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Guj. Ind. Power: Slowly shifting gears - Views on News from Equitymaster
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Guj. Ind. Power: Slowly shifting gears
Nov 20, 2014

Gujarat Industries Power Company (GIPCL) declared its results for the quarter and half year period ended September 2014. During the quarter, the company reported a 3% YoY and 29% YoY increase in revenues and profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 3% YoY during 2QFY15.
  • Operating profits rise by 6% YoY. The company's operating margins expand by 0.8% to 30.8%.
  • Lower depreciation charges (largely due to change in accounting policy) coupled with higher other income lead a profit rise of 29% YoY during the quarter.
  • During 1HFY15, the company's revenues and profits rise by 7% YoY and 32% YoY respectively.

Standalone financial performance
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 3,246 3,338 2.8% 6,375 6,806 6.8%
Expenditure 2,273 2,311 1.7% 4,321 4,490 3.9%
Operating profit (EBDITA) 973 1,027 5.5% 2,054 2,316 12.8%
EBDITA margin (%) 30.0% 30.8%   32.2% 34.0%  
Other income 58 174 200.3% 132 263 100.0%
Depreciation 398 283 -28.9% 791 671 -15.2%
Interest 223 236 6.1% 453 443 -2.2%
Profit before tax 411 682 66.0% 942 1,466 55.7%
Tax 98 278 182.6% 266 576 116.5%
Profit after tax/(loss) 313 404 29.4% 676 890 31.7%
Net profit margin (%) 9.6% 12.1%   10.6% 13.1%  
No. of shares (m)       151.3 151.3  
Diluted earnings per share (Rs)*         13.7  
Price to earnings ratio (x)         6.4  
(*On a trailing 12-month basis)

What has driven performance in 2QFY15?

  • GIPCL reported a revenue growth of 3% YoY during the quarter ended September 2014. Growth was led by an overall 15% YoY increase in volumes. On a QoQ basis, volumes were lower by about 10%.

  • The company's plant availability factor (PAF) remained mixed, ranging from 72% to 99%; PLFs were quite volatile raging from 7% (for Vadodara-II) to 82% for SLPP-II (Surat plant).

  • Given the change in depreciation policy as specified by CERC, the company's depreciation charges reduced substantially during the quarter. That coupled with higher other income and a marginal rise interest costs led to 29% YoY rise in profits during the quarter.
What to expect?
At the current price of Rs 87, the stock is trading at a multiple of over 6.4 times its trailing twelve month earnings and about 0.7 times its FY14 book value per share.

As per the company's management, GIPCL has invited offers through the international competitive bidding route to set up 300 MW of wind power capacity on a turnkey basis in the state of Gujarat. In early September, the company issued a Letter of intent (LoI) for setting up a 51 MW wind based plant to Leitwind Shriram Mfg. Limited. This project is expected to go on stream by August next year. This is be a positive sign in our view given the company's expansion plan seems to be back in place. Funding this project will not be an issue according to us given the strong balance sheet and cash flows generated by the company. Not to mention the company's relatively low debt to equity of 0.4 at the end of FY14 allows it to take on more debt without straining the balance sheet.

However there does not seem to have been much improvement in terms of the company's fuel requirements. The impact is in the form of lower utilisation rates at its gas based plants.

Having said that, we believe the downside risk to the current price is capped given the attractive valuations, the 2.8% dividend yield as well as the strong cash flows of the business. Nevertheless, given the many uncertainties we maintain our hold view on the company from a long term perspective.

We would like to reiterate to our subscribers that for the purpose of diversifying risk, no stock should form more than 5% of one's portfolio. Please visit our asset allocation page for more details.

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