Operational strength showcased again
Godawari Power & Ispat (GPIL) reported much better operational performance than our
expectations with net sales at ~Rs6bn, up by ~22% YoY on account of smart use of its
flexible product mix to achieve higher sales volumes in pellets (up by 73% QoQ at
Chhattisgarh and ~15% QoQ at Orissa). Realizations remained robust across products
and EBITDA stood at Rs1096mn (margin of ~18.2%, up by 340 bps QoQ), led by higher
captive iron ore production of 2.6 lakh tonne. PAT jumped 55% YoY and ~42% QoQ to
reach Rs467mn. We were impressed with GPIL’s strong volumes from pellet plants and
captive iron ore mines for second successive quarter and also it’s intentional build up of
iron ore inventory through higher production in Q1FY13 for the lean season of
monsoons in Q2FY13E. We expect GPIL to maintain its strong operational performance
going forward and revise our volume and earnings estimates upwards for FY13E/14E.
We revise our target price upwards to Rs183 and maintain Buy.
Volumes remain strong, pellet sales jump: GPIL showed strong volume growth QoQ
on the back of operational improvements and flexible product mix advantage. Iron ore
production went up by ~43% QoQ and 243% YoY to reach 2.6 lakh tonne. Chhattisgarh
pellet plant maintained its strong operational performance and utilization was
maintained at ~110% for the second successive quarter. Pellet sales volume went up
QoQ by ~73% as GPIL went for lower sponge iron production in order to benefit from
higher pellet sales which have higher margin. Billet sales increased on the back of
higher production and HB wire sales remained strong. Power sales were flat QoQ due to
higher captive use by GPIL for making steel products. Realizations remained strong
across products with pellet realizations at ~Rs9600/tonne. Pellet volumes from GPIL’s
Orissa subsidiary were robust at 1.2 lakh tonne, up ~15% QoQ.
EBITDA margin improves impressively: Riding on higher iron ore and pellet
production, GPIL improved its EBITDA margin to 18.2%, up 340 bps QoQ. EBITDA went
up by 12.7% QoQ to Rs1096mn mainly on account of higher pellet volumes and strong
realizations across products.
Operations expected to maintain robust performance barring seasonal dip during
monsoons: With captive iron ore mining operations showing impressive performance
and pellet plants operating at high capacity utilization levels, we expect robust
operational performance of GPIL to continue going forward with only seasonal dip
expected in Q2FY13E due to monsoons. Higher iron ore production during Q1FY13
resulted in ~80000 tonne of iron ore inventory which would help the company in
Q2FY13 as iron ore production during monsoons is low. Pellet expansion of 1.2 mtpa at
Chhattisgarh is expected to be on-stream in FY14E and would further increase pellet
volumes from the next year. Solar power project of 50 MW remains on track for
completion in Q1FY14E and we have factored earnings from the same in H2FY14E. We
have revised our volumes and realizations estimates upwards to factor in the robust
operational performance and as a result our consolidated EBITDA estimates for
FY13E/14E have been revised upwards by 6.6%/17.1% respectively.
Valuations: We continue to like the operations of the company with captive iron ore,
power and pellets backed flexible steel portfolio. We value the company at 4.2x FY14E
EV/EBITDA to arrive at a target price of Rs183. We maintain Buy with an upward revised
target of Rs183.
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