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Guj. Ind. Power Co.: But for the tax credit... - Views on News from Equitymaster

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Guj. Ind. Power Co.: But for the tax credit...
Nov 18, 2010

Gujarat Industries Power Co. Ltd. recently declared its 2QFY11 results. The company reported a 5% YoY growth in sales during the quarter. Its net profit grew by 25% YoY, aided by a one-time tax write-back. Here is our analysis of the results.

Performance summary
  • Sales grow by a marginal 5% YoY during 2QFY11, 2% YoY during the first half 1HFY11.
  • Operating margins fall to 20.5% during the quarter from 22.2% during the previous quarter (2QFY10). Higher staff and fuel costs lead to this decline in margins.
  • Largely due to a big tax credit from previous years, 2QFY11 net profits grow by 25% YoY. Profit before tax down by a substantial 72% YoY.


Financial performance snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Power generation (m units) 799 774 -3.1% 1,883 1,908 1.3%
Sales 2,046 2,140 4.6% 4,575 4,665 2.0%
Expenditure 1,592 1,702 6.9% 3,501 3,587 2.5%
Operating profit (EBDITA) 454 438 -3.6% 1,075 1,078 0.3%
Operating profit margin (%) 22.2% 20.5%   23.5% 23.1%  
Other income 13 11 -15.9% 25 15 -38.8%
Interest 40 119 198.5% 95 159 68.4%
Depreciation 224 273 21.9% 445 488 9.5%
Profit before tax 203 57 -72.0% 560 446 -20.3%
Tax 78 (98)   141 (128)  
Profit after tax/(loss) 125 155 24.5% 419 574 37.1%
Net profit margin (%) 6.1% 7.3%   9.1% 12.3%  
No. of shares       151.3 151.3  
Diluted earnings per share (Rs)*         8.1  
P/E ratio (x)*         13.2  
* On a trailing 12 month basis

What has driven performance in 2QFY11?
  • Gujarat Industries Power Co. Ltd. (GIPCL) reported a marginal 5% YoY growth in net sales during 2QFY11. Sales were impacted by a lower power generation. The company generated 3% lesser power during the quarter as compared to the corresponding quarter of the previous year. As per the company, this was owing to some operational issues at the expanded capacity of its Surat plant.

  • As discussed above, GIPCL faced some operational issues at its Surat plant that led to lower generation during the quarter. However the company still had to incur fixed costs of staff and operation and maintenance. This impacted its operating margins during the quarter, with the same dropping to 20.5% from 22.2% in 2QFY10. Subsequently, operating profits fell by 4% YoY.

  • GIPCL recently expanded its capacity at Surat, while had led to the increase in the company’s interest and depreciation charges. While the former almost tripled over the 2QFY10 level, the latter was up by 22% YoY. This led to the company seeing a 72% YoY drop in its profit before tax. However, aided by a tax credit of during the quarter, the net profit managed to grow by 25% YoY.

What to expect?
At the current price of Rs 107, the stock is trading at a multiple of 1.1 times our estimated FY13 book value per share. Given the performance in 1HFY11, we would have to lower our FY11 estimates for the company. However, we maintain our view on the stock from a 2-3 years perspective.

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