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Guj. Ind. Power: Profits rise on lower fuel costs - Views on News from Equitymaster
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Guj. Ind. Power: Profits rise on lower fuel costs
Jun 2, 2010

Gujarat Industrial Power Co. recently announced its FY10 results. The company has reported a 19% YoY decline in sales while net profits have grown by 24% YoY. Here is our analysis of the results.

Performance summary
  • Sales fall by 19% YoY in FY10, largely due to passing on the benefits of lower fuel costs to customers in the form of lower electricity tariffs.
  • Operating margins surge to 23.3% during the year, from 18.2% in FY09. Improvement aided by lower fuel costs (as percentage of sales).
  • Net profits grow by 24% YoY during FY10, helped by higher operating margins and lower interest costs. Profit for 4QFY10 rise 21% YoY.
  • Recommends a dividend of Rs 2.5 per share (dividend yield of 2.3%).


Financial performance snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Sales 2,823 2,520 -10.7% 11,550 9,391 -18.7%
Expenditure 2,181 1,921 -11.9% 9,443 7,203 -23.7%
Operating profit (EBDITA) 642 599 -6.6% 2,107 2,188 3.9%
Operating profit margin (%) 22.7% 23.8%   18.2% 23.3%  
Other income 29 22 -24.8% 162 139 -14.5%
Interest 62 33 -46.6% 296 162 -45.1%
Depreciation 223 216 -3.4% 884 880 -0.4%
Profit before tax 386 373 -3.4% 1,089 1,284 17.8%
Tax 87 11 -86.9% 231 216 -6.6%
Profit after tax/(loss) 298 361 21.0% 858 1,068 24.4%
Net profit margin (%) 10.6% 14.3%   7.4% 11.4%  
No. of shares       151.3 151.3  
Diluted earnings per share (Rs)         7.1  
P/E ratio (x)         15.9  

What has driven performance in FY10?
  • Gujarat Industries Power Co. Ltd. (GIPCL) recorded a 19% YoY decline in sales during FY10. This was on the back of passing on of the benefits of lower fuel costs to customers in the form of lower electricity tariffs. Otherwise, the company recorded a growth in generation and volume sales of electricity during the year. The company recently commissioned the fourth unit of 125 MW under Phase II expansion of its Surat lignite power project. With this expansion, the company's total power generation capacity stands at 805 MW. We see the benefits of this expansion flowing into the numbers of the current fiscal (FY11). The commissioning of this plant also frees up the company's huge capital work in progress that is now converted into fixed assets. This will help the company generated returns on a higher equity base, which will help its profits substantially during the current year.

  • GIPCL saw a sharp improvement in its operating margins during FY10. These stood at 23.3% during the year, as against 18.2% in FY09. This improvement in margins was due to lower fuel costs, which fell from 73.5% of sales in FY09 to 65% in FY10.

  • GIPCL's net profits grew by 24% YoY during the year. This was largely helped by higher operating margins and lower interest cost. The company also benefited from lower taxes, as its effective tax rate dropped to 17% in FY10, from 21% in FY09. These factors helped the company in 4QFY10 as well as profits grew by 21% YoY.

What to expect?
At the current price of Rs 112, the stock is trading at a multiple of 1.2 times our estimated FY12 book value per share. The company's FY10 sales performance has come in lower as compared to our estimates. However, net profits are higher as against our estimates due to better operating margins. The commissioning of new capacity in Surat will aid its profits in the current and upcoming years. We will soon update our research report on the company with the latest numbers and forward estimates and subsequently our view on the stock.

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