Re-rating likely for gas-based power generation firms

Price rise for RIL gas will lead to improved prospects and valuation for Torrent, Lanco Infratech, GVK & GMR Infra units

While the Street has lost faith and given up hope that gas-based power plants will ever make money and reward shareholders, recent developments indicate some light at the end of the tunnel.

The Street is now expecting domestic gas production to improve in the coming months. This was after Reliance Industries got government clearance for a doubling in the price of the gas it produces, to $8.4 a unit.

GMR Infrastructure, GVK Power Infrastructure, Torrent Power and Lanco Infratech, which have large gas-based power generation capacities, could now have some reason to cheer.

Says Rabindra Nath Nayak of SBICAP Securities, “With the price hike for gas, the market is hoping for higher output and availability to the power sector, which is going to be positive for some. Today, about 50 per cent of the 25,000 Mw of gas-based capacity is idle.”

Though this could take time, experts also believe one needs to see if these companies will be able to sell costlier power. If the gas is priced at $8 a unit, experts believe the companies will be able to generate power at about Rs 5 a unit, a higher one. Yet, even at this rate, the companies will be able to produce power at a 40-50 per cent cheaper rate than those produced from imported gas, at $12-13 unit.

Further, many of these capacities have a pass-through clause. Even in the worst case, the gas-based power can be used for industrial consumers and could be blended with cheaper power in the peak seasons.

“I do not think demand will be an issue, as we recently signed a power purchase agreement at about Rs 4.9 a unit. There are other players which have signed power purchase agreements in excess of Rs 5 a unit. In my view, the demand will take care of supply even at higher prices,” said Madhu Terdal, president of new & emerging business, GMR Infra.

More important, the larger issue is availability, as companies have already put up their plants but there is no gas. The biggest in this segment, Torrent Power, with 1,250 Mw of gas-based power generation capacity, is currently operating at a 25 per cent Plant Load Factor (PLF). This compares with a 75 per cent PLF achieved by its 400 Mw of coal-based power generation capacity.

“Torrent's two gas-based plants of about 1,600 Mw, where the company has invested Rs 2,400-2,500 crore, on a conservative basis, have a book value of Rs 50 a share. The market has written that off but for those who are willing to take a view on gas availability (increasing), there is a fair chance of valuation re-rating,” said Devam Modi, who is tracking the company at Equirus Capital.

GVK has a similar situation. Its JP-II and Gautami gas-based power plants are idle due to stoppage of supply from the KG-D6 basin. Its other power plant, JP-I, is operating at 46 per cent PLF, thanks to gas supply from GAIL. At this juncture, the market is not willing to give any value to its gas-based power assets.

Increased availability of gas can also hugely benefit GMR, which has  1,300 Mw of gas-based generation capacity. The market has completely ignored its 768 Mw GMR Rajahmundry Energy project because of lack of gas.

About this project, Vishal Sharma, who tracks the company at BNP Paribas, said: “We believe the downside from this asset is already in the price. The plant is not generating cash due to lack of gas and, therefore, incrementally, if and when the gas supplies resume, there should be an upside from this asset.”

“We are hopeful with the surplus gas available from ONGC, Cairn India, and GSPC, our other plants (GMR Energy and Vemagiri), should reach 30-40 per cent PLF. On the Rajahmundry plant, if the supply from Reliance's K-G basin improves, it will be beneficial,” said Madhu Terdal.