The media baron, who already has an exposure to the business through his Agrani project, has bid $1.2 billion for acquiring a 74 per cent stake in ICO. This surpasses Craig McCaw's bid of an equal amount for an 80 per cent stake in the company. It is perhaps Chandra's desire to control the Asian skies that has prompted him to do so. Agrani is by and large a single satellite domestic project with only a limited reach. What makes Agrani different from the likes of Iridium, ICO or Globalstar is that it does not aim to be a pure satphone service provider. It will also have a Ku band Direct-to-Home TV transmission capability, covering India and West Asia, as well as C-band TV distribution mission with pan-Asia coverage.

The DTH service has synergies with Zee Telefilms' existing business and the limitations that the Agrani project had - that of reach and dependence on a single satellite - could be effectively tackled through a controlling stake in ICO. Not only are most of ICO's large investors from Asia, the continent is also projected to be its largest market. But it is still doubtful whether the $1.2 billion investment in ICO would really pay off. Minority investors in Chandra-run companies need not worry, however, as the monies required will not come from these companies. Chandra has apparently tied up finances through other means.

GIPCL
Having oil-fired both the boilers of its 2x125mw lignite unit on November 6, GIPCL will start commercial generation by the end of the month. Normally, one unit is synchronised three months after another (as was done by BSES for its coal fired unit) but not in this case, probably because of the 10 month delay courtesy turbine problems.

According to the management, the stabilisation period will not be opted for and the unit will add Rs 10 crore to the bottomline. GIPCL has also opted to invoke the penalty clause and as a result BHEL will be asked to pay up 10 per cent of the project cost resulting in no cost overrun for GIPCL as it will adjusted against the project cost-Rs 1,503 crore including lignite mining.

An interesting issue is that, for GIPCL the cash received in lieu of delayed cash flows will be capital receipt and hence non-taxable but BHEL can claim the benefit of revenue expenditure U/s 37(1) of the Income-Tax Act. (Refer: Empire Jute Co Ltd v CIT [124 ITR 1)(SC) & Alembic Chemical Works Co Ltd v CIT (177 ITR 377)(SC)].

Though BHEL will not take the hit in one financial year and it is not either intentional or desirable mode of tax planning, considering its tax liability and the payment of Rs 74 crore to Jindal Tractabel-the tax savings (38.5 per cent of cash outgo) will be substantial. (For I-T purposes, the payment will not be shown as penalty charges, otherwise it will be probably disallowed).

In fact, the agreement with BHEL states that if BHEL fails to perform the `order' within the time fixed, BHEL shall pay to the company as liquidated damages, and not as penalty, a sum equal to half per cent of the `order price' per week of delay.

However, the amount of liquidated damages will be subject to a maximum of 10 per cent of the order price. According to the management, the lignite unit (excluding mining operations) was to contribute Rs 44.1 crore to the bottomline in 1999-2000. Against this, it will now contribute only Rs 10 crore and the payment schedule will be worked out in such a way that cash flows for the year will not be affected as GIPCL will deduct the amount from the payment to be made to BHEL. Hence, PAT for the year will be lower but cash flows will be adjusted. The second positive point is that the very nature of PPA will result in PAT for the next year doubling.

The gas unit will again operate at a PLF of 90 per cent for 1999-2000. The naphtha unit's performance depends on GEB as the variable cost alone works out to be Rs 3 (FC:Re 0.90) due to hike in naphtha prices.

GEB logically is reluctant to but power at Rs 3.9 per unit and hence naphtha unit will probably end the year with the PLF of 75 per cent. In any case, GIPCL will be paid for deemed generation (for the committed offtake) which helps GEB also as variable costs are basically reimbursement of costs and fixed cost includes assured profit as well. For DG, GEB has to pay only fixed cost which is better than paying Rs 3.9 per unit unless whatever it buys is sold to industry.

Despite being a power company, GIPCL is cost conscious for the reasons mentioned above. In all probability, it will manage greater allocation of gas by March 2000.

Naphtha unit is a dual fuel plant and hence in the event of gas being available, fuel consumption will be 30 per cent gas and rest naphtha. During the maintenance shut down of its gas unit in the current financial year, naphtha unit was run on gas.

Though fuel is a pass through cost and does not affect PAT but higher PLF (above committed offtake) will result in incentives which though not material will add to the PAT. The lignite unit will be a cash cow as the variable cost will be less than Re 1 and FC - Rs 2.15 to Rs 2.25 per unit resulting in cost of power to GEB to be Rs 3 to Rs 3.15 and hence will be a base load unit.

The stock should begin to rally immediately on the news of commercial generation.

Emcee (with contributions from Sarad Saraf & Urmik Chhaya)