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Godawari Power and Ispat
Investment Rationale
Higher Capacity Utilization at Merchant Pellet Plant to Drive Near Term Earnings:
Ardent Steel, a 75% Subsidiary of Godawari Power, operates 0.6 mtpa merchant
pellet plant in Orissa. The plant sources inexpensive iron ore fines from the local market
and converts them into high value pellets for merchant sale. The plant use to operate at
half of the stated capacity till November 2011 due to technical difficulties. It has however
stabilised, having achieved ~100% capacity utilization in December 2011. Accordingly,
we expect higher pellet output and moderation in conversion cost, which would drive
segment’s near term earnings.
Commencement of Mining At Boria Tibu to Expand Margins: Godawari Power
operates 0.6 mtpa Ari Dongri ore mine, meeting ~68% of its captive ore requirement at
66% and 100% capacity utilization of its sponge iron and pellet plants respectively. This
mine contains ~7 million tons of mineral resources, indicating mine life of ~12 years at
current production rate. The company also owns Boria Tibu iron ore mine, which contains
~8 million tons of mineral resources and also has all the approvals for mining 0.6
mtpa of ore. Despite having all approvals, mining at Boria Tibu has not begun as the
company is still awaiting handing over of the mine by the forest department. Once Boria
Tibu commences mining operations, the company is expected to source 100% of iron ore
requirement from captive mines namely Ari Dongri & Boria Tibu mines.
Downward Revision in FY12 Earnings: Godawari is facing delays in negotiating
transportation contracts for captive iron ore. Though the management is confident of
closing the contract in early Q4 FY12, we have assumed a further delay of 3-6 months.
Accordingly, we lower our FY12 earnings estimates to `19.3 compared to our previous
estimate of `25. However, we maintain our FY13 earnings estimate at ~`32.
Key Near Term Catalysts: We believe GPIL’s improving operating performance (which
would translate into higher profitability), full year contribution from Ardent steel, commencement
of operations of Boria Tibu mine and favorable outcome on coal mine
(Chhattisgarh Captive Coal Mining Ltd) will be key near term catalysts for the stock.
Outlook & Valuation: We expect Godawari Power to report ~37% CAGR top line
growth between FY11-13E on account of higher capacity utilization of pellet plant, better
realizations and improvement in steel demand. However, its EBITDA margins are expected
to decline due to increasing exposure to high cost e-auction/imported coal.
Based on current weak market conditions, we lower our FY13 EV/EBITDA multiple on the
stock from 4.5x to 4.0x. Accordingly, we reduce our 12 month price target `146 but
maintain our BUY rating due to attractive valuation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Godawari Power and Ispat
Investment Rationale
Higher Capacity Utilization at Merchant Pellet Plant to Drive Near Term Earnings:
Ardent Steel, a 75% Subsidiary of Godawari Power, operates 0.6 mtpa merchant
pellet plant in Orissa. The plant sources inexpensive iron ore fines from the local market
and converts them into high value pellets for merchant sale. The plant use to operate at
half of the stated capacity till November 2011 due to technical difficulties. It has however
stabilised, having achieved ~100% capacity utilization in December 2011. Accordingly,
we expect higher pellet output and moderation in conversion cost, which would drive
segment’s near term earnings.
Commencement of Mining At Boria Tibu to Expand Margins: Godawari Power
operates 0.6 mtpa Ari Dongri ore mine, meeting ~68% of its captive ore requirement at
66% and 100% capacity utilization of its sponge iron and pellet plants respectively. This
mine contains ~7 million tons of mineral resources, indicating mine life of ~12 years at
current production rate. The company also owns Boria Tibu iron ore mine, which contains
~8 million tons of mineral resources and also has all the approvals for mining 0.6
mtpa of ore. Despite having all approvals, mining at Boria Tibu has not begun as the
company is still awaiting handing over of the mine by the forest department. Once Boria
Tibu commences mining operations, the company is expected to source 100% of iron ore
requirement from captive mines namely Ari Dongri & Boria Tibu mines.
Downward Revision in FY12 Earnings: Godawari is facing delays in negotiating
transportation contracts for captive iron ore. Though the management is confident of
closing the contract in early Q4 FY12, we have assumed a further delay of 3-6 months.
Accordingly, we lower our FY12 earnings estimates to `19.3 compared to our previous
estimate of `25. However, we maintain our FY13 earnings estimate at ~`32.
Key Near Term Catalysts: We believe GPIL’s improving operating performance (which
would translate into higher profitability), full year contribution from Ardent steel, commencement
of operations of Boria Tibu mine and favorable outcome on coal mine
(Chhattisgarh Captive Coal Mining Ltd) will be key near term catalysts for the stock.
Outlook & Valuation: We expect Godawari Power to report ~37% CAGR top line
growth between FY11-13E on account of higher capacity utilization of pellet plant, better
realizations and improvement in steel demand. However, its EBITDA margins are expected
to decline due to increasing exposure to high cost e-auction/imported coal.
Based on current weak market conditions, we lower our FY13 EV/EBITDA multiple on the
stock from 4.5x to 4.0x. Accordingly, we reduce our 12 month price target `146 but
maintain our BUY rating due to attractive valuation.
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