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Guj. Ind. Power Co.: Higher interest dents profits - Views on News from Equitymaster
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  • Feb 22, 2011 - Guj. Ind. Power Co.: Higher interest dents profits

Guj. Ind. Power Co.: Higher interest dents profits
Feb 22, 2011

Gujarat Industries Power Co. Ltd. recently declared its 3QFY11 results. The company reported a 29% YoY growth in sales during the quarter. Its net profit however fell by 15% YoY, led by higher interest costs. Here is our analysis of the results.

Performance summary
  • Sales grow by 29% YoY during 3QFY11, 11% YoY during the nine-month period (9mFY11).
  • Operating margins rise to 26.6% during the quarter. Lower fuel costs aid this rise in margins.
  • Despite a 36% YoY growth in operating profits, net profits fall by 15% YoY. This is mainly due to a substantial rise in interest costs. The profits would have fallen further but for a tax credit from previous years.

Financial performance snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Power generation (m units) 1,052 965 -8.3% 2,984 2,824 -5.3%
Sales 2,383 3,078 29.2% 6,958 7,743 11.3%
Expenditure 1,782 2,259 26.8% 5,282 5,846 10.7%
Operating profit (EBDITA) 601 819 36.3% 1,676 1,897 13.2%
Operating profit margin (%) 25.2% 26.6%   24.1% 24.5%  
Other income 5 2 -59.2% 29 17 -42.2%
Interest 35 267 668.0% 129 426 229.3%
Depreciation 219 388 76.9% 665 876 31.8%
Profit before tax 352 166 -52.8% 911 612 -32.8%
Tax 64 (78)   205 (205)  
Profit after tax/(loss) 288 244 -15.4% 707 817 15.7%
Net profit margin (%) 12.1% 7.9%   10.2% 10.6%  
No. of shares       151.3 151.3  
Diluted earnings per share (Rs)*         7.8  
P/E ratio (x)*         11.6  
* On a trailing 12 month basis

What has driven performance in 3QFY11?
  • Gujarat Industries Power Co. Ltd. (GIPCL) reported a good 29% YoY growth in net sales during the quarter. This was largely a result of higher power tariffs, even as its power generation fell by 8% YoY during the quarter. As per the company, it lost substantial generation from Unit 3 of its Surat Lignite Power Plant as it was under repair during the first two months. The management has indicated that this issue (repair) is now behind and the plant is running at around 80-85% PLF (plant load factor, or capacity utilisation).

  • Led by decline in raw material costs, GIPCL recorded an improvement in its operating margins during 3QFY11. Margins stood at 26.6% during the quarter, as against 25.2% in 3QFY10.

  • GIPCL recently expanded its capacity at Surat (Unit 3), while has led to the increase in the company's interest and depreciation charges. While the former was up almost seven times over the 3QFY10 level, the latter was up by 77% YoY during the quarter. This led to the company seeing a 53% YoY drop in its profit before tax. However, aided by a tax credit during the quarter, net profit fell by only 15% YoY.

What to expect?
At the current price of Rs 90, the stock is trading at a multiple of 0.9 times our estimated FY13 book value per share. GIPCL's 9mFY11 performance is in line of meeting our full year FY11 estimates. As such, we maintain our view on the stock from a 2-3 years perspective.

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