3QFY2011 Result : Buy Godawari Power & Ispat –Target Rs247- Angel Broking

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Godawari Power & Ispat – 3QFY2011 Result Update

Angel Broking maintains a Buy on Godawari Power & Ispat with a Target Price of Rs. 247.

GPIL’s net sales increased by 13.2% yoy and 54.6% qoq to `229cr in 3QFY2011,

while net profit grew by 55.6% yoy and 192.1% qoq to `21cr.

Strong growth in profitability: For 3QFY2011, GPIL’s net sales increased by

13.2% yoy and 54.6% qoq to `229cr on account of a) increased pellet sales

volumes (18,265 tonnes v/s nil in 3QFY2010 and 3,313 tonnes in 2QFY2011)

and b) higher realisations yoy and qoq across product categories. During the

quarter, sponge iron realisation increased by 38.0% yoy (up 17.7% qoq) to

`16,988/tonne and billet realisation increased by 19.1% yoy (up 2.7% qoq) to

`25,331/tonne. Average pellet realisation stood at `7,292/tonne, up 35.8% qoq.

Despite other expenses as a percentage of net revenue increasing to 16.7% from

9.7% in 3QFY2010 on account of higher fuel consumption, lower raw-material

cost (which as a percentage of net revenue declined to 57.1% from 71.1% in

3QFY2010) resulted in a 728bp yoy EBITDA margin expansion to 23.0%.

Consequently, EBITDA grew by 65.8% yoy to `52cr and net income grew by

55.6% yoy to `21cr.

Outlook and valuation: GPIL posted strong profitability growth in 3QFY2011.

Despite higher prices of key inputs, GPIL remains well poised to sustain strong

profitability on account of pellet sales going forward. At the CMP, the stock is

trading at 5.1x FY2011E and 2.7x FY2012E EV/EBITDA. On a P/BV basis, it is

trading at 0.8x FY2011E and 0.7x FY2012E estimates. We maintain Buy on GPIL

with a revised Target Price of `247 (`302), valuing it at 4x FY2012E EV/EBITDA.

Revenue growth driven by increased pellet sales

GPIL’s 3QFY2011 net sales increased by 13.2% yoy and 54.6% qoq to `229cr on

account of a) increased pellet sales volumes (18,265 tonnes v/s nil in 3QFY2010

and 3,313 tonnes in 2QFY2011) and b) higher realisations yoy and qoq across

product categories. During the quarter, sponge iron realisation increased by 38.0%

yoy (up 17.7% qoq) to `16,988/tonne, while billet realisation increased by 19.1%

yoy (up 2.7% qoq) to `25,331/tonne. Average pellet realisation stood at

`7,292/tonne, up 35.8% qoq.

Margins improve on account of higher realisations

Other expenses as a percentage of net revenue increased to 16.7% in 3QFY2011

from 9.7% in 3QFY2010 on account of higher fuel consumption. Nevertheless,

EBITDA margin expanded by 728bp yoy to 23.0% due to higher realisations across

product categories (mainly pellets) and lower raw-material cost (which as a

percentage of net sales declined to 57.1% in 3QFY2011 from 71.1% in

3QFY2010). As a result, EBITDA grew by 65.8% yoy to `52cr and net income grew

by 55.6% yoy to `21cr.

Investment rationale

Mining capacity at Ari Dongri mine to increase

Currently, GPIL has an approval to mine 0.6mn tonnes of iron ore from the

Ari Dongri mine. Management expects to increase the mining capacity to

0.9mn tonnes by March 2011. Increased production from captive iron ore mine

should lower the costs further, given a steep rise in iron ore prices recently.

Pellet sales to improve GPIL’s profits

GPIL’s 0.6mn tonne pellet plant in its 75% subsidiary Ardent Steel in Keonjhar,

Orissa, started commercial production during August 2010. This coupled with

GPIL’s 0.6mn tonne pellet plant should drive strong profitability growth in FY2012,

as we expect pellet prices to remain firm during FY2012.

Billet production to increase during FY2012

Merchant power rates have recently declined to `2.5–3.0 per unit. We expect

merchant power rates to remain stable in the medium term. Hence, we expect GPIL

to increase billet production as the company operates a flexible business model

that allows it to interchange between steel and power, depending on the business

economics.

Outlook and valuation

GPIL reported strong profitability growth in 3QFY2011. Despite higher prices of

key inputs, GPIL remains well poised to sustain strong profitability on account of

pellet sales going forward. At the CMP, the stock is trading at 5.1x FY2011E and

2.7x FY2012E EV/EBITDA. On a P/BV basis, it is trading at 0.8x FY2011E and 0.7x

FY2012E estimates. We maintain Buy on GPIL with a revised Target Price of `247

(`302), valuing it at 4x FY2012E EV/EBITDA.

We have increased our net sales estimates for FY2012 as we now expect higher

product prices. However, we have slightly lowered our profitability estimates to

consider increased coal costs and lower realisations from merchant power sales.