GVK Power & Infrastructure: Profitability likely to come under further pressure

Lower gas availability, high interest income and short term borrowings led to GVK Power & Infrastructure (GVK) posting a loss of Rs 1 crore in the year ending march 2012. In the near term, the company’s profitability is likely to come under further pressure.

In the quarter to March 2012, GVK’s two operational power plants worked at 55 to 60% capacity because of lower gas availability from Reliance and ONGC. Due to the gas shortage, the company had to close down one of the two boilers at its Gautami power plant.

However, the fall in revenues in the power division was negated by a healthy growth in its road and airports division. Earnings before interest and taxes from the road division grew 32% on the back of a tariff revision in July 2011. Besdes, the company was able to show profits in the airports division due to higher passenger growth in its airports.

The company’s debt-to-equity as of March 2012 stands at 3.2, which is above comfort levels. This is likely to increase as substantial capital expenditure for road and power projects are to be incurred in this financial year. The company is yet to receive financial closure for its Shivpuri-Dewas road BOT project and Hancock mine development.

It is estimated that, the company will require nearly Rs 2000 crore of additional debt for funding the capex for this year. To optimise debt and to fund the equity portion of its projects, GVK is looking to raise funds through a stake sale at Airports holding company. It is also planning to monetise real estate at the Mumbai Airport.

GVK is currently trading at a Price to book value (P/BV) of 0.6 while its peer - GMR Infra is trading at a P/BV of 1.2. A lower valuation for GVK appears justified due to its concerns on funding its capex.