In line at operational level; tax write back boosts PAT Godawari Power & Ispat:: Centrum

In line at operational level; tax write back boosts PAT
Godawari Power & Ispat’s (GPIL) operational performance was
largely on expected lines with EBITDA at Rs768mn and margin of
12.3% (above our estimate of Rs758mn). Iron ore production
improved by 12.5% QoQ and stood at ~6.9lakh tonne for FY13.
Sponge iron sales at ~49kt (up ~25% YoY) surprised positively.
Realizations remained lower by 2-6% QoQ across steel products due
to low end user demand and that could have prompted GPIL to sell
more of sponge iron and power. PAT was higher on account of tax
write back on power operations earnings for the last few years
(which were exempted under AITA). We expect growth in pellet
volumes through 1.2mtpa expansion (which is ahead of schedule) to
provide support to operating profits and margins. We revise our
realization estimates lower and reduce our earnings estimates for
FY14E/15E by 10.2%/8%. Maintain Buy.
 Volumes increase in sponge and power, as steel realizations weaken further: Iron
ore production went up by ~12% QoQ to reach 1.6 lakh tonne and sponge iron sales
jumped by ~25% YoY to 48.9kt. Billet sales were lower by ~5.5% QoQ and HB wire
sales also dropped by ~12% QoQ as steel product realizations continued to fall amidst
weak demand and were lower QoQ by 2-6% across product categories. Power sales
continued to be strong at 20.1mn units (up ~49% YoY).
 EBITDA largely in line: EBITDA at Rs768mn was higher QoQ by 9.8% and marginally
higher than our estimate of Rs758mn. Due to pressure on realizations across products
and higher share of low margin sponge iron sales, EBITDA margin stood at 12.3%
(lower by 250bps YoY and up 70bps QoQ).

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 Pellet expansion ahead of schedule: GPIL’s pellet expansion of 1.2mtpa at
Chhattisgarh is ahead of schedule and is expected to be on-stream in Q2FY14E and
management expects ~0.5 MT additional pellet volumes from the same plant in
FY14E. Solar power project of 50 MW remains on track for completion in Q1FY14E and
we have factored in earnings from this in H2FY14E. Iron ore production is expected to
be maintained at ~0.7MT in FY14E. We have revised our pellet volumes estimates
upwards but revised blended realizations downwards due to pressure on steel prices
and as a result our consolidated EBITDA estimates for FY14E/15E have been revised
downwards by 14.3%/13.5% respectively. We revise our FY14E EPS estimate
downwards by ~10% to Rs41.7.
 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 with consistent performance and attractive
valuations. We however remain concerned on the company’s investments in solar
power and the highly leveraged balance sheet. We value the company at 3.5x FY15E
EV/EBITDA to arrive at a target price of Rs148. Maintain Buy.