Godawari Power & Ispat -Integration benefits; Anand Rathi

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Godawari Power & Ispat
Integration benefits; maintain Buy
Godawari Power & Ispat (GPIL)’s performance was stellar, with
net profit growth of ~56% yoy, which was in line with our
estimates. We raise our FY11e earnings 6.6% (low raw material
costs), but trim FY12e earnings 1.4% (high interest). Buy.

 Surplus pellet, higher realization help revenue growth. GPIL
reported 10.4% yoy growth in revenue to `2.17bn in 3QFY11; the
growth was largely on account of higher realization yoy across
products and additional revenue from surplus pellets.
 EBITDA boosted by integration benefits. EBITDA grew 68%
yoy at `513mn, with a hefty margin expansion of ~800bps yoy to
23.6% in the quarter. Higher production from captive iron-ore
mine and benefits from the recently-commissioned pellet plant
helped the expansion.
 Net profit up 56%, in line with our estimate. Net profit was up
56% yoy to `210mn, in line with our estimate. Higher product
prices and benefits of backward integration into iron-ore and
pellets have led to the excellent profit growth.
 Change in estimate. We raise our FY11e earnings by 6.6%, to
account of lower-than-estimated raw material costs. But, we trim
our FY12e earnings by 1.4% to factor in higher interest due to
additional borrowings of `1,250m (raised this quarter).
 Valuation and risks. At current market price of `165/share, the
stock trades at attractive FY12e PE of 3.5x and EV/EBITDA of
2.5x. Maintain Buy with target price of `280. Key risk: Delay in
iron-ore mining.


Results Review
GPIL’s 3QFY11 performance was stellar, with 56% yoy growth in net
profit, which was in line with our estimates. Revenue was up 10.4%,
on the back of higher realization across the product line as well as
ramp up in the company’s pellet plant (that led to surplus sale of
pellets).
PAT up a hefty 56% yoy; significant margin expansion
Despite revenue growing only 10.4% yoy, net profit was up a hefty 56%
yoy on account of significant improvement in margin. Margins expansion
was owing to higher production from the captive Ari Dongri mine at
Chhattisgarh. The company’s 0.6m-ton pellet plant, which commissioned
in 4QFY10, also contributed to the margin expansion.


Valuations attractive; maintain Buy
GPIL would benefit from backward integration, mainly on account of
higher iron-ore prices. We expect the company to see FY10-13e earnings
CAGR of 58%. The early commissioning of coal mines, which we have
not factored in our estimates, would provide further upside to earnings.
At current market price of `165/share, the stock trades at FY12e PE of
3.5x and an EV/EBITDA of 2.5x, which is at ~50-60% discount to large
steel players. We believe current valuations are attractive, considering the
company’s backward integration plans, which would drive margin and
de-risk it from volatility in commodity prices to some extent.
We value GPIL at 3.5x FY12e EBITDA and arrive at a value of
`253/share. We value its 75% subsidiary, Ardent Steel, at `26/share. We
maintain a Buy on the stock and target price of `280/share.
Risks
 Some iron-ore mines at Chhattisgarh have been facing severe Naxalite
problems in the area where GPIL too has mining operations. Any
such issue in the company’s mining area would pose a major risk.
 Delay in commencement of operations at the Boria Tibu iron ore
mine and slower-than-expected ramp-up in the Ari Dongri mine
would raise costs and, consequently, curtail expected earnings.
 A sharp correction in commodity prices due to a slowdown in
demand would have an adverse impact on our earnings estimate.