VBC FERRO ALLOYS-HIDDEN VALUE?

VBC FERRO ALLOYS.

IT IS A COMPANY WHICH MANUFACTURES Ferro Silicon and Silico Manganese . OUTSTANDING SHARES 41.95 lakh SHARES.

VBC Ferro Alloys had promoted Konaseema Gas Power Ltd. (KGPL) in East Godavari

District. KGPL is Gas Based Power Project which has in Phase-I, already

implemented 445 MW Power Plant. Plant for the same has been supplied by

Siemens. EPC is by L&T and O&M is by NTPC. As on date, VBC Ferro is holding

13.43 cr. shares at a cost of Rs. 134.30 crs. being 27.91% Equity of KGPL. Other

share holders of KGPL are:

L & T                        5.06 %

ILFS                         6.75 %

LIC                           4.82 %

GIC                           4.82 %

INTL POWER VISION   2.01 %

TIFOI                         8.89 %     

Project cost of Phase-I was 1383 crs.   Phase-I was ready for commissioning in

2006 but could not be commissioned due to delay in gas supply from RIL. As a

result, project cost stands increased to around 2000 crs(due to interest burden for

more than 2 years). Now, KGPL has embarked on Phase-II which involves setting up of

820 MW Plant at a cost of Rs. 2782 crs. which works out to Rs. 3.39 cr.per MW.

D.E. Ratio will be 4:1. Phase-II is likely to be implemented by April 2011.

Phase-II is being erected at the existing site to avail of ready infrastructure

Due delay in supply of gas from AP Govt, Konaseema has been granted some

concessions to compensate for interest loss being suffered by the company for the

delayed period. Earlier, Konaseema was supposed to supply entire power to

APTRANSCO @ Rs 2.10 per unit. However, subsequently, Govt has permitted to sell

25% power of Phase-1 in open market. Company has signed an agreement with

Karnataka Electricity Board to supply @ 3.65/ per unit.

For Phase-II, company has inked agreement with PTC @ Rs 2.25 for 25% capacity,

another 25% with Karnataka Govt @ 3.65 per unit. Balance 50% power sale can be

finalised within 1 year of financial closure. KGPL is ideally located as it is hardly 15

Km. from K.G. Basin.

HIDDEN VALUE IN  COMPANY’S HOLDING IN KONASEEMA

L&T is providing 66 cr. deferred payment credit. For Phase II, last year Lehman and

an Indian infrastructure finance company had agreed to take Equity in Konaseema @

Rs. 60/- per share to pump USD 75 million. However, due to Lehman bankruptcy,  deal did not go through .

Rs. 60/-, 13.43 cr. shares of VBC Ferro get a value of Rs. 806 crs.

 to get. Adani IPO may set some benchmark on valuations of similar

Konaseema may come out with IPO which could unlock value of VBC Ferro’s holding. IPO of Konaseema can be attractive because:

1. KSK Energy (another BSE listed company) has huge Equity of Rs. 346 crs.,

current market price Rs. 180/-. KSK holds Equity stake in some power projects,

stake ranging from 49% to 74%. 144 MW equivalent power projects have been

commissioned and another 131 MW likely to be commissioned soon. It may be

noted that KSK does not have 100% stake in these projects and still market cap of

KSK is more than Rs. 6000 crs. Thus, on peer comparison, Konaseema should

command much higher valuations.

2. Strong pedigree (marquee of existing investors)

3. Gas based power plant like Konaseema will be at great advantage as gas price is

fixed for 5 years whereas thermal power plants (its competitors) will continue to pay

higher n higher coal prices each coming year.

4. By the time IPO hits market, Konaseema will be a profit-making company.

5. Konaseema will be eligible for carbon credits as well.

VBC Ferro also holds 60 lakh shares in Orissa Power Corporation which is

implementing 100 MW Hydel Power Plant out of which 20 MW may start operations in

next 3 months. This investment may also have market value of nearly 60 crs.

Further, VBC Ferro is investing money in another company which is implementing 45

MW Thermal Power Plant which will supply power to VBC Ferro at concessional rates

to bring down power cost of VBC Ferro.

In fact, KGPL IPO may turn out to be successful  considering giants like L&T, ILFS, IDBI, GIC, LIC, Australian Funds are share holder of KGPL

(very few companies will have such a big list of renowned investors). KGPL has

settled for the best in all respects as Siemens, L&T, NTPC are also associated with

it for plant and its erection.