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Godawari Power & Ispat -Encouraging results in current scenario…
Godawari Power and Ispat has reported better than estimated numbers
for Q3FY11. The topline grew a robust ~54% QoQ and ~13% YoY led
by improved volumes in all segments (saleable steel volumes up ~31%
QoQ) and robust blended realisations (up ~13% QoQ and ~38% YoY).
EBITDA margins also improved ~240 bps QoQ and ~730 bps YoY
despite a surge in raw material costs (up ~40% QoQ) on the back of
robust topline growth arresting further declines in EBITDA margins.
Similarly, PAT registered a steep rise solely on the back of robust
topline growth despite a rise in interest cost (up ~50% QoQ and
~106% YoY) partly due to an increase in the loan book (fresh issue of
12% secured debentures aggregating | 125 crore). A backward
integrated business comprising captive iron ore mines and a flexible
sales product mix of steel, pellets and power make Godawari Power &
Ispat an interesting investment bet. We have maintained our target
price of | 184/share on the stock and rate it as BUY.
ƒ Volume growth leads the way
Sales volumes saw a rise during Q3FY11 across all segments viz.
sponge iron (up ~7% QoQ), steel billets (up ~115% QoQ and
~116% YoY), HB wire (up ~16% QoQ) and power (up ~5% QoQ)
ƒ Pellet plant to add more value
Pellet sales came in higher at ~18,265 tonnes (up ~450% QoQ). The
Orissa pellet plant (merchant - 0.6 MT) has been commissioned and
is expected to start contributing to the merchant pellet sales from
Q3FY12 onwards. We believe pellet prices would continue to remain
strong in the near medium term. Coupled with higher volumes, it
should be the key performance driver for the company.
Valuation
At the CMP of | 165, the stock is discounting its FY11E and FY12E
EV/EBITDA by 4.8x and 3.9x, respectively. We have valued the stock at
3.5x FY12E EV/EBITDA and maintained BUY rating with a target of| 184.
Result Analysis
The topline growth was aided by robust volume growth (saleable steel
volumes up ~31% QoQ) and improved blended realisations (up ~13%
QoQ and ~38% YoY). EBITDA margins expanded (up 240 bps QoQ and
730 bps YoY) despite a surge in the operational cost. PAT growth also
jumped due to topline growth acting as the prime catalyst despite a rise in
interest cost due to additional debt raised to the tune of | 125 crore.
Pellets to add value going forward
GPIL commissioned its 0.6 MT pellet plant in Chhattisgarh in Q4FY10
using captive fines produced from the nearby Ari Dongri iron ore mine.
Also, GPIL’s 75% subsidiary, Ardent Steel, recently commissioned its 0.6
MT merchant pellet plant in Orissa in Q3FY11.
Iron ore production saw a substantial jump during Q3FY11 on a QoQ
basis (up ~65%). Pellet sales during the quarter also remained strong at
~18,265 tonnes (up ~450% QoQ).
At present, the entire iron ore production is coming only from the Ari
Dongri mine, as the Boria Tibu mine is on the verge of starting mining
operations. An additional 0.6 MT of pellet plant at Ardent Steel was
commissioned and has begun trial production. It will start contributing to
merchant pellet sales from Q3FY12 onwards.
We have factored in the positive contribution of pellets to our estimates
based on increased iron ore production on account of additional
contribution from the Boria Tibu mine and additional sales contribution
from the merchant pellet plant at Orissa from Q3FY12 onwards.
We believe additional pellet production contribution from the Orissa pellet
plant would contribute ~| 44 crore to the topline of the company during
FY12E.
Valuations and future outlook
World crude steel production reached 1,414 million metric tonnes (MMT)
in 2010. This was an increase of 15% compared to 2009. All major steelproducing countries and regions showed double-digit growth in 2010.
The EU and North America had higher growth rates due to the lower base
effect from 2009 while Asia and the CIS recorded relatively lower growth.
In December 2010, world crude steel production for the 66 countries
reporting to the World Steel Association (worldsteel) was 116.2 MMT, an
increase of 7.8% compared to December 2009. The crude steel capacity
utilisation ratio of the 66 countries in December 2010 declined slightly to
73.8% compared to 75.2% in November 2010.
Shifting of raw material contracts from an annual to quarterly basis and
improvement in steel production on a global basis and in China during
the quarter ended December 2010 also led to cost-based pressures with a
simultaneous recovery in steel prices.
Exports of steel products from China have reduced in recent months on
the back of energy conservation norms and closure of small mills. This is
further expected to be a positive for steel prices and steelmakers globally.
In such a scenario, we continue to prefer companies with backward
integration in terms of raw material linkage. GPIL has successfully started
its iron ore mining and has been ramping up the production gradually
with improved iron ore production expected due to contribution from the
Boria Tibu mine. Pellet sales will also improve the topline of the company
based on firm iron ore realisations on the back of supply side constraints
due to the ongoing floods and cyclone in Australia.
We have factored in the improved volume scenario due to additional
contribution expected from the merchant pellet plant at Orissa from
Q3FY12 onwards along with an increase in iron ore production aided by a
ramp-up at the Boria Tibu mine. We have revised upward our EPS
estimates for the company for both FY11E and FY12E based on firm
realisations across major product categories and demand outlook ahead.
At the CMP of | 165, the stock is discounting its FY11E and FY12E
EV/EBITDA by 4.8x and 3.9x, respectively. On the other hand, it is also
discounting its FY11E and FY12E earnings by 8.2x and 6.2x, respectively.
We believe the stock could see significant value addition from its pellet
business. We have valued the stock at 3.5x its FY12E EV/EBITDA and
assigned a target price of | 184. We maintain our BUY rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Godawari Power & Ispat -Encouraging results in current scenario…
Godawari Power and Ispat has reported better than estimated numbers
for Q3FY11. The topline grew a robust ~54% QoQ and ~13% YoY led
by improved volumes in all segments (saleable steel volumes up ~31%
QoQ) and robust blended realisations (up ~13% QoQ and ~38% YoY).
EBITDA margins also improved ~240 bps QoQ and ~730 bps YoY
despite a surge in raw material costs (up ~40% QoQ) on the back of
robust topline growth arresting further declines in EBITDA margins.
Similarly, PAT registered a steep rise solely on the back of robust
topline growth despite a rise in interest cost (up ~50% QoQ and
~106% YoY) partly due to an increase in the loan book (fresh issue of
12% secured debentures aggregating | 125 crore). A backward
integrated business comprising captive iron ore mines and a flexible
sales product mix of steel, pellets and power make Godawari Power &
Ispat an interesting investment bet. We have maintained our target
price of | 184/share on the stock and rate it as BUY.
ƒ Volume growth leads the way
Sales volumes saw a rise during Q3FY11 across all segments viz.
sponge iron (up ~7% QoQ), steel billets (up ~115% QoQ and
~116% YoY), HB wire (up ~16% QoQ) and power (up ~5% QoQ)
ƒ Pellet plant to add more value
Pellet sales came in higher at ~18,265 tonnes (up ~450% QoQ). The
Orissa pellet plant (merchant - 0.6 MT) has been commissioned and
is expected to start contributing to the merchant pellet sales from
Q3FY12 onwards. We believe pellet prices would continue to remain
strong in the near medium term. Coupled with higher volumes, it
should be the key performance driver for the company.
Valuation
At the CMP of | 165, the stock is discounting its FY11E and FY12E
EV/EBITDA by 4.8x and 3.9x, respectively. We have valued the stock at
3.5x FY12E EV/EBITDA and maintained BUY rating with a target of| 184.
Result Analysis
The topline growth was aided by robust volume growth (saleable steel
volumes up ~31% QoQ) and improved blended realisations (up ~13%
QoQ and ~38% YoY). EBITDA margins expanded (up 240 bps QoQ and
730 bps YoY) despite a surge in the operational cost. PAT growth also
jumped due to topline growth acting as the prime catalyst despite a rise in
interest cost due to additional debt raised to the tune of | 125 crore.
Pellets to add value going forward
GPIL commissioned its 0.6 MT pellet plant in Chhattisgarh in Q4FY10
using captive fines produced from the nearby Ari Dongri iron ore mine.
Also, GPIL’s 75% subsidiary, Ardent Steel, recently commissioned its 0.6
MT merchant pellet plant in Orissa in Q3FY11.
Iron ore production saw a substantial jump during Q3FY11 on a QoQ
basis (up ~65%). Pellet sales during the quarter also remained strong at
~18,265 tonnes (up ~450% QoQ).
At present, the entire iron ore production is coming only from the Ari
Dongri mine, as the Boria Tibu mine is on the verge of starting mining
operations. An additional 0.6 MT of pellet plant at Ardent Steel was
commissioned and has begun trial production. It will start contributing to
merchant pellet sales from Q3FY12 onwards.
We have factored in the positive contribution of pellets to our estimates
based on increased iron ore production on account of additional
contribution from the Boria Tibu mine and additional sales contribution
from the merchant pellet plant at Orissa from Q3FY12 onwards.
We believe additional pellet production contribution from the Orissa pellet
plant would contribute ~| 44 crore to the topline of the company during
FY12E.
Valuations and future outlook
World crude steel production reached 1,414 million metric tonnes (MMT)
in 2010. This was an increase of 15% compared to 2009. All major steelproducing countries and regions showed double-digit growth in 2010.
The EU and North America had higher growth rates due to the lower base
effect from 2009 while Asia and the CIS recorded relatively lower growth.
In December 2010, world crude steel production for the 66 countries
reporting to the World Steel Association (worldsteel) was 116.2 MMT, an
increase of 7.8% compared to December 2009. The crude steel capacity
utilisation ratio of the 66 countries in December 2010 declined slightly to
73.8% compared to 75.2% in November 2010.
Shifting of raw material contracts from an annual to quarterly basis and
improvement in steel production on a global basis and in China during
the quarter ended December 2010 also led to cost-based pressures with a
simultaneous recovery in steel prices.
Exports of steel products from China have reduced in recent months on
the back of energy conservation norms and closure of small mills. This is
further expected to be a positive for steel prices and steelmakers globally.
In such a scenario, we continue to prefer companies with backward
integration in terms of raw material linkage. GPIL has successfully started
its iron ore mining and has been ramping up the production gradually
with improved iron ore production expected due to contribution from the
Boria Tibu mine. Pellet sales will also improve the topline of the company
based on firm iron ore realisations on the back of supply side constraints
due to the ongoing floods and cyclone in Australia.
We have factored in the improved volume scenario due to additional
contribution expected from the merchant pellet plant at Orissa from
Q3FY12 onwards along with an increase in iron ore production aided by a
ramp-up at the Boria Tibu mine. We have revised upward our EPS
estimates for the company for both FY11E and FY12E based on firm
realisations across major product categories and demand outlook ahead.
At the CMP of | 165, the stock is discounting its FY11E and FY12E
EV/EBITDA by 4.8x and 3.9x, respectively. On the other hand, it is also
discounting its FY11E and FY12E earnings by 8.2x and 6.2x, respectively.
We believe the stock could see significant value addition from its pellet
business. We have valued the stock at 3.5x its FY12E EV/EBITDA and
assigned a target price of | 184. We maintain our BUY rating on the stock.
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