Godawari Power & Ispat

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1 BSE SENSEX S&P CNX CMP: INR103 TP: INR185 Buy 17,077 5,158 Bloomberg GODPI IN Equity Shares (m) Week Range (INR) 200/70 1,6,12 Rel. Perf. (%) 32/-31/-33 M.Cap. (INR b) 3.3 M.Cap. (USD m) 65.3 Consolidated 3QFY12 Results Update Sector: Metals Godawari Power and Ispat's (GODPI) adjusted standalone PAT for 3QFY12 declined 25% QoQ to INR74m (v/s our estimate of INR249m), as local issues and extended monsoons impacted iron ore production. Consolidated PAT was flat QoQ at INR106m. The company will be providing marked-to-market (MTM) loss of INR229m on forex loans at the year-end. The company's pellet plants continue to operate at 100% capacity utilization. Pellet prices are strong at INR9,000/ton due to shortage of DRI grade iron ore. Billet realization increased 5% QoQ to INR32,406/ton while pellet realization improved 10% QoQ to INR9,002/ ton. We are cutting our EPS estimate for FY13 by 9% to INR42.7 to factor in frequent production disruption at captive iron ore mines due to local issues. The stock is trading at 2.4x FY13E EPS and 0.5x FY13E BV, and at an EV of 3.3x FY13E EBITDA. Maintain Buy. Sanjay Jain / Pavas Pethia

2 Iron ore production impacted by extended monsoon and local issues Revenues increased 25% QoQ to INR4.2b due to higher steel and pellet sales volumes and realization. Billets realization improved 5%QoQ to INR 32,406/t while pellet realization improved 10% QoQ to INR 9002/t. Pellet production was down 2% QoQ at 150k tons. 600ktpa pellet plant at Raipur continues to operate at 100% capacity utilization. Another 600ktpa pellet plant under its subsidiary, Ardent steel produced 71k (down 3% QoQ) of pellets in 3QFY12. Iron ore production declined sharply due to extended monsoon in October followed by local logistics issue. However production has return to normal levels in December 2011 end. Sponge iron ore production declined 5% QoQ to 77k tons due to limited availability of low cost captive iron ore. As a result, sales volumes also declined 34% QoQ to 28k tons during the quarter. Sponge iron realization improved 8% QoQ at INR 21,464/t. Standalone EBITDA declined 4% QoQ to INR413m as high cost external iron ore impacted margins. EBIT from Steel division also decreased 2% QoQ to INR334m. Power generation increased 12% QoQ to 98mu. Average realization increased Paisa 10 QoQ to INR3/kwh. 20MW bio mass power plant is operating at lower utilization level due to demand. Average coal cost is around INR 4000/t with 50% of the requirement coming from linkage coal while rest of it being imported. No provision was made for INR229m MTM loss on forex loans. Production trend ('000 tons) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Billets YoY(%) -n/a n/a Sponge iron YoY(%) HB wire MS Rounds/ Wire rods Fe-Mn Power (MU) Iron Ore Pellets Iron Ore Mining Source: Company/MOSL Sales ('000 tons) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Billets YoY (%) , Sponge iron YoY (%) HB wire MS Rounds/ Wire rods Fe-Mn Pellet Power (MU) Source: Company/MOSL 2

3 Cutting FY13 EPS by 9% and lowering iron ore mining output to 474kt; Maintain Buy We expect pellet realization to remain at elevated levels due to shortage of DRI grade iron ore in India. Ramp up in pellet production in Ardent steel along with superior margins in pellet business will drive earnings. We expect consolidated earnings to grow at a cagr of 26% over FY11-13E on the back of stronger volume growth from the pellet plants and higher mine production. However we are lowering our mining output assumption to 474kt from earlier 601kt due to risk to production from local issues. The stock is trading at a P/E of 2.4x FY12E and EV/EBITDA of 3.3x FY12E. Maintain Buy. 3

4 Godawari Power & Ispat: an investment profile Company description Godawari Power and Ispat (GODPI) is a mid-sized integrated player that produces steel through the sponge iron 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 ironore 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. 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 FY13E P/BV (x) FY12E FY13E EV/Sales (x) FY12E FY13E EV/EBITDA (x) FY12E FY13E Recent developments GODPI 20MW biomass power plant has been registered for eligibility of issue of REC certificates Valuation and view The stock is trading at a P/E of 2.4x FY12E and EV/ EBITDA of 3.3x FY12E. Maintain Buy. Sector view Global steel demands still remains subdued due to European economic problems and slow down in construction in China. Certain raw material side issues have prevented costs correction for steel mills thereby forcing them to cut production. Global crude steel production is down 11% to 115m tons in November 2011 from peak production of 130m tons in May 2011 largely driven by China. Global economic growth slow down more particularly in China continues to cloud demand outlook. Indian real steel demand too has slowed down growing only 4.2% YoY to 45.2m tons during April- November We believe Indian demand will still grow 7-8% over couple of years. Depreciation of INR against USD and appreciating Yuan has increased competitiveness of Indian producer's vis-à-vis their Chinese counterparts, therefore lowering Chinese imports threat. EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target* Upside Reco. Price (INR) Price (INR) (%) Buy *FY13 SOTP based Stock performance (1 year) Shareholding pattern (%) Dec-11 Sep-11 Dec-10 Promoter Domestic Inst Foreign Others Godawari Power & Ispat Sensex - Rebased Jan-11 Apr-11 Jul-11 Oct-11 Ja n-12 4

5 Financials and Valuation 5

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