ICICI Direct : Buy Gujarat Industries Power Company limited

(BSE: 517300 | NSE: GIPCL | ISIN: INE162A01010)

Company Background Gujarat Industries Power Co Ltd (GIPCL) was promoted by Gujarat Urja Vikas Nigam Ltd (GUVNL – erstwhile Gujarat Electricity Board), Gujarat State Fertilizers and Chemicals Ltd (GSFC), Gujarat Alkalies and Chemicals Ltd (GACL) and Petrofils Cooperatives Ltd. It commissioned its first power project, a 145-MW gas-based combined cycle power plant, in February 1992 at Vadodara. Power from this plant is distributed to its promoters in proportion to their original equity holding. The company expanded its capacity and commissioned a 160-MW naphtha and gas-based combined cycle power plant in November 1997 as an independent power producer (IPP) with a power purchase agreement (PPA) with GUVNL. Later, it commissioned a 250-MW lignite-based power plant in Surat. The company is implementing a 2×125-MW expansion project, including the development of a captive mine, that would increase the generating capacity of its lignite-based plants to 500 MW.

Investment Rationale State government initiatives a boon The recent initiatives by the Gujarat state government provide a better platform for state-run enterprises and in particular the panchratnas , which include GIPCL. The initiatives include reforms in the power sector, restructuring the Gujarat Electricity Board, near completion of the Sardar Sarovar project, provision of cheaper fuel and developing infrastructure for facilitating domestic trade, import, export and logistics

Expansion to drive future growth The company is setting up a lignite-based power plant. It has already awarded the engineering, procurement and construction (EPC) contract for its 2×125 MW expansion project at Surat to Bhel for Rs 1,199.5 crore (excluding cost of spares, lignite shed, service tax and works contract tax). It is expected that unit-3 will start commercial operation by November 2008 and unit-4 will start commercial operation from March 2009. The company already has long-term and guaranteed power off-take arrangements for all its existing power plants. This would help the company focus more on improving efficiency.

Proximity to fuel sources The company has the advantage as most of its plants are situated close to the sources of its raw material. Its gas-based plant at Vadodra is near to the gas grid (it procures gas from GAIL and naphtha from Indian Oil Corporation). The proximity of its plants to fuel sources helps the company reduce costs and enables it produce power at competitive rates. The company uses lignite from its captive mines for its Surat plant. The lignite mines could support the Surat plant for another 30 years, even with capacity of 1,000 MW with an average PLF of 80%.

Customers tied-up The company operates power plants with a total installed capacity of 555 MW. Electricity produced from the lignite-based power plant at Surat with an installed capacity of 250 MW is supplied to GEB under a power purchase agreement (PPA). The company has two other power plants in Baroda Station I and Station II with installed capacities of 145 MW and 160 MW respectively. The gas based Baroda Station I plant supply 28% of the electricity generated to its promoters and the rest to GEB. Meanwhile, the gas and naphtha-based Baroda Station II plant supplies to the GEB through a PPA. With customers already tied up, the company does not have to look for buyers and can focus more on enhancing efficiency.

More expansions in offing The company’s board has considered a proposal to set-up a 500-MW lignite-based plant with the option of increasing it by 20% at Surat. The techno-economic feasibility report and detailed project report for the proposed expansion project will be taken up soon.

Risks & Concerns The high cost of naphtha is a serious concern and the company is focusing on reducing its dependence on naphtha, Availability of gas is a critical issue for which the company is getting into tie-ups for additional gas supplies.

Financials The company has displayed stability in its financial performance. Revenue grew from Rs 744.67 crore in FY05 to Rs 795.58 crore in FY07. Net profit during the same period increased from Rs 103.67 crore to Rs 182.92 crore on account of higher other income and improvement in interest cost. Interest cost has declined significantly due to debt restructuring. The company’s debt-equity ratio came down from 1.96 in FY05 to 0.57 in FY07 on positive cash flows.

Valuations At the current price of Rs 76.50, the stock discounts its FY07 EPS of Rs 11.8 by 6.48x. On an EV/EBITDA basis, it is trading at 3.85x FY07 earnings. A peer like Neyveli Lignite is trading at a P/E multiple of 26x. We rate the stock an outperformer with a 3-6 month price target price of Rs 92, an upside of 20%.

Technical Outlook The stock has been moving in an upward trend in the range of Rs 50 to Rs 76. On the weekly charts above Rs 76, the stock made a strong breakout on good volumes and ios attempting to touch the previous resistance of Rs 82. Above Rs 82, the stock could re-rest Rs 96. The MACD momentum indicator made a positive crossover while the RSI is in overbought levels, suggesting short consolidation.

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Every week, the ICICIdirect research team selects a stock based on fundamental and/or technical parameters, which is likely to give a return of 20% or more over a 3-6 month perspective.

Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.


  • raga

    well good thing