular toll rates
(Mn) Cars LCVs Buses Trucks Multi-axle PCU Cars LCVs
Trucks Buses
50 (Rs) Multi-axle Heavy
Average toll rate
40 600
21.5 22.2 22.8 545
30 18.8 19.1 19.7 20.3 20.9 500
400 434 407
20
300 324
8.5 8.8 9.0 9.3 9.6
8.0 8.0 8.3
2.7 2.8 2.9 244
200 200
10 2.8 2.4 2.5 2.6 2.7
5.8 6.4 6.6 6.8 7.0 7.2 7.5 7.7 122
0 100 99
50 63
0
FY08

FY09

FY10E

FY11E

FY12E

FY13E

FY14E

FY15E

FY08 FY09 FY10E FY11E FY12E FY13E

Source: Company, RHH Source: Company, RHH

Valued at Rs 7.9bn or Rs 5/share

22
 GVK Power & Infrastructure Initiating Coverage 11 August 2009

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

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 - - - - - - - - - -
Change in debt (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
Value per share 5
Source: RHH

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

21,460
10,000 19,182

5,000 1,369 1,459

3,331 3,679
0
FY08 FY09 FY10E FY11E

 
Source: RHH

But margins would be squeezed

Margin crunch in FY10 as new power
plants become operational – to ease in
FY11
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 11 August 2009

Fig 37 - EBITDA margin trend Fig 38 - Adjusted net income margin trend
(Rs Mn) EBITDA EBITDA Margin (R) (%)
(Rs Mn) Adj net income (%)
8,000 39.9 7,199 45 2,500 Adj net income margin (R) 2,318 35
34.3 40
28.8 30
6,000 5,380 35 2,000
30 25
1,355 20.7 1,364
31.1 25 1,500 20
4,000 25.9 1,064
20 15
1,875 1,000
1,763 15
2,000 10
10 500 10.0 5
5 6.5
0 0 0 0
FY08 FY09 FY10E FY11E FY08 FY09 FY10E FY11E

Source: RHH, Company 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. Mumbai International GVK Perambalur (SEZ)

(217 + 220 MW) Airport Ltd. (36.63%) Pvt Ltd.

Gautami Power Ltd. GVK Jaipur Expressway

(464 MW) 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 Amount raised Comment

8.27mn shares at a face value of Rs 10 with a

February ’06: IPO Rs 2.6bn
premium of Rs 300/share

37.57mn shares of Rs 10 each with a premium

May ’07: QIP Rs 12.2bn
of Rs 315/share

Equity share of Rs 10 face value split into 10

February ’08: Share split -
shares of Re 1 face value each

July ’09: QIP Rs 7.2bn 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 Y/E March (Rs mn) FY08 FY09 FY10E FY11E
Revenues 4,700 5,138 20,745 23,134 Cash and cash eq 1,643 1,562 8,345 7,638
Growth (%) 17.9 9.3 303.8 11.5 Accounts receivable 652 643 1,659 1,834
EBITDA 1,875 1,763 5,380 7,199 Inventories 227 442 1,503 1,519
Growth (%) (7.8) (6.0) 205.2 33.8 Other current assets 2,356 1,579 5,649 6,583
Depreciation & amortisation 776 780 2,051 2,206 Investments 7,068 3,214 6,155 6,619
EBIT 1,099 983 3,330 4,992 Gross fixed assets 10,367 12,535 44,695 44,697
Growth (%) (10.4) (10.5) 238.6 49.9 Net fixed assets 4,727 6,360 36,470 34,265
Interest 431 334 2,418 2,450 CWIP 13,501 38,502 17,012 32,012
Other income 619 202 187 247 Intangible assets 7,548 7,230 6,853 6,476
EBT 1,287 851 1,098 2,789 Deferred tax assets, net (886) (880) (874) (867)
Income taxes 239 100 259 511 Other assets - - - -
Effective tax rate (%) 18.5 11.8 23.6 18.3 Total assets 36,837 58,651 82,772 96,079
Extraordinary items - 12 - - Accounts payable 193 350 1,364 1,426
Min into / inc from associates 508 319 440 899 Other current liabilities 77 953 3,183 3,327
Reported net income 1,355 1,076 1,364 2,318 Provisions 28 36 124 139
Adjustments - 12 - - Debt funds 12,910 29,798 42,213 52,669
Adjusted net income 1,355 1,064 1,364 2,318 Other liabilities 1,764 4,285 4,125 4,438
Growth (%) 124.7 (21.5) 28.3 69.9 Equity capital 1,406 1,406 1,579 1,579
Shares outstanding (mn) 1,405.8 1,405.8 1,579.1 1,579.1 Reserves & surplus 20,460 21,823 30,182 32,501
FDEPS (Rs) (adj) 1.0 0.8 0.9 1.5 Shareholder's funds 21,866 23,229 31,761 34,080
Growth (%) 61.9 (27.2) 14.2 69.9 Total liabilities 36,837 58,651 82,772 96,079
DPS (Rs) - - - - BVPS (Rs) 15.6 16.5 20.1 21.6

Cash flow statement Financial ratios

Y/E March (Rs mn) FY08 FY09 FY10E FY11E Y/E March FY08 FY09 FY10E FY11E
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 28.8 20.7 6.6 10.0
Capital expenditure (2,099) (2,294) (10,294) (14,625) ROE 9.7 4.7 5.0 7.0
Change in investments (41) (1,673) (2,941) (464) ROCE 6.1 3.1 5.1 5.4
Other investing cash flow (0) (50) 525 40 Working Capital & Liquidity ratios
Cash flow from investing (2,140) (4,017) (12,711) (15,048) Receivables (days) 49 46 20 28
Issue of equity 11,981 - 7,168 - Inventory (days) 54 49 27 41
Issue/repay debt (2,428) 6,679 12,415 10,456 Payables (days) 43 40 10 127
Dividends paid (96) - - - Current ratio (x) 18.1 3.2 3.8 3.7
Other financing cash flow (293) 275 - - Quick ratio (x) 8.1 1.6 0.4 0.4
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

Economic Value Added (EVA) analysis Total asset turnover 0.1 0.1 0.3 0.3
Interest coverage ratio 2.5 2.9 1.4 2.0
Y/E March FY08 FY09 FY10E FY11E
Adjusted debt/equity 0.6 1.3 1.3 1.5
WACC (%) 12.6 11.7 11.3 11.3
Valuation ratios (x)
ROIC (%) 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
EVA spread (%) (9.4) (9.6) (7.2) (5.9) P/BV 2.8 2.7 2.2 2.0

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
QoQ growth (%) (27.0) (17.7) (4.7) 60.0 99.0
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
Leverage (Avg TA/Avg equtiy) 383.0 228.4 211.7 257.2 271.6
Return on equity 10.7 9.7 4.7 5.0 7.0

Company profile Shareholding pattern

GVKPIL is the holding company of GVK group’s infrastructure (%) Dec-08 Mar-09 June-09
business and operates diversified infrastructure assets under three Promoters 60.9 60.9 60.9
broad verticals: energy, transportation and urban infrastructure. FIIs 19.8 17.8 17.0
Under the energy vertical, the company is engaged in power
Banks & FIs 6.4 8.6 9.2
generation, coal mining and oil & gas exploration. In the
transportation vertical, it is into airport management & Public 12.9 12.7 12.9
development and operations of roads & expressways. The urban
infrastructure vertical comprises SEZ development.

Recommendation history Stock performance

Date Event Reco price Tgt price Reco
60
11-Aug-09 Initiating Coverage 44 50 Buy
● Buy
50

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 By market cap (US$)

(%) (%)
60 53 60 55
50 50
36 34
40 40
30 30
20 11 20 11
10 10
0 0
Buy Hold Sell > $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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