GPIL - Q1FY15 Result Update - Operational performance strong, one-offs lift PAT: Centrum

Rating: Buy; Target Price: Rs225; CMP: Rs139.4; Upside: 61.4%



Operational performance strong, one-offs lift PAT



We maintain Buy on Godawari Power & Ispat (GPIL) with at TP of Rs225
and reiterate it as one of our top ferrous midcap picks as we see
earnings at an inflection point (we expect EBITDA/PAT CAGR of ~30%/81%
during FY14-16E) and margin improvement on the back of higher pellet
volumes and captive iron ore mining. Q1 results were strong with
margins at 18.2% led by strong pellet sales. Boria Tibu mine (0.7
mtpa) remains on track to start production in H2FY15E and together
with higher pellet volumes could lead to a sharp re-rating in the
stock.

$ Higher pellet volumes, uptick in realizations drive EBITDA beat:
Q1FY15 results were above our estimates with EBITDA at Rs1084mn (up
11.5% vs est. of Rs972mn) led by higher pellet volumes and better
realizations from the steel business. Pellet production was up ~104%
QoQ at 3.95 lakh tonne while sales volumes stood at 2.6 lakh tonne (up
~145% QoQ). Steel business realizations were up 4-6% QoQ across
products. Solar power plant produced 27.5 mn units at a PLF of ~25%
while Ardent Steel’s plant was closed due to delay in approval for
operations from MoEF.

$ Exceptional gain of ~Rs350mn, lower depreciation and negative tax
lift PAT: GPIL had exceptional gain of ~Rs350mn on sale of one of its
long term trade investments (shares of coal washery project sold by
GPIL which was part of Hira Ferro Alloys) while depreciation was lower
by ~Rs88mn due to change in Schedule 2 of Companies Act. PAT was
further lifted by negative tax on account of investment allowance for
capex incurred for new pellet plants and some deferred tax reversal.
Management indicated that tax rate for FY15 could be below MAT rate
but would be closer to MAT from FY16E onwards.

$ Higher pellet volumes, captive mining (Boria Tibu) key triggers:
Management has sounded positive on mine development work at Boria Tibu
mine and reiterated its volume guidance of ~0.2MT captive iron ore
mining in FY15E at Boria Tibu. We revise our pellet sales volume
estimates from Chhattisgarh upwards by ~11%/8% for FY15E/16E but
reduce pellet volumes for FY15E from Ardent Steel due to temporary
shutdown. We expect EBITDA/PAT CAGR of ~30%/81% during FY14-16E led
largely by the pellet division and higher captive iron ore
availability. With no major incremental capex in either steel or
power, we expect ~Rs2bn of net debt repayment over FY15-16E resulting
in deleveraging.

$ Reiterate stock as top ferrous midcap pick: We expect sharp
re-rating of the stock on the back of higher profits from the pellet
division (led by higher volumes), starting of Boria Tibu mine in
H2FY15E, deleveraging of the balance sheet with debt repayments, end
of the capex cycle and improvement in return ratios. We view GPIL as
one of the best diversified midcap steel stocks available at
attractive valuations, value it at 4x June’16E EV/EBITDA and maintain
Buy with a target price of Rs225. Key risks include sharp drop in
realizations of steel products, lower than expected PLF at the 50 MW
solar power plant and lower pellet and captive iron ore production.



Thanks & Regards

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