Investors can consider buying the Gujarat Industries Power Company (GIPC) stock at the current market price with a medium- to long-term perspective.
The company is in the growth mode and is increasing generation capacity that will add to earnings from 2009-10. Meanwhile, the existing generation units are stabilising and improving their operating efficiencies.
At the current price of around Rs 80, the stock is valued at a discount to its peers such as Neyveli Lignite Corporation; re-rating could happen sooner than later given the company’s improving performance and its investment in capacity expansion.
Growing fastGIPC now runs three power stations adding up to a total capacity of 555 MW, which is just about 10 per cent of the total installed power generation capacity in Gujarat.
The company’s capacity will increase to 805 MW by March 2009 when the new units under construction are commissioned. GIPC supplies its power to the State electricity board under power purchase agreements already signed.
The company has a healthy fuel mix for generation. The two older units at Vadodara (aggregate capacity of 305 MW) run on natural gas while the third and the latest one at Surat (250 MW) commissioned in 2000 is fuelled by lignite from the company’s captive mine. GIPC has firm allocation for more than 90 per cent of its gas requirements from GAIL and a fallback allocation for the remainder. But it has faced problems in gas availability in the past for its second 160 MW unit in Vadodara and has had to resort to naphtha which is dearer.
Operating margins have been hit due to this; the low plant load factor at this station has also not helped overall performance.
The new capacity of 250 MW under implementation will be fuelled by lignite and will be a pit-head plant. The company has adequate lignite reserves in its mine to fuel the new capacity comfortably in the long term.
This is expected to ensure fuel security and also help in increasing margins as the pit-head location will save on transportation costs for lignite. The first 125 MW unit of this plant is scheduled to go on stream in November 2008 and the second by March 2009 which means that initial revenues from these projects will get reflected in the financial statements of 2009-10.
Meanwhile, GIPC has initiated a study for another new 500-600 MW plant at the pit-head of another mine that it has been leased by the Gujarat Government. This augurs well for the long-term growth plans of the company.
Sound financialsThough it has had challenges in the past in the form of declining margins, GIPC has managed to stabilise its financials well in the last couple of years.
Thanks to a significant reduction in debt, interest costs have dropped appreciably (20 per cent lower in 2006-07) enabling the company to post good earnings growth in the last few quarters.
The falling debt has also lowered the leverage of the company which will come in handy now as it embarks on borrowings for its ongoing expansion project at Surat. However, the flip side is that interest charge could now increase and could pressure margins in the near-term till the projects are commissioned.
More gas, higher priceMargins could also come under some pressure when gas supply contracts come up for renewal in the next couple of years.
Though gas availability is set to improve significantly in the region, it could come at a relatively higher cost than the subsidised prices that GIPC has been used to till now.
What lends confidence though is that Gujarat has an 8.5 per cent energy deficit which goes up to 13.6 per cent during peak hours.
Given this large deficit, GIPC’s power will be consumed even at marginally higher prices. Shareholders can buy the stock with a two- to three-year holding period in mind.