GIPC - Power play

IPO REVIEW

Gujarat Industries Power Company (GIPC), which operates gas-based and lignite-based power plants, is a listed company on the BSE and NSE is entering the capital market for its capital expansion plans. It plans to raise part of the equity aggregating to Rs 275 crore through a 100 per cent book building route.

The company plans to set up an additional unit of 250 mw of its lignite-based thermal power plant in Surat, apart from a project for development of a captive lignite mine at a total estimated cost of Rs 1448 crores. Analysts expect the price band to be at a discount of 12-15 per cent to its current market price of Rs 87.25.

GIPC is a private sector power generating utility. The company was basically set up with an objective of meeting the energy requirements of its promoter company namely Gujarat Urja Vikas Nigam Ltd. (formerly Gujarat Electricity Board), Gujarat Alkali and Chemicals Ltd., Gujarat State Electricity Corporation Ltd. and Petrofils Cooperative Ltd.

Thus it is assured of continuous power offtake as it has long-term contracts with its customers through memorandum of understanding (MOUs) and power purchase agreement (PPAs).

It currently operates three power plants in Gujarat with a total installed capacity of 555 mw and has two gas-based plants at Vadodara (total 305MW) and one lignite based plant at Surat (250 mw). However, the company's capacity is smaller as compared to its peers - Neyveli Lignite, Tata Power, and Reliance Energy.

The company is assured of its raw material supply namely lignite and gas as its plants are close to the gas grids and have enough lignite reserves. GIPC has been appointed by the government of Gujarat as a nodal agency for setting up lignite-based power projects in South Gujarat.

The company has signed a memorandum of understanding with Gujarat government for commissioning a power plant with an installed capacity of 2000 mw capacity. 
 

FINANCIALS
Rs crores	FY04	FY05	% change
Net sales	745.40	744.70	-0.09
Oerating profit	73.60	132.70	80.30
OPM	9.87	17.82	-
Net profit	67.20	103.70	54.32
NPM	9.02	13.93	-

In FY05, the company's revenues were almost flat at Rs 744.7 crores. However, net profits increased by 54.30 per cent at Rs 103.70 crore as company's expenditure declined by 8.90 per cent at Rs 612 crore.

The outlook on the power sector continues to be bright, say analysts. Government has already announced an ambitious plan viz., 'Power for all by 2012', which requires India's power generation capacity to increase from 114000 mw to 200000 mw by 2012.

Central Electricity Authority has assessed a capacity addition of 60896 mw to be achieved during 11th Plan to meet all India peak demand and energy requirement.

Thermal power requirement would constitute about 55 per cent or 33536 mw of the total demand. This augurs well for all power generating companies including GIPC.

However, there is certain amount of risk involved for the company due to introduction of Electricity Act 2003. It provides for removal of licensing requirements for thermal generators, provision for open access to transmission and distribution networks and removal of restrictions on the right to build captive generation plants. This could lead to increased private sector involvement in the industry.

Also the possibility of increased foreign participation and other power generators using cheaper sources of fuel could pose a threat to the company.

The GIPC stock is currently trading at a trailing P/E of about 8.7x. Competitors like Neyveli Lignite (9.5x), Tata Power (16.5x), Reliance Energy (18.3x) are trading at higher valuations. The company does not have much downside to earnings as its is assured of continuous power offtake through its long-term contracts with customers.

The stock is a safe bet in today's roaring bull market. But as is true for all power companies growth may not be anything extra-ordinary with administered tariffs. Short-term investors can look to make arbitrage profit if the stock is offered at a significant discount to the trading price.

Issue opens on: October 13, 2005
Issue closes on: October 19, 2005.