Australian coal mine buy likely to weigh on GVK Power prospects

After Adani Enterprises and Lanco Infratech, the GVK Group is the latest to buy coal mining assets abroad , including a 79 per cent stake in Australia's Alpha Coal and Alpha West Coal and a 100 per cent stake in Kevin's Corner.

Though the acquisition is being routed through GVK Coal Developers Singapore Pte, the India-listed GVK Power may have to assume liabilities for the debt to be raised for the ramp-up of the coal operations.

This may weigh on the company's prospects if the acquisition takes longer than expected to pay off, as the company already has a large portfolio of power and other infrastructure projects to execute. GVK Power stock which gained as much as 7 per cent intraday, ended the day with 0.59 per cent loss.

The deal value is $1.26 billion and these projects have high quality coal resource base of 7.9 billion tonnes. Adani Enterprises last year bought 10.4 billion tonnes of coal assets for a value of $1.5 billion .

GVK's mines will begin operations from end-2014 with peak mining capacity expected to be as high as 89 million tonnes per annum.

Complex structure

However, the deal structure is quite complex. Initially, the listed GVK Power and Infrastructure will subscribe to a 10 per cent stake in the Singapore company. Apart from the initial outlay to buy the assets, ramping up of operations at these mines may entail substantial capital expenditure of about $10 billion.

GVK Power has an option of purchasing 20 million tonnes a year from these mines to fuel 7,500 MW of thermal power capacity.

According to reports, the Singapore company may put in $260 million while the rest of the amount would have to be funded by debt.

GVK Power would also provide corporate guarantee for 49 per cent of the outstanding loan amount taken for the acquisition.

Additionally, it will pledge its stake in GVK Energy and Transportation to secure equity requirements and debt. This would expose GVK Infrastructure to execution risk.

If there is any delay in execution and a consequent cash flow delay, the impact on GVK Power could be high.

GVK Power and Infrastructure has an option of increasing its stake in the project to 49 per cent which would entail a Rs 600-crore outgo over the next two years.

This is the period during which the company would also see its debt levels rise due to the debt component in its various projects, including the Mumbai Airport.

This may put further pressure on leverage. The FY11 consolidated debt-equity ratios stood at 1.6 times.

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