GIPCL

GIPCL’s expansion is about to be completed. It will significantly add to its returns

Power company stocks have been hot for a while but we have picked a couple of stocks that still have some steam left. Given India’s need for power, this sector will enjoy long-term demand growth. Look at Gujarat Industries Power Company Ltd (GIPCL), promoted by Gujarat Electricity Board (GEB), Gujarat State Fertilizers & Chemicals (GSFC) and Gujarat Alkalies and Chemicals Limited (GACL).

The company has been in power generation since 1992. Currently, it has three power plants in Gujarat with a total generation capacity of 555 megawatts (MW). Power from the 145-MW gas-based plant, called Vadodara Station 1, is distributed to its promoters in proportion to their original equity holding. The second station in Vadodara has 160MW capacity. Its third plant, Surat Lignite Power Project (SLPP), has a capacity of 2x125MW. It sells power from Vadodara Station 2 and Surat to the state electricity board of Gujarat under a power purchase agreement (PPA). It is also setting up the second phase of SLPP (2x125MW). This is expected to go on stream in two phases. The project, which has suffered some delay mainly due to late arrival of critical equipment such as boilers and turbines, is expected to be fully commissioned by this quarter. Surat 2, as this expansion project is called, will enjoy a higher return on equity (RoE) (unlike GIPCL’s current projects which have an RoE of 13%) on account of the PPA signed with GUVNL (Gujarat Urja Vikas Nigam) under the Central Electricity Regulatory Commission (CERC) regulations. CERC has also allowed grossing up of post-tax RoE (15.5%), based on the company-level applicable tax rate.

Unlike some recent power projects, which rely on imported coal, GIPCL has captive lignite mines, with reserves adequate for power generation of up to 1,000MW for the next 30 years. This has insulated the company from the impact of increase in coal prices. It has a long-term agreement with Gas Authority of India (GAIL) for the supply of gas to its Vadodara plant, ensuring fuel availability. GIPCL is planning to set up another 500MW power plant at Surat which will increase its power generation capacity to 1,805MW by 2012. The lignite for this project will be sourced from its captive mines. Although the per capita power consumption in Gujarat is twice the national average, the state still suffers from power deficit.

GIPCL has implemented a clean development mechanism project under which it is reducing the emission of environment-polluting gas. It has applied for carbon credit benefits with the United Nations Framework for Climate Control and is expected to get 80,000 units of carbon credits per annum.

Worth buying at around Rs100.