GVK reported 1% revenue growth and a PAT decline in its 3Q FY3/09 results, in line with our expectations.
Weak revenue bookings were a result of non-availability of gas in its power plants, with Jegrupada-I running at only a 63% Plant Load Factor (PLF), much below the threshold requirement.
The PAT decline was accentuated due to lower other income and a one-time hit of Rs128m from payment of arrears to Airport Authority of India (AAI) employees on account of the 6th pay commission pay revisions.
These employees are on the payroll until May 2009, post that GVK would not have to take the extra hit, which should help boost margins.
Incremental clarity is emerging on gas availability, with the Bombay High Court modifying its earlier interim order, now allowing Reliance Industries to sell gas from KG-D6 to third parties as soon as production starts, with a final judgement expected by 15 March 2009.
However, we are still building in gas availability from September 2009. Our sensitivity analysis suggests a 4% increase in the target price if gas is made available even by June 2009.
Two of GVK’s upcoming power plants – Alaknanda and Govindwahil Sahib – could benefit from the recent Central Electricity Regulatory Commission’s (CERC) ruling that ROEs would be increased to 15.5% from 14%. However, management said that clarity is yet to emerge on the guidelines.
We have increased our FY09E earnings by 22% and FY10E earnings by 8% to incorporate better margins.
GVK remains our preferred pick in the developer space. The stock has excellent growth prospects, with gas availability coming up, stable road projects and a financially closed Mumbai airport project.
The stock is currently available at attractive valuations of 0.9x FY10E P/BV.