Buy or Sell: GVK Power stock

Can GVK Power pull off such a large acquisition?

The stock has declined 4.8 percent since late March,when the news gained currency that it is a contender for Hancock mines. In comparison,the benchmark index has gained 3.2 percent.

In 2011 thus far,the stock has lost about 38 percent compared with the benchmark index8217;s 5.8 percent. The stock is at 16.2 times the estimated price-to-earnings ratio for FY12,as per Thomson Reuters Knowledge.

BUY 8211; ACQUISITION UNLIKELY VIA GVK POWER

Of 18 brokerages that cover the stock,eight have 8220;strong buy8221; recommendation on it,and 6 have 8220;buy8221;,according to I/B/E/S estimates.

8220;The acquisition will not be through the listed entity,that is the indication we get,and there would not be much impact on the listed firm8217;s stock prices,8221; said an analyst with a Mumbai-based brokerage,who has 8220;outperform8221; rating on the stock.

8220;We believe that the acquisition would be through a group firm,8221; said the analyst,who did not want to be identified as he is not authorised to speak to the media.

If the acquisition is through it,GVK Power would have to own up an additional capex and working capital burden of 7 billion,spread over five to six years.

8220;It is just the scale of this acquisition which will make people go into a wait and watch mode,8221; said Vijaykumar Bupathy,Chennai-based analyst at Spark Capital.

8220;But if they can pull off an acquisition like this over the long term,I definitely think it can pay off. It could be a risky bet but is a high value bet,8221; said Bupathy who has a 8220;buy8221; on the stock due to his weightage on factors other than those of power and coal.

8220;The resource coal is in short supply,there is a huge market for it,8221; he said.

NEUTRAL 8211; STRAIN LIKELY ON FINANCIALS

Three out of 18 brokerages have rated the stock as 8220;hold8221; and one has ascribed a 8220;sell8221; rating,according to I/B/E/S estimates.

8220;GVK has in mind growth proposals for which the equity requirement could be more than its current market capitalisation. Large growth aspirations could pressure leverage and dilution risk would be enhanced,8221; Deepika Belani,analyst at J.P. Morgan told Reuters.

8220;The market is treating these developments negatively,8221; she said,resulting in the brokerage downgrading the stock in April to 8220;Neutral8221; from 8220;Overweight8221;.

GVK Power would go in for an acquisition only if the funding is in place,and 8220;if the funding is in place,then what is the problem?8221; asks a Mumbai-based analyst,who declined to be identified.

Her brokerage,which had put the company 8220;Under Review8221; a month ago from 8220;Buy8221;,is awaiting clarity from airport regulator on aeronautical charges and looking at how the company will monetise its airport land before re-rating the stock.