Well above expectations, maintain buy Godawari Power :: Centrum

Well above expectations, maintain buy
Godawari Power & Ispat (GPIL) reported much better operational performance than our
expectations with net sales at ~Rs6bn, up by ~39% YoY on account of higher iron ore
mining output (up ~102% YoY) leading to higher sales volumes in pellets (up 61% YoY
at Chhattisgarh), billets (up 54% YoY) and HB wires (up ~42% YoY). Realizations
remained lower by 4-6% QoQ across products and EBITDA stood at Rs746mn (margin of
~12.5%, up by 20bps YoY). PAT jumped 100% YoY to reach Rs213mn. We were
impressed with GPIL’s strong volumes from pellet plants and captive iron ore mines for
third successive quarter and also higher overall steel output in an otherwise seasonally
weak Q2. We expect GPIL to maintain its strong operational performance in H2 with
pick up in iron ore mining output and revise our volume and earnings estimates
upwards marginally for FY13E/14E. Maintain Buy.
Volumes remain strong in seasonally weak quarter: GPIL showed strong volume in a
seasonally weak quarter on the back of operational improvements, higher mining
output during H1 and flexible product mix advantage. Iron ore production went up by
~102% YoY to reach 1.3 lakh tonne. Chhattisgarh pellet plant maintained its strong
operational performance and utilization was above 100%. Pellet sales volume went up
61% YoY as GPIL went for lower sponge iron production 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 also higher QoQ at 16.6mn units.
Realizations showed a drop of 4-6% QoQ as steel prices weakened in the domestic
markets after the global price fall.
EBITDA improves impressively; margin weakens on account of seasonality and
price fall: Riding on higher iron ore and pellet production, EBITDA went up by 41.7%
YoY to Rs746mn. Margin stood at 12.5%, a drop of 570bps QoQ on account of lower
realizations and lower overall mining volumes during the monsoon quarter.

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Operations expected to maintain robust performance in H2FY13: 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 in H2. Iron ore production for FY13E is expected to be well
above 7 lakh tonne as GPIL has the flexibility to go upto 0.9-1 mtpa production in the
next few years on the basis of its mining plan approval by IBM. 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 in earnings from the same in H2FY14E.
We have revised our volume estimates upwards marginally to factor in the robust
operational performance and as a result our consolidated EBITDA estimates for
FY13E/14E have been revised upwards by 3.2%/3.3% respectively. GPIL has achieved
H1 EPS of Rs21.4 and we see a good probability of the company surpassing our FY13E
EPS estimate of Rs41.2. We revise our FY14E EPS estimate upwards by 6% to Rs49.5.
Valuations: We continue to like the operations of the company with captive iron ore,
power and pellets backed flexible steel portfolio and reiterate our view on GPIL as one
of the best diversified midcap steel stocks having consistent performance and attractive
valuations. We value the company at 4x FY14E EV/EBITDA to arrive at a target price of
Rs175. Maintain Buy.