Vadodara II PPA yet to be signed; TP revised upward to Rs126 on FY19x

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1 Gujarat Industries Power India Equity Research Power February 10, 2017 Result Update Emkay Your success is our success Vadodara II PPA yet to be signed; TP revised upward to Rs126 on FY19x CMP Target Price Rs109 Rs126 ( ) Rating Upside BUY ( ) 15.7 % GIPCL reported subdued Q3FY17 numbers marginally below our estimate due to nonavailability of Vadodara II unit and increased depreciation during the quarter. PAT however increased 26.8% YoY to Rs413mn due to fall in fuel expenses and interest cost. PLF declined across Vadodara I to 58.4% vs 62.6% YoY and for Surat II plants to 64.7% vs 67.4% YoY. PLF across Surat II however increased to 71.8% vs 52.0% YoY. Vadodara II operated at 0% PLF and the plant was not made available during the quarter Core RoE (calculated on quarterly PAT) improved to 3.2% in Q3FY17 vs 2.3% YoY. PPA for Vadodara II is yet to be renewed and the plant remained unavailable during the quarter. GIPCL has till date installed 83MW of wind capacity of the total MW. We have rolled over our valuation to FY19 numbers and revise our target price to Rs126/share based on 0.76x FY19E book. Maintain Buy rating for the stock Strong earnings growth led by lower fuel cost and operating expenses GIPCL reported a PAT growth of 26.8% YoY to Rs413mn (marginally below our estimates). Overall generation declined 5.4% YoY to 930 mn units due to non-availability of Vadodara II plant in Q3FY17, as PPA with GUVNL is not renewed. Generation was also down across Vadodara I and Surat I plant while it improved across the Surat II plant. Consequently, revenue declined 11.1% YoY to Rs3.0 bn while fuel cost was down by 21.4% YoY due to lower generation. The earnings growth in Q3FY17 was further aided by lower other expenses (-10.4% YoY), Interest cost (-16.9% YoY) and tax expenses (-16.1% YoY). PLF declined during the quarter PAF for Vadodara-I/Surat-I/II was 97.9%/84.0%/85.5% during the quarter (vs 97.0%/85.7%/54.1% in Q3FY16). PAF for Vadodara II was zero vs 100% in Q3FY16. PLF declined across Vadodara I to 58.4% vs 62.6% YoY and Surat I plants to 64.7% vs 67.4% YoY. PLF at Vadodara II was zero as the plant was not available during the quarter. Surat II PLF however increased to 71.8% in Q3FY17 vs 52.0% YoY as the plant had faced technical issue during Q3FY16. During FY16-YTDFY17, company has commissioned 83MW of wind power plant in Gujarat, and another 29.4 MW of wind capacity is expected to be installed over next 6 month-1year. Also, work on GIPCL s 80 MW (2 x 40 MW) Solar power projects in Gujarat under the National Solar Mission, Phase II, Batch IV is progressing at a decent pace. The said projects is scheduled to be commissioned by June 17. Revise target price to Rs126 and Reiterate a BUY While the Management has reiterated that delay in renewing Vadodara Unit 2 PPA is mainly due to procedural issues. While the plant is made unavailable, we don t figure out major impact of under recovery as the plant is fully depreciated and debt free. We have rolled over our valuation to FY19 numbers and revise our target price to Rs126/share based on 0.76x FY19E book. Maintain Buy rating for the stock Financial. Snapshot (Consolidated) (Rsmn) FY15 FY16 FY17E FY18E FY19E Revenue 12,091 13,458 15,271 15,775 16,248 EBITDA 4,197 3,836 3,767 3,972 4,139 EBITDA Margin (%) APAT 1,448 1,884 2,083 2,268 2,389 EPS (Rs) EPS (% chg) (22.1) ROE (%) P/E (x) EV/EBITDA (x) P/BV (x) Emkay Research is also available on Bloomberg EMKAY<GO>, Reuters and DOWJONES. Change in Estimates EPS ChgFY17E/FY18E (%) NA Target Price change (%) 8.5 Previous Reco BUY Emkay vs Consensus EPS Estimates FY17E FY18E Emkay Consensus Mean Consensus TP Rs121 Stock Details Bloomberg Code GIP IN Face Value (Rs) 10 Shares outstanding (mn) Week H/L 117 /74 M Cap (Rsbn/USD bn) 16 / 0.25 Daily Avg Volume (nos.) 1,87,551 Daily Avg Turnover (US$ mn) 0.3 Shareholding Pattern Dec '16 Promoters 58.2% FIIs 3.8% DIIs 14.5% Public and Others 23.5% Price Performance (%) 1M 3M 6M 12M Absolute Rel. to Nifty Relative price chart 125 Rs % Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Gujarat Industries Power (LHS) Source: Bloomberg Urmik Chhaya urmik.chhaya@emkayglobal.com Anuj Upadhyay anuj.upadhyay@emkayglobal.com Emkay Global Financial Services Ltd.

2 Exhibit 1: Actual Vs Estimate (Rsmn) Actual Estimate (Emkay) Consensus Estimate Emkay % Variation Consensus Total Revenue 3,038 3,255 3, % -10.6% EBITDA % -2.8% EBITDA Margin (%) bps +2 bps Reported Net profit % -12.6% Comment Revenue was below our expectation primarily due to non-availability of Vadodara II station during the quarter EBITDA was in line with our estimate due to lower than anticipated fuel cost as generation declined during the quarter Pat was marginally below our estimate due to low PLF based incentive Exhibit 2: Quarterly performance Rsmn Q3FY16 Q2FY17 Q3FY17 YoY (%) QoQ (%) YTDFY16 YTDFY17 YoY (%) Revenue 3,418 3,142 3, ,796 9, Expenditure -2,552-2,211-2, ,894-6, as % of sales -74.7% -70.4% -69.2% -70.4% -69.3% Fuel -2,045-1,561-1, ,271-5, as % of sales -59.8% -49.7% -52.9% -53.8% -52.5% Power purchases as % of sales 0.0% 0.0% 0.0% 0.0% 0.0% Other Mfg Expenses as % of sales Employee Cost as % of sales -4.9% -6.0% -6.3% -5.0% -5.7% Other expenditure ,133-1, as % of sales -9.9% -14.7% -10.0% -11.6% -11.1% EBITDA ,903 2, Depreciation EBIT ,011 2, Other Income Interest PBT ,682 1, Total Tax Adjusted PAT Extra ordinary items Reported PAT (Profit)/loss from JV's/Ass/MI PAT after MI Adjusted EPS Margins (%) (bps) (bps) (bps) EBIDTA EBIT EBT PAT Effective Tax rate Source: Emkay Research, Company Emkay Research February 10,

3 Exhibit 3: Operating performance Particulars Q3FY16 Q2FY17 Q3FY17 YoY (%) QoQ (%) YTDFY16 YTDFY17 YoY (%) Generation (Mn Units) Vadodara-I Vadodara-II Surat-I ,189 1, Surat-II , Total Generation ,833 2, PAF Vadodara-I Vadodara-II Surat-I Surat-II PLF Vadodara-I Vadodara-II Surat-I Surat-II Realisations (Rs/unit) Fuel cost (Rs/unit) Exhibit 4: Changes in earnings estimates All fig in Rs mn (except % and EPS) FY17E FY18E FY19E Old New % change Old New % change Introduced Revenues 15,271 15, ,775 15, ,248 EBITDA 3,767 3, ,972 3, ,139 EBITDA margins, % Net profits 2,083 2, ,268 2, ,389 EPS Source: Emkay Research Exhibit 5: Key assumptions Key Assumption FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Capacity (MW) Overall PLF (%) Gross Generation (Mn Units) Regulated Equity Valuation At CMP of Rs109, GIPCL trades at 0.7x its FY19E book value. We have rolled over our valuation to FY19E metrics and revised our target price of Rs126 valuing the same at 0.76x FY19 P/BV. Reiterate a BUY. Risk Vadodara II has not been able to renew its PPA with GUVNL from past 2 quarters and the company has not availability during Q3FY17. We will wait for one more quarter and even if the PPA is not renewed then we would adjust the regulated equity accordingly (by removing Vadodara II regulated equity) to arrive at the target price. Emkay Research February 10,

4 Financials (Consolidated) Income Statement Y/E Mar (Rsmn) FY15 FY16 FY17E FY18E FY19E Revenue 12,091 13,458 15,271 15,775 16,248 Expenditure 7,894 9,622 11,505 11,803 12,109 EBITDA 4,197 3,836 3,767 3,972 Depreciation 1,226 1,134 1,220 1,238 1,265 EBIT 2,971 2,702 2,547 2,735 2,874 Other Income Interest expenses PBT 2,679 2,497 2,447 2,603 2,698 Tax 1, Extraordinary Items (185) Minority Int./Income from Assoc Reported Net Income 1,263 1,884 2,083 2,268 2,389 Adjusted PAT 1,448 1,884 2,083 2,268 2,389 Balance Sheet Y/E Mar (Rsmn) FY15 FY16 FY17E FY18E FY19E Equity share capital 1,513 1,513 1,513 1,513 1,513 Reserves & surplus 16,853 18,245 19,889 21,717 23,491 Net worth 18,365 19,758 21,402 23,230 25,003 Minority Interest Loan Funds 5,124 4,248 4,106 4,106 4,241 Net deferred tax liability 2,000 2,110 2,110 2,110 2,110 Total Liabilities 25,489 26,115 27,617 29,446 31,353 Net block 19,462 19,120 18,247 17,829 17,485 Investment 2,253 2,677 3,312 3,736 4,161 Current Assets 7,975 8,432 10,519 12,384 14,257 Cash & bank balance 3,656 1,930 3,141 4,763 6,407 Other Current Assets Current liabilities & Provision 4,629 4,460 5,280 5,424 5,569 Net current assets 3,346 3,972 5,238 6,960 8,687 Misc. exp Total Assets 25,489 26,115 27,617 29,446 31,353 Cash Flow Y/E Mar (Rsmn) FY15 FY16 FY17E FY18E FY19E PBT (Ex-Other income) (NI+Dep) 2,191 2,084 2,066 2,254 2,377 Other Non-Cash items Chg in working cap 893 (2,352) (56) (100) (84) Operating Cashflow 3, ,200 3,873 4,055 Capital expenditure (337) (710) (820) (920) (1,020) Free Cash Flow 3, ,380 2,952 3,035 Investments (635) (425) (635) (425) (425) Other Investing Cash Flow Investing Cashflow (483) (722) (1,074) (996) (1,124) Equity Capital Raised Loans Taken / (Repaid) (2,032) (875) (142) Dividend paid (incl tax) (439) (440) (440) 0 0 Other Financing Cash Flow Financing Cashflow (3,251) (1,933) (1,062) (481) (362) Net chg in cash 124 (1,783) 1,064 2,396 2,569 Opening cash position 3,155 3,656 1,930 3,141 4,763 Closing cash position 3,279 1,873 2,994 5,537 7,331 Emkay Research February 10,

5 Key Ratios Profitability (%) FY15 FY16 FY17E FY18E FY19E EBITDA Margin EBIT Margin Effective Tax Rate Net Margin ROCE ROE RoIC Per Share Data (Rs) FY15 FY16 FY17E FY18E FY19E EPS CEPS BVPS DPS Valuations (x) FY15 FY16 FY17E FY18E FY19E PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) FY15 FY16 FY17E FY18E FY19E Net Debt/ Equity (0.1) Net Debt/EBIDTA (0.2) (0.5) Working Cap Cycle (days) (9.4) Growth (%) FY15 FY16 FY17E FY18E FY19E Revenue (11.8) EBITDA (10.2) (8.6) (1.8) EBIT (3.9) (9.1) (5.7) PAT (32.0) Quarterly (Rsmn) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Revenue 3,418 3,661 3,525 3,142 3,038 EBITDA 866 1,080 1, EBITDA Margin (%) PAT EPS (Rs) Shareholding Pattern (%) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Promoters FIIs DIIs Public and Others Emkay Research February 10,

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