Gujarat Industries Power Company (GIPCL) has recorded a disappointing fourth quarter performance. While revenues were 27% higher than our estimate at Rs2.9 billion, this was primarily due to the inflated fuel prices which were passed along to customers.
The EBITDA margin dropped ~600bps below our estimate to 22.2% and net profit missed our target by a distance with a decline of 88% Y-o-Y to Rs63 million.
Profits were suppressed due to a one-time interest expense provision of Rs109 million for arbitration matters related to a mining contractor who had claims of 4–5 times the amount settled.
With this the contingent liability is likely to come down to ~Rs 200–250 million. GIPCL has also witnessed lower other income due to a reduction in interest earned on funds that have now been utilised for its SLPP-II expansion project.
The expansion of the 250MW (2x125MW) lignite-based power plant at Surat is on schedule, with the two units expected to be commissioned by December 2008 and March 2009 respectively.
We have revised our earnings estimates for FY09 and FY10 to reflect the commencement of operations of the expanded plant and higher fuel prices. The stock continues to trade close to its book value and at a considerable discount to peers.
We have valued the company based on an average of the P/BV and DCF methods. Our estimate revision coupled with a tweaking of DCF assumptions generates a revised target price of Rs123 for the stock from Rs136 previously. We maintain BUY recommendation.