2QFY12 Results Update Sector: Metals Godawari Power & Ispat BSE SENSEX S&P CNX 17,193 5,169 CMP: INR119 TP: INR198 Buy Bloomberg GODPI IN Equity Shares (m) 31.8 52-Week Range (INR) 224/108 1,6,12 Rel. Perf. (%) 4/-27/-28 M.Cap. (INR b) 3.8 M.Cap. (USD m) 75.9 Consolidated Godawari Power and Ispat's: below est.; Heavy rains impact captive iron ore production affecting volumes, profitability Godawari Power and Ispat's (GODPI) 2QFY12 adjusted standalone PAT declined 67% QoQ to INR99m (against our estimate of INR309m) due to the use of high cost external iron ore and lower sales volumes. Iron-ore production at captive mines (Ari Dongri) declined 17% QoQ to 63k tons due to heavy monsoons in 2QFY12, which led to GODPI having to procure iron ore from external sources. Revenue declined 20% QoQ to INR3.4b due to lower sponge iron sales volumes as production was affected by limited availability of captive iron ore. Standalone EBITDA declined 38% QoQ to INR429m as the high cost of external iron ore impacted margins. EBIT from the steel division decreased 38% QoQ to INR340m. The power division's EBIT declined 40% QoQ to INR60m. Power generation suffered due to lower sponge iron production. Power generation declined 13% QoQ to 87mu. Average realization was sequentially flat at INR2.9/kwh. Sponge iron ore production declined 11% QoQ to 81k tons due to limited availability of low cost captive iron ore and heavy rains. As a result, sales volumes declined 28% QoQ to 43k tons in 2QFY12. Sponge iron realization improved 2% QoQ to INR19,873/t. Pellet production was sequentially flat at 153k tons as a 600ktpa pellet plant in Raipur continues to operate at over 100% capacity utilization. We expect consolidated earnings to post 32% CAGR over FY11-13 due to strong volume growth from the pellet plants, higher steel volumes and ramping up of iron ore mines in line with captive requirements. The stock trades at a P/E of 3.5x FY12E and EV/EBITDA of 4x FY12E. Maintain Buy. Sanjay Jain (SanjayJain@MotilalOswal.com);Tel:+9122 3982 5412 Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com); +9122 39825425/ Pavas Pethia (Pavas.Pethia@MotilalOswal.com); +9122 39825413
Heavy rains hit captive iron ore production, has cascading effect on 2QFY12 performance Godawari Power and Ispat's (GODPI) revenues declined 20% QoQ to INR3.4b due to lower sponge iron sales volumes as limited availability of captive iron ore hit production. Standalone EBITDA declined 38% QoQ to INR429m as the high cost of procured iron ore from external sources impacted margins. EBIT from the steel division decreased 38% QoQ to INR340m. The power division's EBIT declined 40% QoQ to INR60m. Power generation suffered due to lower sponge iron production. Power generation declined 13% QoQ to 87mu. Average realization was sequentially flat at INR2.9/kwh. Iron-ore production declined sharply due to heavy monsoons but production is expected to return to normal levels in 2HFY12. Sponge iron ore production declined 11% QoQ to 81k tons due to limited availability of low cost captive iron ore and heavy rains. As a result, sales volumes declined 28% QoQ to 43k tons in 2QFY12. Sponge iron realization improved 2% QoQ to INR19,873/ t. Specific coal consumption increased as kiln capacities were kept up at high temperature despite lower sponge iron production. Pellet production was sequentially flat at 153k tons as a 600ktpa pellet plant in Raipur operated at above 100% capacity utilization. No provision was made for INR120m MTM loss on forex loans. Production declines on limited availability of captive iron ore 240 Pellet (kt) Sponge Iron (kt) Steel (kt) Iron ore (kt) 180 120 60 0 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 Lower production leads to lower sales volumes 80 Pow er (MU) Sponge Iron (kt) Steel (kt) 60 40 20 0 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 Source: Bloomberg/Company/MOSL 2
Pellet plant operates at over 100% capacity; Ardent pellet production up 21% QoQ; Maintain Buy Pellet production was sequentially flat at 153k tons as a 600ktpa pellet plant in Raipur operated at above 100% capacity utilization. Another pellet plant, under its subsidiary, Ardent Steel, is ramping up well and produced 73k tons (up 21% QoQ) of pellets in 2QFY12. Pellet realization was sequentially flat at INR8,218/ton and is expected to remain strong on the backdrop of scarcity of iron ore after a mining ban in Karnataka. With the successful commissioning of these pellet plants, GODPI announced capex of INR3.5b to set up another pellet plant with 1.2mtpa capacity at Raipur, where its existing plant is located. GODPI expects to commission the plant by September 2013. We expect consolidated earnings to post 32% CAGR over FY11-13 due to strong volume growth from the pellet plants, higher steel volumes and ramping up of iron ore mines in line with captive requirements. The stock trades at a P/E of 3.5x FY12E and EV/EBITDA of 4x FY12E. Maintain Buy. 3
Godawari Power & Ispat: an investment profile Company description Godawari Power and Ispat (GODPI) is a mid-sized integrated player that produces steel through the spongeiron route and generates captive power (from waste gases produced at its kilns) to feed its induction furnaces. GODPI's product slate includes sponge iron, steel billets, steel wires, wire rods and ferro alloys and it has been allotted coal and iron ore mines as well. It doubled capacity of sponge iron to 495,000tpa and that of steel billets to 400,000tpa and has a 53MW CPP with an additional 20MW biomass-based power plant. Key investment arguments GODPI's 0.6mtpa pellet plant, which converts iron-ore fines into pellets, is operating at 100% capacity, well after technological modification in 1HFY11. Captive iron-ore production is also ramping up. Self sufficiency in iron ore, sale of surplus pellets and recovery of sponge iron prices will expand margins of the steel segment. A 0.6mtpa pellet unit in a 75% subsidiary (Ardent Steel) was commissioned in 1HFY11. This plant, located in Barbil, will add growth to consolidated earnings over the next few years. Recent developments A 0.6mtpa pellet unit of a 75% subsidiary (Ardent Steel) is ramping up well with utilization of 49% in 2QFY12. Valuation and view The stock trades at a P/E of 3.5x FY12E and EV/ EBITDA of 4x FY12E. Maintain Buy. Sector view A mining ban in Karnataka and regulatory rigor in the Barbil region has affected supply of iron ore to the sponge iron industry. Marginal sponge iron ore producers are forced either to operate at lower capacity or incur high iron ore cost. This has resulted in strong sponge iron prices, which are at a three-year high in the domestic market. Prices are expected to remain strong in the near term as iron ore availability to the industry will remain a concern as more mining regions come under regulator rigor. Key investment risks Earnings are highly leveraged to sponge iron and steel prices. Comparative valuations Godawari Monnet Sarda Power Ispat Energy P/E (x) FY12E 3.5 9.5 7.9 FY13E 2.6 8.0 5.9 P/BV (x) FY12E 0.5 1.2 0.5 FY13E 0.5 1.1 0.5 EV/Sales (x) FY12E 0.6 3.1 1.4 FY13E 0.7 2.0 1.0 EV/EBITDA (x) FY12E 4.0 11.6 9.6 FY13E 4.3 9.2 6.4 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY12 34.5 35.2-2.0 FY13 46.9 44.2 6.3 Target price and recommendation Current Target* Upside Reco. Price (INR) Price (INR) (%) 119 198 66.4 Buy * Basis:1x P/B FY13 Stock performance (1 year) Shareholding pattern (%) Sep-11 Jun-11 Sep-10 Promoter 63.7 63.7 59.0 Domestic Inst 4.6 4.7 5.4 Foreign 4.8 5.3 8.0 Others 26.9 26.3 27.6 Godawari Power & Ispat Sensex - Rebased 225 190 155 120 85 Nov-10 Feb-11 May-11 Aug-11 Nov-11 4
Financials and Valuation 5
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