Emkay. Gujarat Industries Power Company Ltd. On powerful track BUY. Private Client Research. Coverage. Initiating. Rs 100 Rs 130.

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1 Emkay Private Client Research Gujarat Industries Power Company Ltd On powerful track Initiating Coverage 27 May, 2008 BUY Price Target Rs 100 Rs 130 Sensex 16,385 Price Performance % 1M 3M 6M 12M Absolute Rel to Sensex Source: Capitaline Stock Details Sector Reuters Bloomberg Shareholding Pattern (%) Promoters 58.2 Govt. Companies 8.0 FII/NRI 4.7 Institutions 11.2 Private Corp. 2.9 Public 15.0 (31st Mar. 08) Source: Capitaline Power Generation Pankaj Kumar pankaj.kumar@emkayshare.com GJIP.BO GIP IN Equity Capital (Rs mn) Face Value (Rs ) Week H/L (Rs ) 185/57 Market Cap (Rs Bn) Daily Avg Vol (Rs Mn)) Gujarat Industries Power Company Ltd (GIPCL) is Gujarat based power generation company with total current generation capacity of 555 MW. The company is expanding its generation capacity by adding 250 MW (2x125 MW) lignite based power plant at Surat, Gujarat with captive lignite mine. The new capacity would be operational in two phases by December 2008 & March 2009 and would strengthen FY09E & FY10E financials. The power generated from the new plant would be sold under power purchase agreement with State Electricity Board (SEB) of Gujarat. It further plans to set up another 500 MW lignite based power plant at Surat. Thus the installed capacity of the company would increase from 555 MW at current level to 805 MW by FY2009 and 1305 MW by The company expects its plants to run at above 85% plant load factor. We estimate the topline and EBITDA of the company to grow at a CAGR of 16.8% and 24.1% respectively during FY07A-10A. The scrip currently discounts FY09E BVPS of Rs 98.6 by 1x, thus available at a discount to most of its peers which are trading at one year forward P/BV of 1.5x to 2.5x. We recommend BUY on the scrip with one year target price of Rs 130. At our target price the scrip will be trading at one year forward P/BV of 1.32x. Expansion to drive financials by FY2010E The company is setting up 250 MW (2x125MW) lignite based power plant at Surat, Gujarat which is expected to go on stream in two phases. The first phase is expected to become operational by December 2008 and the second by March The expansion would drive FY10E financials. Planning to add another 500 MW lignite based power plant GIPCL is planning to set up a new 500 MW lignite based power plant. The project is at initial phase and the exact cost and financing of the project has not been finalized. Assured raw material supply The company has captive lignite mines which have adequate reserves to meet the lignite requirement for the power generation up to 1000 MW for 30 years. Even for the gas based plants the company has got the firm tie up for the fuel supply with GAIL. Positive industry outlook GIPCL is expanding its capacity in Gujarat which is a power deficit state with power deficit ranging from 8.5% to 13.6% and thus leaves scope for power generation companies like GIPCL to expand in the region. Attractive valuation The scrip is currently trading at FY09E & FY10E P/BV of 1x & 0.92x respectively, thus available at a discount to most of its peers trading at P/BV of 1.5x to 2.5x. At our target price the scrip will trade at 1.32x. Financial Estimates: Y/E, March Net EBIDTA EBIDTA PAT EPS EPS Grth ROE P/E EV/EBITDA P/BV (Rs.mn) Sales (%) (Rs) (%) (%) (x) (x) (x) FY , FY08E , FY09E , FY10E , C-6, Ground Floor, Paragon Center Pandurang Budhkar Marg, Worli, Mumbai India

2 Background Gujarat Industries Power Company Ltd (GIraPCL) is currently engaged in the business of generation of Electrical Power. The company was promoted by Gujarat Electricity Board (GEB), Gujarat State Fertilizers & Chemicals (GSFC), Gujarat Alkalies and Chemicals Limited (GACL) and Petrofils Co-operatives and is engaged in power generation since Currently it has three power plants in Gujarat with a total generation capacity of 555 MW. Power from 145 MW gas based plant called Vadodara Station 1, is distributed to its promoters in proportion of their original equity holding. The second plant, Vadodara Station 2, has 160 MW of capacity and power from this plant is sold to GEB under power purchase agreement (PPA). Both of these plants have operated at above 85% PLF in FY08. The company has 2x125MW lignite based power plant at Surat which is operating at above 85% PLF. The company sells power generated from Vadodara Station 2 and from Surat plant under PPA to State Electricity Board of Gujarat. GIPCL is commissioning 2x125 MW lignite based power plant in Surat (Surat Lignite Power Plant) with captive lignite mines. Thus with all these facilities it will have a total generation capacity of 805 MW by the end of March The company has envisioned transforming itself into a national level power sector enterprise and targets to achieve 2800 MW by The topline and bottomline of the company grew at a CAGR of 2.2% and 31% respectively during CY03A- 07A. The net profit of the company grew in the last four years due to substantial reduction in interest cost by about 200 basis points to 8.6% in FY06. Financials Performance The topline and bottomline of the company grew at a CAGR of 2.2% and 31% respectively during CY03A-07A. The net profit of the company grew in the last four years due to substantial reduction in interest cost by about 200 basis points to 8.6% in FY06. The company carried out debt restructuring exercise to reduce the interest cost. In FY06 the overall plant load factor (PLF) was 81.2% but in FY07 the overall PLF decreased to 75.5% due to its plant at Vadodara undergone for a major overhaul during the year. But in FY08 the overall PLF again improved to above 85% level. Going forward the overall PLF is expected to be above 85%. The net profit of the company grew in last four years due to substantial reduction in interest cost. The debt equity ratio of the company is at 0.5 in FY07. Its Vadodara plant is debt free and 250MW Surat plant is expected to become debt free by FY09. Recent Financial Performance Particulars (Rs mn) Q3FY08 Q3FY07 VAR [%] 9MFY08 9MFY07 VAR [%] Net Sales Other Income Total Income Total Expenditure Employee Expenses Fuel Cost Other Expenses EBITDA Interest Depreciation Tax Fringe Benefit Tax Deferred Tax Reported PAT Equity (FV Rs10) Source: Company 27 th May,

3 Industry India is facing power supply deficit with peak power deficit at 13.6% during FY07. The total installed power generation capacity in India at the end of 10th plan (as on 31st Mar 2007) was 1,32,330 MW which is expected to move up to 2,10,907 MW by the end of 11th plan. The reason behind such a kind of capacity addition is the insufficient power supply. India is facing power supply deficit with peak power deficit at 13.6% during FY07. In the XI Five Year Plan, MW of fresh generation capacity is expected to be added to bridge the shortfall. The capacity addition is expected to be met through participation of central government, state government and private players. Power Generation capacity in India (as on 31st March, 2007) Thermal Renewable Sector Hydro Coal Lignite Gas Diesel Total Nuclear Energy Total Sources Central State Private Total Source : CEA Power supply deficit During Peak Time Year Requirement Availability Shortage(-) (MW) (MW) (MW) Shortage/Surplus% 2006/07 1,00,715 86,818-13, % Source : CEA Year-wise break of capacity addition Particulars Total Thermal Power (MW) 12,704 5,077 10,773 14,140 15,950 58,644 Hydro Power (MW) 2,751 1,625 3,425 2,330 6,422 16,553 Nuclear Power (MW) 880 1,000 1, ,380 Total addition per annum (MW) 16,335 7,702 15,198 16,970 22,372 78,577 Expected investment Rs mn 854, , , ,406 1,169,891 4,109,000 Source: CEA The current electricity demand in Gujarat is of the order of 9500 MW, the maximum demand catered is of the order of MW. The per capita consumption in Gujarat is double of national average. But it is a power deficit state with power deficit raging from 8.5% to 13.6%. The current electricity demand in Gujarat is of the order of 9500 MW, the maximum demand catered is of the order of MW. Similar is the scenario in the other states in the Western India. Hence the large scale expansion is required to meet the rising demand of power in the region. 27 th May,

4 Investment rationale The company is setting up 250 MW (2x125MW) lignite based power plant at Surat, Gujarat in two phases. Expansion to drive financials by FY2010 The company is setting up 250 MW (2x125MW) lignite based power plant at Surat, Gujarat in two phases. The first phase of 125 MW is expected to go on stream by December 2008 and the second with similar capacity to be operational by March The revenues from these projects will get reflected partly in FY09E and fully in FY10E financials. The company will sell power generated from these plants under the power purchase agreement with the SEB of Gujarat. It is expected to sell power at Rs 2.30 per unit. After being operational, these plants are expected to run at above 85% PLF. The total cost of this expansion project is Rs 16,340 mn including interest during construction and mines development cost. Rs 1,770 mn would be utilized for developing lignite mines acquired on lease and Rs 14,570 mn for power plant. The mine would suffice the raw material requirement for the next 30 years. Rs 12,250 mn has been funded through debt at an average interest cost of 8.65% per annum and the rest through the mix of equity capital (Rs 2,750 mn raised through IPO in 2005) and internal accruals. Total Power Generation Capacity in MW FY06 FY07 FY08E FY09E FY10E FY11E FY12E Total Capacity GIPCL is planning to set up additional 500 MW lignite based power plant at Surat. The project is expected to be commissioned by March Lower debt equity ratio of 0.73 by FY10E is giving leeway to expand further without equity dilution. Its gas plant faces no problem related to fuel supply as 80% of the fuel requirement has been tied up with GAIL. Planning to add another 500 MW lignite based power plant GIPCL is planning to set up additional 500 MW lignite based power plant at Surat. The company will source lignite from its captive mines. The project is at initial phase and the exact cost and financing of the project has not been finalized. As per our rough cut estimates the company is expected to invest Rs 25,000 mn in this project. The funding route is expected to be through the mix of debt and internal accruals in the ratio of 70:30. The project is expected to be commissioned by March Lower leverage giving edge for expansion without major equity dilution Lower debt equity ratio of 0.73 by FY10E is giving leeway to expand further without equity dilution. During FY08E-FY10E, we expect the debt equity ratio to increase from 0.5 to 0.73 due to Rs mn of debt raised by the company for funding its ongoing expansion project at Surat. But it is still at a comfortable level and leaves scope for further expansion (of 500 MW power plant at Surat) without any major equity dilution. Assured raw material supply Its power plants at Surat utilize lignite as a fuel. The company has captive lignite mine to suffice the fuel requirement. The lignite mines have adequate reserves to meet the lignite requirement for the power generation up to 1000 MW for 30 years. Even its gas plant faces no problem related to fuel supply as 80% of the fuel requirement has been tied up with GAIL. Recently coal prices have witnessed 3 times rise which may increase the fuel cost burden for the companies with non-captive backup of fuel. But GIPCL has no risk associated with the fluctuation in the important raw materials for its Surat plant. 27 th May,

5 Carbon credit benefits The company has implemented Clean Development Mechanism project under which it is reducing the emission of environment polluting gas. It has applied for carbon credit benefits with United Nation Framework for Climate Control and is expected to get 80,000 of carbon credits per annum. Power deficit in Gujarat GIPCL is expanding its capacity in Gujarat which is a power deficit state with power deficit ranging from 8.5% to 13.6%. The current electricity demand in Gujarat is of the order of 9500 MW, the maximum demand catered is of the order of MW. Similar is the scenario in the other states in the western India. Hence the large scale expansion is required to meet the rising demand of power in the region. Underground gasification project with ONGC GIPCL along with ONGC is working on underground gasification of lignite mines at Surat, Gujarat. Under this project lignite reserves deep down the earth can be converted into gas known as synthetic gas. The synthetic gas has relatively lower calorific value as against other gas used as fuel. The underground gasification project is still at initial phase and the kind of benefit from this project can not be estimated at present. Concerns The company is utilizing natural gas a fuel for its plant at Vadodara. Currently it is buying gas from GAIL and Gujarat State Petronet. Any disruption in the supply of gas can affect the operation of its plant. The PLF of the GIPCL is comparatively lower at 85% than the larger players like NTPC at around 90% level. Any decline in PLF may affect the profitability of the company. Outlook The net revenue and EBITDA of the company is expected to grow at a 3yr CAGR of 16.8% and 24.1% respectively. Net Revenue & EBITDA to grow at a CAGR of 16.8% & 24.1% respectively in next 3 years The net revenue and EBITDA of the company is expected to grow at a 3yr CAGR of 16.8% and 24.1% respectively. The growth in topline would largely be seen in the FY10E when its 250MW new power plant would get operational. We do not expect any major growth in revenue during FY08E and FY09E. We have assumed that the electricity generated from the new unit will be sold at Rs 2.30 per unit. On the other hand electricity generated from the Vadodara station 2 would be sold at Rs 2.35 per unit and 250MW SLPP would be sold at Rs 2.15 per unit. Revenue from Sale of Electricity in Rs mn FY06 FY07 FY08E FY09E FY10E Sale of Electricity 27 th May,

6 Overall PLF to be above 85% by FY10E In our revenue estimates we have taken a conservative approach by assuming no major improvement in PLF. We have assumed that the New 250MW lignite plant at Surat to operate at 85% PLF. This plant is expected to be fully operational by FY10E Assumptions regarding PLF at various plants FY07 FY08E FY09E FY10E 145MW PS Vadodara Station % 89.4% 87.4% 87.4% 160MW PS Vadodara Station % 85.0% 85.0% 85.0% 250MW SLPP Surat 80.0% 85.5% 85.5% 85.5% 250MW Lignite Plant New Phase 1 Surat 0.0% 0.0% 28.0% 85.0% 250MW Lignite Plant New Phase 2 Surat 0.0% 0.0% 0.0% 85.0% Overall PLF 80.3% 86.4% 75.2% 85.6% We expect 546 basis points improvement in EBITDA margin which is expected to be at 35.6% by FY10E. EBITDA margins to improve by 596 basis points We expect 546 basis points improvement in EBITDA margin which is expected to be at 35.6% by FY10E. This improvement in EBITDA margin is attributed to larger contribution from the lignite based plants in future. Higher interest and depreciation in FY09E and FY10E is expected to result into modest CAGR of 17% in the adjusted PAT during FY07A- 10E. The book value per share of the company is expected to grow at a decent CAGR of 15.1%. Higher interest and depreciation expense is expected to result into low return on equity of 11.2% by FY10E. Book Value Per Share to rise further FY06 FY07 FY08E FY09E FY10E BVPS in Rs Valuation The scrip is currently trading at FY09E & FY10E P/BVPS of 1x and 0.92x, thus available at a discount to most of its peers trading at P/BV of 1.5x to 2.5x. We have valued the scrip on the basis of Price to Book value multiple. We expect the BVPS of the company to be at Rs 98.6 and Rs by the end of FY09E and FY10E respectively. The scrip is currently trading at FY09E & FY10E P/BVPS of 1x and 0.92x, thus available at a discount to most of its peers trading at P/BV of 1.5x to 2.5x. Besides this, the dividend yield on the stock is at a decent level of 2%. We recommend a BUY on the scrip with the target price of Rs 130. At our target price the scrip discounts FY09E and FY10E BVPS by 1.32x and 1.2x respectively. Peer comparison Company CMP FY09E FY10E FY09E FY10E FY10E FY07 Rs. P/E P/E P/BV P/BV ROE PLF GIPCL % 85.6 NTPC % 89.0 Source: Emkay PCG Research, Bloomberg 27 th May,

7 Consolidated Financial Tables Gujarat Industries Power Company Ltd Income Statement Year Rs mn FY07A FY08E FY09E FY10E Net Sales 7,956 8,877 9,453 12,671 % Growth 5% 12% 6% 34% Other Income Electricity & Fuel Expenses 4,273 5,320 5,609 7,054 Operating Expenses Employee Exp Selling & Administrative Exp Other Expenses Total Operating Exp 5,595 6,125 6,465 8,157 EBIDTA 2,361 2,752 2,988 4,515 % Growth -16% 17% 9% 51% Depreciation ,522 EBIT 2,013 1,306 1,433 1,978 Interest ,015 PBT 1,815 1,541 1,668 2,213 Tax PAT 1,829 1,279 1,385 1,837 % Growth 59% -30% 8% 33% Balance Sheet Year Rs mn FY07A FY08E FY09E FY10E Equity Cap 1,513 1,513 1,513 1,513 Reserves 9,277 12,316 13,399 14,933 Total Shareholders Funds 10,789 13,829 14,911 16,446 Total loans 5,427 8,479 13,658 11,943 Total Liability 16,966 23,057 29,318 29,137 Net Block 9,577 8,730 15,925 22,573 Investments 1,357 1,357 1,357 1,357 Inventory 811 1,110 1,182 1,584 Debtors 1,071 1,200 1,277 1,712 Cash balance 1,331 1, ,033 Other Current Assets 1,233 3,082 3,163 3,566 Total Current Assets 4,446 6,644 6,101 7,896 Creditors 1,667 1,973 2,363 2,816 Total Current Liabilities 2,106 1,973 2,363 2,816 Net Current Assets 2,340 4,672 3,738 5,080 Total Assets 16,966 23,057 29,318 29,137 Source: Company, Emkay PCG Research Source: Company, Emkay PCG Research Key Financial Ratio Year FY07A FY08E FY09E FY10E EBITDA % 29.7% 31.0% 31.6% 35.6% NPM % 23.0% 14.4% 14.6% 14.5% ROE % 17.0% 9.3% 9.3% 11.2% ROCE % 13.8% 8.0% 6.9% 10.3% Int. Cover (x) D/E (x) Asset Turnover (x) Debtors T/O (x) Inventory T/O (x) Per Share Data EPS (Rs) CEPS (Rs) BVPS (Rs) Dividend per Share (Rs) Valuation ratios P/E (x) P/CEPS (x) EV/EBITDA (x) EV/Sales (x) Mcap/Sales(x) P/BV (x) Source: Company, Emkay PCG Research Cash Flow Statement Year to Mar Rs mn FY07A FY08E FY09E FY10E PBT 1,815 1,541 1,668 2,213 Depreciation ,522 Tax (454) (262) (284) (376) Change in WC (27) (347) 160 (787) Operating CF 2,496 2,379 3,100 3,587 Inv in FA (64.5) (4,655.8) (8,170.0) - Investing CF (697.8) (4,655.8) (8,170.0) - Issuance of Equity Capital Debt 1, , ,179.0 (1,715.0) Dividends (395.6) (302.5) (302.5) (302.5) Interest (506.8) (550.0) (580.0) (1,015.1) Financing CF (1,498.2) 2, ,296.5 (3,032.6) Net Change (78.3) (773.6) Opening Cash 1, , , Closing Cash 1, , ,033.4 Source: Company, Emkay PCG Research 27 th May,

8 The Team Gujarat Industries Power Company Ltd Name Sector Tel No id Daljeet S. Kohli Head of Research Urmil Negandhi Auto, Auto Ancillary and Pharmaceutical Pankaj Kumar Engineering, Capital Goods & Mid-caps Sweta Sinha Hotels & IT Manas Jaiswal Technical Analyst Suruchi Kapoor Junior Technical Analyst Sameer Shetye Associate Derivative Analyst Siddharth Panvalkar Research Associate DISCLAIMER Emkay Share & Stock Brokers Limited (Emkay) has two separate independent equity research groups: Institutional Equities and Private Client Group. This document has been prepared by Emkay Private Client Group (Emkay -PCG). Affiliates of Emkay Institutional Group may have issued other reports that are inconsistent with and reach different conclusions from the information presented in this report. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating and target price of the Institutional Equities Research Group of Emkay Share & Stock Brokers Limited. This document is not for public distribution and has been furnished to you solely for your information and any review, re-transmission, circulation or any other use is strictly prohibited. Persons into whose possession this document may come are required to observe these restrictions. This document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential information and/or privileged material. We are not soliciting any action based upon this material. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Emkay -PCG. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. Emkay-PCG will not treat recipients as customers by virtue of their receiving this report. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable. It should be noted that the information contained herein is from publicly available data or other sources believed to be reliable. Neither Emkay, nor any person connected with it, accepts any liability arising from the use of this document. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Opinions expressed are our current opinions as of the date appearing on this material only. We do not undertake to advise you as to any change of our views expressed in this document. While we would endeavor to update the information herein on a reasonable basis, Emkay, its subsidiaries and associated companies, their directors and employees are under no obligation to update or keep the information current. Also there may be regulatory, compliance, or other reasons that may prevent Emkay and its affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Emkay and its affiliates, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Analyst s holding in the stocks mentioned in the report: NIL Emkay Share and Stock Brokers Ltd. Member: Bombay Stock Exchange Limited (BSE) and The National Stock Exchange (NSE). C-6, Ground Floor, Paragon Center, Pandurang Budhkar Marg, Worli, Mumbai Tel No Fax: ; marketing@emkayshare.com; Regn.Nos.PMS-INP ; BSE (Cash) INB ; BSE (Derivative) INF ; NSE (Cash) INB ; NSE (Derivative) INF ; DP CDSL IN-DP-CDSL Call (Tollfree) / th May,