GIPCL - stable Govt. of Gujarat Company


(Ashish Pandey) #1

Hi,

GIPCL has 815MW capacity, very stable, generates FCF of 250-350 crores every year. It wanted to expand capacity, had given contract to Lanco, but Lanco couldn’t fulfill some conditions so took it back. Debt is going down by close to 150 crores per year, gives dividend of 2.5/- per share and very stable, do huge debtors etc.

If u have paid attenntion to recent deals of power sector, informed buyers are paying 5crores per MW EV, GIPCL has currently EV/MW of 2.3Crores. As debt is going down, we should have seen expansion in equity and rerating but somehow they haven’t been able to increase profits drasticaly. One reason can be the prices of coal but that peoblem should be with everyone. Though controlled by Gujarat Govt. it is efficient if we go by numbers and share price was 160+ in the past. June Qtr results are good too. Any more info/opinion on this?

Even NTPC is getting EV/MW of 3.86 which is on the lower side of current deals. One reason could that these companies wont be sold by Govt but still i think these don’t deserve so low multiples if they r doing good…

Ashish


(Ravenrage) #2

2.3 crores/ MW seems dirt cheap. You don’t even get the turbine and its aux. for that.


(DHARMESH) #3

What are sources of growth?It will never trade at higher pe multiples due to poor growth.So its better to invest in growth stock instead of cheap value stock.


(Ashish Pandey) #4

Sources of growth can be two-> first would be to expand capacity like they tried doing some years back and second could be rapid payment of debt which saves the interest.

One thing which stops it from getting proper valuations is that it is a sarkari company and can’t be sold off to anyone just like that, i guess so


(Ashish Pandey) #5

As per annual report 13-14, net debt is just 125 crore, CFO was 310 crore (excluding interest) and company plans to add 300mw


(Ashish Pandey) #6

Gujarat Industries Power Company Ltd has informed BSE that the Company has issued Letters of Intent dated September 01, 2014, to M/s. Leitwind Shriram Manufacturing Ltd., Chennai, for setting up a 51 MW Wind based Power Project in Gujarat, on ERG basis. The Project is expected to go on stream before end of August, 2015.


(Pranav Singh) #7

GIPCL was expecting to get coal mines allotted from the Government, which did not happen. Now, it is planning to install wind power generation capacity of 300 MW. This would create huge debt on their balance sheet.

The key is taking a call on wind energy business. Is it value generating or value destroying. I do not have much idea, although I don’t remember hearing wind energy as a great value creator in India. If you can do some research on wind energy business and let us know, then we could evaluate further.


(Ashish Pandey) #8

I searched on google and found this from govt of india’s website:

Why Wind Energy

  • The project is environment friendly.

  • Good wind potential to harness wind energy.

  • A permanent shield against ever increasing power prices. The cost per kwh reduces over a period of time as against rising cost for conventional power projects.

  • The cheapest source of electrical energy. (on a levelled cost over 20 years.)

  • Least equity participation required, as well as low cost debt is easily available to wind energy projects.

  • A project with the fastest payback period.

  • A real fast track power project, with the lowest gestation period; and a modular concept.

  • Operation and Maintenance (O&M) costs are low.

  • No marketing risks, as the product is electrical energy.

  • A project with noinvestment in manpower.

From another website, found this:

Wind Power Plant Cost in India

The capital cost is slightly higher than fossil fuel power plants but much lower than a solar power plant. For a wind farm, the capital cost ranges between 4.5 crores to 6.85 crores per MW, depending up on the type of turbine, technology, size and location.The Running Cost of a Wind Farm is very low as the fuel cost is zero and operations and maintenance costs are low also.

So if we assume that GIPCL is able to set up 300MW of windpower plants, they would need to invest 300*7Crores = 2100 Cores. Current Debt = 620 crores, cash = 450 cores. CFO/years is 300+ crores. So in five years, cash generated from operations = 1550 crores, current cash = 450 crores so total cash would be 1950. Current debt is 620 crores, suppose new capacity comes with full debt, so total debt would be 2100+620 = 2720 crores.

So net debt AFTER 300 MW capacity materialises = 2720-1950 = 770 crores.

Assuming stock price doesn’t move for the next 5 years, we would be having 815+300 = 1115 MW capacity selling at 1350 crores of MCAP + 770 crores of debt = 2120 crores of EV for 1115 MW. EV would be less than 2 crores. And right now with 815 MW capacity CFO is 300, assuming % increase in capacity and %increase in CFO remains the same, a 2120 crore EV company, having 1115 MW capacity would be generating 300*(1115/815) = 410 crores of CFO. With that CFO, they would be able to pay all the debt in less than 2 years.


(Ashish Pandey) #9

Found this too:

Wind Energy Subsidies in India

  1. Tax incentives a Indian renewable energy companies are entitled to take 80.0% accelerated depreciation on assets employed in renewable energy power generation and benefit from a 10-year tax holiday.
  2. Generation Based Incentives (GBI) )- The Federal Government gives an incentive of 50 paisa per unit of wind power supplied to the grid by independent wind power producers. The incentive is limited to wind farms with a maximum aggregate installed capacity of 4,000 MW.This is over and above the state fixed electricity tariffs for Wind Energy Generation.
  3. **Preferential Tariffs **)- State electricity regulatory commissions (SERCS) are encouraged to set preferential tariffs for power produced from Wind energy.You can read the detailed tariffs for wind energy at the _CWET_ Link: http://www.cwet.tn.nic.in/html/information_wdh.html

Wind Zone Tariff (Rs./kWh)

  • Wind Zone 1 (200-250 W/m2) Wind 5.63
  • Wind Zone 2 (250-300 W/m2) Wind 4.90
  • Wind Zone 3 (300-400 W/m2) Wind 4.17
  • Wind Zone 4 (above 400 W/m2) Wind 3.75
  • **Renewable Purchase Obligations **)- This is the Indian name for RPS which means the obligation to purchase a fixed amount of electricity generation from renewable energy sources.Each state in India has coordinated with the Central Regulator (CERC) to fix a RPO level.
  • **_Renewable Energy Certificates_ Link: http://greenworldinvestor.com/2010/11/18/renewable-energy-certificate-policy-starts-in-india-what-you-need-to-know-and-who-will-benefit/ (REC) **)- On January 14, 2010, CERC issued the Central Electricity Regulatory Commission Terms for recognition and issuance of Renewable Energy certificate for Renewable Energy Generation.
  • **CDM/Kyoto Protocol **)- Indian Renewable Energy Plant Operators can also benefit from the CERs issued under the Kyoto Protocolas Clean Development Mechanism (CDM).This improves the project returns and is a form of developed country funds transfer to developing countries in reducing carbon emissions.

I think with subsidies, low cost of running wind farms, if GIPCL comes up with 300MW capacity in next 5-6 years, they would generate much more than 410 crores of FCF.


(P Puch) #10

Please look at the Gas Plants before taking a call on this Company. Out of 300 MW; 165 MW has a PLF below 10% and the remaining 140MW is at 50-60%. The main reason for such low PLF is that the Company finds it uneconomic to generate power at current gas prices which it mainly procures from RIL and GAIL. If gas prices go up as expected then I would expect PLF levels to fall even further; infact if gas prices double then the gas plants might make no economic sense especially due to improved economics of thermal plants. Also keep in mind that the gas plants are ~15-19 years old.


(Ashish Pandey) #11

Hi P Puch,

Thanks for mentioning that. As i mentioned above, company is generating 300+ crores CFO RIGHT NOW, including the petty performance of gas plants as you said. “Out of 300 MW; 165 MW has a PLF below 10% and the remaining 140MW is at 50-60%.” --> i need to look at it again but if that is the case, then rest 500MW is generating all the CFO, no?

Also we ae talking about new capacity, which is Wind Mills.

Also, in my post above i took a horizon of 5 years for 300 MW capacity of winf mills but i came to know that wind mills get set up only in 6 months or so. In case it is true and wind mills cost 7 crores to set up and CFO is 300+ crores, i think then every year GIPCL can set up 40-45MW additional wind mill capacity and debt will go down sooner than we imagined in above posts, please reply


(Pranav Singh) #12

Hi Ashish,

GIPCL has some strengths like cheap valuation and also that ti owns coal mines that generate enough coal to be self dependent for thermal power generation. But, in my opinion a little more clarity regarding Gas based plants and a lot more clarity regarding returns of wind energy are needed for it to be a substantial holding.

A study of wind generators, their performance history, good and bad of the business, etc. need to be studied. Published government tariff do not tell the whole picture. Government has not paid the tariff that it promised to solar developers. Did not even pay the banks what it promised them for opening new accounts. Is putting 2000 crores in wind energy, which is more than the EV of the company, a good investment or capital misallocation?


(P Puch) #13

FCF after maintenance Capex of 30-40CR is around 260CR. If the 140MW gas plant PLF levels also come down to 10% with the gas price hike then we should assume a FCF of 200CR going forward.

I will assign 0 value to wind right now as there is too much risk. Though there are government incentives I would request you to do research on how many wind power projects have failed recently. 30% PLF levels were promised but at the end 8-9% PLF levels were attained causing massive losses. There are enough examples of this.

200CR of FCF for a **minimal or zero **growth Company with an EV of 1500-1600CR is not really that cheap in my opinion.

_ “Out 50-60%.” _


(Ashish Pandey) #14

i think the case ur making is the worst case scenario and what i m making is the best one, future lies somewhere in-between :slight_smile:


(P Puch) #15

Agree Ashish but I always want to have sufficient margin to be wrong. In GIPCL’s case there are lots of question marks so more margin is required to feel secure in the investment.


(Ashish Pandey) #16

I guess current price offers sufficient margin, mcap 1350 crores, net debt zero(as per AR13-14 debt was 620 crores, cash was 475 crores, we r 2 qtrs down, company would have generated 150 crores so net debt should be kind of zero right now). Even if u assign gas station values of zero, remaining 500MW should be valued at 500*5 crores = 2500 crores at least, no?


(P Puch) #17

Use NTPC EV/MW. Debt is still there of 250CR. So value is around ~1600CR. Not very attractive with its risk profile. You can find better investments. Remember Mgmt of such companies is not really accountable to investors (as it keeps changing every 1-2 years) and they have no incentive if the Company does well. As a result such companies forever trade at a discount.


(vaibhav) #18

EV/MW of NTPC is around 3.6-3.7 Crores. I found GIPCL quite attractive on the valuation front. Even if one is not totally convinced about the 350MW wind power addition plans, it could still be a good short term investment bet. Even PSUs are attractive investments at some point imho, I invested in Indian [email protected] and [email protected] 266 a few days back which is giving decent returns in short time-period.

Disc: Invested


(Ashish Pandey) #19

U r correct, NTPC too is getting low valuations right now as everybody is concerned about negatives of power sector but recent deals which have happened, people have got 5-6 crores per MW. Of course GIPCL can’t be sold just like that but it shows that it is undervalued. Also, if a company is generating CFO, has almost now debt, if it increases dividends, or expands, stock price should go up.

Agree with this too “You can find better investments.”–> I was saying GIPCL is NOT the only company but one of the companies to look at.


(Pranav Singh) #20

Lets not worry too much about missing a profitable investment or two, but keep honing our skills (knife). We will get opportunities to cut many a watermelon, only the knife has to be sharp at that time.

~best of luck to all of us!