July 20 , 201 2

GUJARAT INDUSTRIES POWER COMPANY LTD BUY Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs Strong Buy Industries Power Company Ltd (GIPCL) is one of the 'Panchratnas' (five jewels), in the State of Buy Gujarat. The company is engaged in the business of generation of electrical power with generation Hold capacity of 815MW. Reduce • GIPCL is insulated from the poor financial health of state electricity boards (SEBs), as it is supplying Sell Strong Buy – Expected Returns > 20% p.a. power to Ltd (GUVNL), which is the best performing state utility in the Buy – Expected Returns from 10 to 20% p.a. country. The company has power purchasing agreement (PPA) with GUVNL for the capacity of Hold – Expected Returns from 0 % to 10% p.a. Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk 670MW. Sell – Returns < 0 %

• The company has integrated lignite thermal power plant and meets its lignite requirement captively.

The company has lignite mining reserves of 212mn tonnes which is sufficient for its existing and under construction lignite based power projects. • Due to its integrated, regulated business model and cost – plus PPA with GUVNL it provides certainty for future earnings. The company currently earns 13 -14% return on equity (RoE) across its power plant and has applied for the enhancement in RoE to the Gujarat government. • The company is expected to benefit from the normal operation of the power plant at Surat area. The STOCK DATA BSE / NSE Code 517300/ GIPCL Surat power plant was not functional during Q4FY12 due to some technical reasons resulting into Bloomberg Code GIP IN Equity No. of Shares (Mn) 151 16% decline in top-line in Q4FY12. However as the power plant has been restored for normal Sensex / Nifty 17,185/ 5,216 PRICE DATA operation, we expect improvement in the operating performance. CMP Rs (18th July' 12) 64 Beta 0.57 • GIPCL’s gas based power plant at Vadodara operation was constrained (lower plant load factor) by Market Cap (Rs mn) 9,741 52 Week High-low 87/ 56 the lower availability of gas from KG D6 basin and backing down of plant as per the grid demand. Average Daily Volume 10,922 STOCK RETURN (%) The RoE of the gas based power plant was not affected as it is based on plant availability factor (PAF) 30D 3M 6M 1Y Co Ltd 4% -7% -9% -17% and not on PLF. For FY11, the company had PAF of 89%. Sensex 3% -1% 4% -7% Nifty 3% -2% 5% -6% SHARE HOLDING PATTERN (%) Based on a consolidated FY14 P/E multiple of 8, the fair value for the company works out Promoter 58 Institutional 29 to Rs. 81 Financial Snapshot Non Institutional 13 Total 100 Projections (Rs Mn) FY10A FY11A FY12E FY13E FY14E 1 Year Price Performance (Rel. to Sensex) Total Operating Income 9,391 10,779 13,002 15,540 16,133 Sensex GIPCL Y-o-Y Growth % -19% 15% 21% 20% 4% 120 EBIDTA 2,188 3,010 4,261 4,185 4,964 110 Y-o-Y Growth % 4% 38% 42% -2% 19% PAT 1,068 1,629 1,184 1,430 1,536 100 Y-o-Y Growth % 25% 53% -27% 21% 7% 90 EPS Rs 7.1 10.8 7.8 9.5 10.2 BVPS Rs 82 90 95 101 108 80 EBIDTA % 23% 28% 33% 27% 31% NPM % 11% 15% 9% 9% 10% 70 ROE % 8.6% 11.9% 8.2% 9.3% 9.4% PER x 6.81 6.34 P/B Ratio 0.63 0.59 www.fullertonsecurities.co.in Page | 1

July 20 , 201 2

BUSINESS PROFILE

GIPCL was incorporated in 1985 as public limited company under the auspices of Government of Promoter Shareholding Pattern by Gujarat. The Company is promoted by Gujarat Electricity Board (GEB) [now Gujarat Urja Vikas Nigam Ltd. end of FY12 (GUVNL)], Gujarat State Fertilizers and Chemicals Ltd. (GSFC), Gujarat Alkalies and Chemicals Ltd. (GACL), LPCL, 0.3% PCL, 2.5% Petrofils Co-operative Ltd (PCL) and Liquidator Petrofils Co-operative Ltd (LPCL).

GSFC, 14.8% The company is engaged in business of electrical power generation. The total present capacity of GUVNL, 25.4% Vadodara and Mangrol plants is 815 MW. In February 2012, the company has commissioned 5MW solar power plant in Surat district. PPA for the same has been signed with GUVNL. Moreover it also has 500MW lignite based power plant and 310MW gas based power plant. Fuel for thermal plants is met from its captive GACL, 15.3% mine. The company is planning to increase the thermal generation capacity to 1,000MW from current 500MW. It has enough lignite resources to fire the current and under construction thermal plants for 30 years. Thus the company is better placed against the volatility in the fuel prices.

Power Generation Capacity GIPCL has power generation capacity of Plant Capacity Fuel Offtake Arrangement 815MW Vadodara I 145 Gas Promoters

Vadodara II 165 Gas GUVNL

SLPP I 250 Lignite GUVNL SLPP II 250 Lignite GUVNL The company has Solar Power Plant 5 -- GUVNL lignite mining reserves of 212mn Lignite Mines (mn tonnes) tonnes

Vastan 126 Mangrol 44

Mangrol Valia 42 Total 212 RoE of gas based plant at Vadodara is based Fuel for gas based plant is tied up with GAIL India Ltd (GAIL) and KG D6 basin. Currently out of total gas on the plant availability factors as requirements of around 1.6MMSCMD for Vadodara Stations, 1MMSCMD is tied up with GAIL and KG D6 basin on long term against the PLF basis. The remaining quantity is tied up with Gujarat State Petroleum Corporation Ltd (GSPCL) and GAIL for supply of spot gas on “as and when required” basis. Due to lower gas production from the KG D6 basin, the company’s operation was constrained leading to lower PLF in FY12. PLF for both Vadodara power plants, declined to 65% and 46% in FY12 from 80% and 58% respectively in FY11. RoE of the gas based plant is not affected as its returns are based on plant availability as GIPCL is planning to against PLF. expand its thermal power generation Power generated from the power plants are tied up through PPA with its promoters and GUVNL on cost plus basis. capacity to 1GW Thus GIPCL due to its integrated and regulated business model is better placed with certainty for future earnings.

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July 20 , 201 2

INDUSTRY OVERVIEW

The power sector's woes never seem to end. The sector is facing problems like coal deficit, inadequate gas supply, Major issue faced by power sector is higher interest rate, regulatory delay, poor financial conditions of SEBs etc. However, efforts are taken by the Indian inadequate fuel Government to solve the issue related to power sector. India’s thermal coal miner is unable to ramp up its productions as its supply mines are stuck in getting regulatory approval. Gas supply to the power sector is also not going to improve in the next 3-4 years as the gas output from the KG D6 basis has declined to all time low and it is further expected to decline. Indian

Government has advised the power generators not to set up gas based power plant till FY15 as the there will be huge mismatch in demand and supply. Thus around 30GW of the generation capacity is held idle due to fuel supply. Besides this Power sector is expected to add there is a problem with huge transmission and distribution (T&D) losses. A T&D loss in the country is around 30% which is very 18GW of operating high in power deficit country like India. Indian power sector is expected to add around 60GW of additional capacity to the capacity in FY13 existing capacity of 200GW. In terminal year of 11 th five year plan the country has added 20GW of the generation capacity and in FY13 around 18GW of the capacity is expected to be added. However, fuel supply deficit is expected to continue as power capacity addition growth rate is expected to be more as compared to growth in fuel production like coal and gas.

GIPCL is operating its power plant in power surplus state of Gujarat. In order to meet the power deficit in rest of the Gujarat is favorable country, the power producers in Gujarat state are selling surplus power to grid. The state of Gujarat is one of the business state for power sector due to large friendly states for power sector due to vast coastal region & ports, lower T&D losses and better financial conditions of SEBs. coastal line and

The demand of power in the state is expected to grow faster as many businesses are getting attracted. lower T&D losses

GIPCL, having operations in the state of Gujarat, is expected to benefit if there is favorable change in regulation. Currently GIPCL is operating its gas based plant at lower PLF due to inadequate gas supply from KG D6 basis. The company is ready to operate on imported gas but the end users are not ready to purchase power at high rate. GIPCL has gas linkage from GAIL and KG D6 basin at an administered price. Unless the gas production is ramped up, the company is not expected to By selling power to grid, GIPCL’s operate the plant at full capacity. Moreover, the company will also benefit if the state power regulator allows it to sell the profitability is power generated from the imported gas to the grid, which will result in increasing its profitability. expected to improve

RISK & CONCERN Delayed regulatory approvals: Power projects are capital intensive and are subjected to risk associated with longer GIPCL is subjected to development period due to delayed statutory clearance. The company is planning to expand its thermal power generation risk associated with delayed regulatory capacity to 1,000MW from 500MW. clearance Ageing power plant: GIPCL’s Vadodara gas based power plant of capacity 145MW was commissioned in 1997 and almost completed 19 year of operation. Any unexpected technical issue of outage would affect the plant’s performance and financial projection.

Change in government policies: GIPCL is subjected to risk associated with the change in Gujarat government’s policies and Rejection of RoE regulation in the power sector as it generated whole revenue from Gujarat state. The company has applied for improvement enhancement would in the RoE for the plants from 13-14% to 15%. Rejection in approval would affect the earnings of the company. be negative for the company www.fullertonsecurities.co.in Page | 3

July 20 , 201 2

FINANCIAL PERFORMANCE GIPCL in Q4FY12 reported 15% and 54% Y-o-Y decline in top-line and bottom-line respectively due to lower power For Q4FY12, net sales generation and realization. Due to technical problems in Surat power plant, power generation declined by 5% Y-o-Y to 1bn and net profit declined units. Realization declined by 11%Y-o-Y to Rs. 2.5 per unit. Tariff realization declined owing to under - recoveries in Surat as by 15% and 54% Y-o-Y respectively the plant operated below the threshold PLF of 75% for the full year. EBITDA margin (operating margin) improved by 200bps to 41% as operating expenditure declined by 18% Y-o-Y due to lower employee expenses and fuel expenses. On a Q-o-Q basis, operating margin improved by 1,700bps. Pretax profit declined by 36% Y-o-Y due to 17% Y-o-Y increase in depreciation expenses and 18% Y-o-Y decline in other income. Net profit Power sales volume declined by 62% Y-o-Y due to higher tax rate of 20% as against tax credit taken in the same quarter last year. During the declined by 5% Y-o-Y to quarter, the technical problem at Surat power plant was restored. 1bn tonnes

In FY12, bottom-line declined by 27% despite 21% increase in top-line. Increase in top-line was aided by 11% increase in power realization with almost flat power production as compared to FY11. Higher depreciation and interest expenses dragged net profit to Rs. 1bn

Power sales realization Yearly Operating Margins Quarterly Operating Margins declined by 11% Y-o-Y 20 35% 4.0 45% 31% due to lower PLF and 33% 30% 38% 3.9 41% 40% under – recoveries 18 28% 27% 40% 35% 23% 16 25% 3.5 31% 16 16 3.1 3.4 30% 20% 3.0 24% 25% 14 15% 13 3.0 26% 15% 20% 11% 2.7 12 10% 15% EBITDA margin 11 9% 10% 9% 2.5 13% improved by 200bps due 12% 10% 10 9 5% 9% 4% to fall in employee 5% expenses and fuel cost 8 0% 2.0 0% FY10A FY11A FY12A FY13E FY14E Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Revenue (Rs Bn) EBIDTA Margin PAT Margin Revenue (Rs Bn) EBITDA Margins PAT Margins

Yearly Operating Performance Quarterly Operating Performance GIPCL is expected to 5.5 3.13 3.50 1.5 3.5 generate 5bn units of 3.11 3.3 2.91 1.2 1.2 power mainly due to 3.00 1.1 1.1 2.44 2.63 5.0 5.0 3.0 1.1 1.1 restoration of Surat 5.1 5.1 1.2 1.2 2.50 1.0 3.0 power plant 1.0 1.0 4.5 4.4 4.4 2.00 4.5 2.8 2.8 1.50 4.1 4.1 0.5 2.5 1.00 2.5 3.8

0.50 Power sales realization is 0.0 2.0 3.5 0.00 expected to grow at a Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY10A FY11A FY12A FY13E FY14E CAGR of 4% over FY12- Power Generation (Bn Units) Power Sales (Bn Units) Power Generation (Bn Units) Power Sales (Bn Units) 14

Power Realization Per Unit (Rs) Power Realization Per Unit (Rs) www.fullertonsecurities.co.in Page | 4

July 20 , 201 2

PEER COMPARISION

Peer Group Comparison Debt Revenue EBIDTA PAT Margin P/E P/B CMP FV Companies ROE % Equity (Rs. mn) Margin (%) (%) (x) (x) (Rs.) (Rs.) Ratio Gujarat Industries Power Co Ltd 13,002 33% 9% 8% 0.8 8 0.7 64 10 Neyveli Lignite Corporation Ltd 48,669 36% 29% 12% 0.4 10 1.3 84 10 FY12 Consolidated Figure

Neyveli Lignite Corporation Ltd (NLC) has same business model like GIPCL, having lignite based power plant and having off take arrangement with SEBs. NLC is a large player as compared to GIPCL with power generation capacity of 3GW and lignite GIPCL is expected to mining capacity of 31mn tonnes. NLC is trading at higher P/E multiple due to its better operating performance as compared benefit from the RoE to GIPCL. The company is expected to benefit from the improvement in the operating performance due to restoration of enhancement from the Gujarat government Surat power plant leading to improvement in RoE and expected enhancement in the RoE level to 15% from the Gujarat government.

VALUATION

The company has restored the technical problem in the Surat power plant and the PLF level is expected to improve going forward. Restoration the plant has clocked a PLF of 84% as against level of 50% recorded in Q4FY12. Thus the company GIPCL’s top-line and is expected to report higher power generation going forward. bottom-line is Based on the conservative estimates given below, we anticipate that GIPCL’s net revenue to grow at a CAGR of 11% expected to grow at a CAGR of 11% and 14% over FY2012-14E to Rs. 16bn. Further, we estimate that net profit would grow at a CAGR of 14% to Rs. 2bn over the same respectively over period. FY12-14 Based on a consolidated FY14 P/E multiple of 8, the fair value for the company works out to Rs. 81. Thus we recommend a ‘BUY ’ rating on the stock. Positive trigger for the stock would be approval for RoE enhancement and better PLF for Surat plant.

Key Financial Assumptions

FY13E FY14E Power Generation Capacity (MW) 815 815 Power Unit Produced (MW) 4,967 5,116 Power unit Sales (mn Units) 4,965 5,115 Power Sales Realization Per unit (Rs) 3.11 3.13

Tax Rate (%) 19% 19%

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July 20 , 201 2

FINANCIAL STATEMENTS AND RATIOS

Consolidated Profit & Loss Statement Particulars (Rs Mn) FY10A FY11A FY12E FY13E FY14E Total Operating Income 9,391 10,779 13,002 15,540 16,133 Operating Expenditure 7,203 7,770 8,742 11,355 11,168 Depreciation 880 1,251 1,712 1,808 2,133 EBIT 1,308 1,759 2,548 2,377 2,831 EBIT Margin (%) 7% 35% 45% -7% 19% Interest Expenses 162 703 1,189 822 1,152 Profit Before Tax 1,284 1,211 1,416 1,766 1,897 Less: Tax 216 (419) 232 336 361 PAT 1,068 1,629 1,184 1,430 1,536 PAT Margin (%) 11% 15% 9% 9% 10% EPS (Rs) 7.1 10.8 7.8 9.5 10.2 BVPS (Rs) 82 90 95 101 108 ROE % 8.6% 11.9% 8.2% 9.3% 9.4%

Valuation Ratios (x) FY13E FY14E PER x 6.81 6.34 P/B Ratio 0.63 0.59

Consolidated Cash Flow Statement

Particulars (Rs Mn) FY10A FY11A FY12E FY13E FY14E Profit Before Tax 1,284 1,211 1,416 1,766 1,897 Depreciation 880 1,266 1,712 1,808 2,133 Other Adjustments 131 663 1,189 822 1,152 Change in Working Capital 211 (499) 1,765 (766) 19 Direct Tax Paid (231) 72 (232) (336) (361) Cash Flow from Operations 2,276 2,713 5,850 3,293 4,841

Change in Fixed Assets (85) (17,130) (3,048) (5,099) (6,341) Other Adjustments (3,880) 15,054 (42) 109 686 Cash Flow from Investment (3,965) (2,076) (3,091) (4,991) (5,654)

Debt Raised 3,292 2,290 4,399 6,882 12,905 Debt Repaid (1,052) (1,795) (7,082) (2,394) (4,821) Dividend Paid (338) (377) (378) (476) (500) Interest Paid (176) (693) (1,189) (822) (1,152) Others (57) (63) 1,982 (129) (713) Cash Flow from Financing 1,670 (638) (2,268) 3,061 5,718

Net Cash Flows (18) (1) 491 1,364 4,904 Op bal of cash 34 16 15 505 1,869 Transferred to B/S 16 15 505 1,869 6,773

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July 20 , 201 2

FINANCIAL STATEMENTS AND RATIOS

Consolidated Balance Sheet Particulars (Rs Mn) FY10A FY11A FY12E FY13E FY14E Application of Funds Fixed Asset (Net) 7,264 21,927 22,842 24,623 30,554

Capital Work in Progress 17,554 3,373 1,638 3,148 1,425

Investments 271 298 453 473 500

Inventories 1,035 1,035 1,257 1,461 1,531 Sundry Debtors 1,373 2,002 2,101 2,571 2,626 Cash & Bank Balance 16 15 505 1,869 6,773 Other Current Assets 128 113 89 86 68 Loans & Advances 491 675 754 828 860 Total 28,131 29,436 29,638 35,059 44,337

Sources of Funds Share Capital 1,513 1,513 1,513 1,513 1,513

Reserves and Surplus 10,948 12,138 12,882 13,836 14,872

Total Debt 10,641 11,135 8,452 12,940 21,024 Net Deferred Tax 764 465 415 959 926 Sundry Creditors 3,346 3,171 1,916 4,433 4,602 Other Current Liabilities 148 173 3,527 210 218 Provisions 771 840 933 1,168 1,182 Total 28,131 29,436 29,638 35,060 44,337

Ratio Analysis Particulars (Rs Mn) FY10A FY11A FY12E FY13E FY14E

Current Ratio 0.6 0.8 0.7 1.0 1.7 Cash Ratio 0.0 0.0 0.1 0.3 1.0 Interest Coverage Ratio 8.1 2.5 2.1 2.9 2.5 Debt Equity Ratio 0.9 0.8 0.6 0.8 1.3 ROCE 4% 8% 7% 5% 5%

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July 20 , 201 2

BOARD OF DIRECTORS

Board Of Directors

Director Name Current Position Description

Shri. D. J. Pandian is Non-Executive Chairman of the Board of Gujarat Industries Power Co Ltd. He is a senior IAS Officer of 1981 batch. Shri D.J Pandian, IAS on academic front is M.A. (Fin. Mgmt.) and holds Bachelor’s Degree in Business Administration (BBA) and MBA (Market Research) from Madras University and is presently functioning as Principal Secretary, Energy and Petrochemical Department, Government of Gujarat. He has to his credit D. Pandian Non-Executive Chairman of the Board experience of holding key positions in different departments in Govt. of Gujarat and Govt. of India. He held the position of Director, External Commercial Borrowings, Ministry of Finance, Govt. of India and was deputed as Advisor to Board of Directors in World Bank, Washington, D.C. He has long stint of Administrative and Corporate experience of more than 25 years.

Shri. L. Chuaungo is Managing Director, Executive Non-Independent Director of Gujarat Industries Power Company Limited since 1st May, 2005. He was placed at the disposal of Energy & Petrochemicals Department (E&PD) vide Government of Gujarat (GOG), General Administration Department Managing Director, Executive Non-Independent L. Chuaungo (GAD) dated 28th April,2003. He is an Arts Graduate and lAS Officer of the 1987 batch. He has worked with various departments of the State and the Director Central Government and before he took over as the Managing Director of the Company he was the Collector — Valsad, Gujarat State. The total experience of Shri L. Chuaungo, AS is more than 20 years. He is also functioning as the Managing Director of Gujarat Urja Vikas Nigam Ltd. Director - Nominee of Gujarat Urja Vikas Nigam Ltd. Raj Gopal Shri. Raj Gopal is serving as Director in the board and is nominee from GUVNL. (GUVNL).

D. Jain Director - Nominee of IDBI Bank Ltd. Shri. D. Jain is serving as Director in the board and is nominee from IDBI Bank Ltd.

Non-Executive Director - Nominee of Gujarat State Atanu Chakraborty Shri. A. Chakraborty is serving as Non - Executive Director and is nominee from Gujarat State Fertilizers and Chemicals Ltd. Fertilizers & Chemicals Ltd. Non-Executive Director - Nominee of Gujarat M. Dagur Shri. M. Dagur is serving as Non - Executive Director and is nominee from Gujarat Alkalies and Chemicals Ltd. Alkalies & Chemicals Ltd.

Professor Shekhar Chaudhuri is Non-Executive Independent Director of Gujarat Industries Power Co Ltd., since 18th May, 2004. He has been inducted on the Board of Directors of the Company with a view to further strengthen the Board of Directors and to avail the benefit of his in the field of Joint Ventures and strategic alliances and corporate matters. Prof. Shekhar Chaudhuri, is currently a Director of Indian Institute of Management (MM), Kolkatta. He is Graduate Engineer (Mechanical Engineering) from Indian Institute of Technology, Kharagpur and did his doctoral program from Indian- Shekhar Chaudhuri Non-Executive Independent Director Institute of Management (IIM), Ahmedabad. He has to his credit experience of more than 37 years in various fields of management including the corporate experience at senior positions. Prof. Shekhar Chaudhuri's exposure encompasses through various key business management areas like - Strategic Management, International Management and Management of Technology and Innovation etc. Besides the corporate experience he is consultant to several Organizations including the World Bank.

Dr. Prafulla Kumar Das is Non-Executive Independent Director of Gujarat Industries Power Co Ltd., since July, 2006. He holds BA (Hon.) in Political Science, MA (Political Science) LLB, Masters in Public Administration, Ph.D. in Political Science and IAS (Retd.). Dr. Das is Senior IAS Officer and retired from services of Govt. of Gujarat. Post retirement, Dr. Das was appointed as the first Chief Information Commissioner of Gujarat State until May, 2006. Prafulla Das Non-Executive Independent Director He is associated with Centre for Governance and Policy from March, 2008 at Pandit Deendayal Petroleum University (PDPU). Dr. Das has made numerous Presentations and delivered lectures on the contemporary subjects at national and international forums. He is prolific writer and has been regular contributor to various journals and magazines and newspapers. Dr. Das has widely travelled both nationally as well as internationally during his various assignments and he is the Life Member of Institute of Public Administration. He is Director of GSPC Pipavav Power Company Ltd.

Professor Kirankumar M. Joshi is Non-Executive Independent Director of Gujarat Industries Power Co Ltd., since 1st July, 2006. He is a academician with exposure in the field of corporate management. Prof. Joshi, shall be an Independent Director on the Board of the Company. He is Professor of Business Economics, Faculty of Management Studies, Maharaja Sayajirao University, Vadodara. On the academics front Prof. Joshi is a Commerce Graduate (Accountancy as a subject), MA (Economics) from M S University and has done his Ph.D. in Economics from Gujarat University in the year Kirankumar Joshi Non-Executive Independent Director 1987. Prof. Joshi is a professional and academician with varied experience. He has written various articles on the contemporary subjects and has completed various research projects in different areas. Prof. Joshi has written many books and monographs and has been the regular visiting faculty on different subject at the institutes and also to various companies in and around Baroda and across Gujarat. He has also presented various papers on contemporary subjects in various seminars and workshops. Besides this Prof. Kirankumar Joshi is the Director in Company Ltd. and he is the member of Audit Committee and Personnel Committee of Gujarat Industries Power Company Ltd.

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