India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Pellet plant operating at >100% CU
We visited Godawari’s (GPIL) Raipur plant to conduct a
ground check on operations of 0.6mn tpa pellet plant and
20MW biomass-based power plant. We also visited plant of
Hira Ferro alloys, which is to become GPIL’s 51% subsidiary
post completion of proposed amalgamation of group
companies – RR Ispat and Hira Industries.
Key Takeaways:
Pellet plant: 0.6mn tpa pellet plant is currently operating at
>100% capacity utilization. The total cost of production at Rs3,750/
tonne consists of iron ore fines cost of Rs2,050/t (from captive
mine, incl. yield loss of 12-14%) and conversion cost of Rs1,700/
tonne. Even though market price of pellet is Rs6,500-7,000/tonne,
majority of pellet is captively consumed as availability of lumpy
iron ore for DRI production is not sufficient (see next point).
Iron ore operation: 140ktpa of output is expected from captive
Ari Dongari mine for Q3FY11. The landed cost is Rs1,500/tonne
(freight cost of Rs500). However, since the magnetite ore from this
mine is not suitable for direct usage in DRI kiln, ~85% of ore is
first converted into pellet, which is then mostly consumed captively
for DRI production (see pg3 for DRI costing with captive pellet).
20 MW biomass-based power plant: The company has
commenced operation at recently commissioned plant. However,
cost of power generation is high because of high fuel cost (husk
cost of Rs2.3/unit of power).
VALUATIONS AND RECOMMENDATION
Although slow offtake in steel demand, declining global steel prices
and strong raw material prices could keep steel profitability under
pressure in the near-term, we expect GPIL to benefit from earnings
CAGR of 50% over FY10-FY12E on volume growth and margin
expansion driven by recently commissioned 0.6 mntpa pellet plant,
20 MW biomass power plant and Ari Dongri Mine.
At CMP of Rs189, the stock is attractively valued at 3.4x EV/
EBITDA and 4.6x P/E on FY12E basis. We recommend conviction
‘BUY’ on the stock with a target price of Rs276.
Sponge iron: In spite of producing only ~120kt of DRI in H1FY11, the company is positive
of producing 160-170kt of DRI in H2FY11. Higher usage of pellet to help in better DRI yield
(67% compared to 65% when using lumpy ore of the same grade).
Power tariff a dampener: Power tariff remains low at Rs2-2.8/unit, as a result of which
the trade-off is in favour of producing billet and Ferro alloys rather than selling power on
merchant basis.
Ardent Steel (not visited): Operation of 0.6mn tpa pellet plant at GPIL’s 75% subs.
Ardent Steel is yet to stabilise fully and can contribute to profitability significantly from
Q4FY11 onwards only. The company would be using iron ore fines purchased from 3rd party
miners. However, owing to freight advantage, the company expects good profitability.
Amalgamation of group companies expected soon: GPIL is merging Hira Industries
and RR Ispat (100% subsidiary) with itself; which would result in 13% equity dilution.
No comments:
Post a Comment