The Hindu Business Line : Gujarat Industries Power Company: Avoid

INVESTORS can stay away from the book-built public offer of Gujarat Industries Power Company offered in the Rs 63-75 price band. The stock trades at Rs 78 and appears to be fully priced at current levels. Lack of visibility in earnings growth in the medium term till the new project is commissioned is also a deterrent.

Plans for joint venture projects of 2,000 MW in South Gujarat and a foray into power distribution lend optimism; they are, however, still in the preliminary stage and are unlikely to contribute to earnings growth in the medium term. At the upper end of the price band the stock trades at eight times its FY05 earnings and is at a discount to its peers.

Flat top line: Gujarat Industries Power is engaged in generation and distribution of electricity through its gas- and lignite-based power stations. The current public offer of Rs 275 crore is to partly fund the expansion plan of setting-up a 250-MW lignite-fired thermal power plant. The new capacity is scheduled to be commissioned by early 2009.

The proposed plant's estimated project cost of Rs 4.5 crore per MW appears at par with the industry average. As all the three plants are operating at a plant load factor of more than 80 per cent, the growth in revenues is likely to be flatuntil the new plant becomes operational. The earnings growth will be driven by cost efficiencies until the new project goes on stream.

The revenue for the quarter-ended June 2005 was lower by 6 per cent at Rs 188.2 crore compared to the same period last year. Operating profit margins declined from 50 per cent in March 2004 to 39.6 per cent for the quarter ended June 2005; the company attributes this to a maintenance shutdown at one of its units. Sustained dip in interest cost as a result of debt swapping has ensured the bottomline growth. Going forward, the scope for gains on this score may be limited.

Tariff Risk: GIPCL has entered into a memorandum of understanding with Gujarat Urja Vikas Nigam (the State electricity board) Ltd for sale of power from the proposed plant but the nature of tariff has not been finalised. The project will be subject to the guidelines of the Gujarat State Electricity Regulatory Commission, which has proposed a 14 per cent return on equity in its draft tariff guidelines. Hence, the company is hopeful of obtaining the minimum stipulated in the guidelines.

It has entered into long-term contracts with its promoter companies for assured power offtake. The return on equity for the existing gas-based station II and the lignite plant is capped at 13 per cent.

The electricity board has proposed a reduction in the return on equity and the company has opposed this; the matter is now pending a decision by the Government of Gujarat. As the agreements do not fall within the ambit of the guidelines of the regulatory body, there is a risk of further decline in tariffs.

Gas supplies: Supply of gas from Panna Mukta and Tapti through GAIL is through the administered-price mechanism. GAIL has the flexibility to sell gas from this field at market-driven prices. If it pursues such a move, higher prices are likely to tighten GIPCL's margins.

Growth prospects: If the company pursues its plan of setting up two more 1000-MW lignite plants, it has the option of going in for competitive bidding to market the output. If that happens, the company is likely to enjoy higher revenues; this, too, is however likely to benefit the company only over the long term and entail additional resources. The possibility of further equity expansion cannot also be ruled out if these two big-ticket projects are pursued.

An entry into distribution of power will also help diversify and boost margins but this is subject to the government privatising the distribution circles in Vadodara and Anand and the company succeeding in bagging the rights.

Given the risks, the lack of visibility of earnings and the opportunity cost of locking funds for close to four years before the benefits of expansion start to flow, investors can avoid the offer now and evaluate possible exposures later.

Offer details: The company plans to raise Rs 275 crore through this equity offer. The offer, which opened on October 13, closes on October 19. The lead managers to the issue are, Allianz Securities, Enam Financial Consultants, GSFS Capital and Securities and HSBC Securities and Capital Markets. The offer document is available on the Web site of SEBI — www.sebi.gov.in.

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