\ Visit Note Godawari Power and Ispat Ltd. January 13 th, 2010 BUY MEDIUM RISK PRICE Rs. 224 TARGET Rs.340 Steel EARLIER RECO Early Signal Stock Review Date Aug. 07, 2009 Reco Price Rs. 110 Target Rs. 170 SHARE HOLDING (%) Promoters 59.0 FII 7.1 FI / MF 5.8 Body Corporates 7.7 Public & Others 20.4 Reuters Code Bloomberg Code BSE Code NSE Symbol Market Capitalization STOCK DATA Shares Outstanding GDPI.BO GODPI@IN 532734 GPIL Rs.6297.5 mn US$ 137.9 mn 28.07 mn 52 Weeks (H/L) Rs. 248 / 42 Avg. Daily Volume (6m) Price Performance (%) 172661 Shares 1M 3M 6M 35 36 165 200 Days EMA Rs.140 Godawari Power and Ispat Ltd (GPIL) is a flagship Company of Raipur (Chattishgarh)-based Hira Group of Industries, which is an integrated steel manufacturer and is having dominant presence in the long product segment of the Steel industry. GPIL manufactures sponge iron, billets, Ferro alloys, captive power, wires rods (through subsidiary company), steel wires and sized ore pellets. Its capacities stand at 490,000 tonnes of Sponge Iron, 400,000 tonnes of Steel Billets, 16,500 tonnes of Ferro Alloys, and 80,000 tonnes of Steel Wires. We recently met the management of GPIL for updates on its latest developments. The managements focus is now on the following:- GPIL has already commissioned mining ore from its Ari Dongri (Chhattisgarh) iron ore mine, which has reserves of 7million tonnes. The company is also under the process of commencing Boria Tibbu (Chhattisgarh) iron ore mine, having reserves of 7mt, in next couple months. GPIL had taken up a backward integration program with setting up a 0.6mtpa pelletization plant and acquiring captive iron ore mines. The pellet plant is expected to be operational by January 10 end which will GPIL to reduce input costs for the sponge iron plant and add to its bottomline. With the surplus pellet sales in the market, GPIL expects to add further to its operating profits. GPIL has set up a 20 MW Biomass power plant that is powered by rice husk. This is over and above its existing 53 MW power plant that is already operational. The company intends to sell its surplus power at market determined rates. The management is also focusing now on (1) Development of existing iron ore mines to meet complete captive requirement in FY 2011 & (2) Commissioning of 0.6Mn TPA Pelletisation plant in Orissa based subsidiary company Ardent Steel (75% holding) by March 10. OUTLOOK & VALUATION Godawari Power and Ispat Ltd is one of the largest sponge iron producers in the country with a capacity of 0.5 Mn tonnes. In the scenario of fluctuating steel prices and volatile demand, GPIL stands strong owing to its backward integrated operations. Taking an early step towards backward integration, GPIL mines it own iron ore and expects to start its pelletisation plant very soon. The company has been allotted coal mines, in a joint venture, out of which GPIL s share is 63 mn tones. It expects to start its coal mining in about a year s time. With GPIL s backward integration coming on track, we expect significant cost saving by way of cost of raw materials. This will directly impact is EBIDTA and bottom line. A further uptick in the steel prices will only add positively to the profits to the company. We expect GPIL to report an APAT of Rs. 543 Mn and Rs. 1355 Mn in FY10E and FY11E respectively. i.e. while its APAT is expected to fall by 15% in FY10, we expect it to grow by 150% in FY11. At the CMP of Rs.224, the stock currently trades at 4.7x its FY11E earnings. We retain our positive view on the stock & recommend a Buy with a target of Rs. 340 (7x its FY11E Earnings and 5 x EV/EBITDA). KEY FINANCIALS Y/E Mar. Please refer to important disclosures at the end of the report Revenue (Rs mn) APAT (Rs mn) AEPS (Rs.) AEPS (% Ch.) PER (x) ROCE (%) ROE (%) EV/EBIDTA (x) FY09 10,355.4 644.7 20.4 (39.6) 11.0 12.9 14.5 7.8 FY10E 9,186.3 543.1 19.3 (5.3) 11.6 10.5 10.9 7.5 FY11E 11,799.8 1,355.5 48.3 149.6 4.7 19.2 21.4 3.7 Analyst : Vatsal Shah vatsal.shah@sushilfinance.com +91 22 4093 5017 Sales : Devang Shah devang.shah@sushilfinance.com +91 22 4093 6060/61 : Nishit Shah nishit.shah@sushilfinance.com +91 22 4093 6074 For private Circulation Only. Sushil Financial Services Private Limited Office : 12, Homji Street, Fort, Mumbai 400 001. Member : BSEL, SEBI Regn.No. INB/F010982338 NSEIL, SEBI Regn.No.INB/F230607435. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : info@sushilfinance.com
INVESTMENT RATIONALE Captive iron ore mines to drive steel business margins Mining from GPIL s captive iron ore mines was commissioned in May, 2009. GPIL produced ~45000 mt of captive iron ore in Q2FY10. It expects to mine 125,000 mt and 150,000 mt of iron ore in Q3FY10 and Q4FY10 respectively. In FY11E and FY12E the company expects to meet its 100 % captive iron ore requirement through its own mines. The total iron ore reserves are at around 7 mn tonnes. Margins are likely to expand due to significant cost savings. Its Coal mine development, however, will take another year. GPIL mined material is in the form of fines and sized ore. The ratio of sized ore to fines is 60:40. In FY11, GPIL will ramp up its iron ore production. It is expected to produce in excess of 600,000 tonnes of Iron ore from its Ari Dongri mine and about 300,000 tonnes from its Boria Tibu Mines. This would amount to a saving close to Rs. 2000/- per tonne from its current cost of production and will directly reflect at the EBIDTA level. The surplus iron ore fines already lying at the mines will be converted to iron ore pellets, after its pellet plant gets operational by January 10 and will be sold in the open market. The company expects an additional operating profit margin of Rs. 1000 per tonne, which contributes to an EBIDTA of Rs. 630 Mn. GPIL holds 75% stake in Orissa based company Ardent Steel, wherein, the company is setting up another iron ore pelletisation plant with a capacity 600,000 TPA. This plant will be operational by end of March, 2010. All of the pellets produced in this plant will be sold in the open market. Company is expecting to produce and sell 300,000 TPA sized iron ore (pellets) from this facility. Additional biomass power plant of 20 MW to further add to the operating profits GPIL is currently selling most of its surplus power on merchant basis as the billets and ferro alloys production is temporarily suspended. The company is currently selling 25 MW of power generated from its waste heat recovery power plant and 10 MW from its thermal power plant. Its total capacity stands at 53 MW. GPIL has set up an additional 20 MW power plant in the vicinity of its existing facilities. This plant is a bio mass based power plant and will run on rice husk. This plant has started operating since December 09. With the additional power plant coming in, the company is hopeful to meet all of its captive requirements. GPIL will sell significant amount of surplus power on the grid at market determined rate. We expect the company to sell approx 256 Mn units and 347 mn units of surplus power in FY10E and FY11E respectively. This would contribute a sum of Rs. 102 Mn in FY10E and Rs. 1319 Mn in FY11E to its EBIDTA. January 13, 2010 2
INDUSTRY REVIEW Indian steel ministry, while giving performance update for Indian steel sector, reaffirmed that India is expected to become the 2nd largest producer of crude steel in the world by 2015, provided all requirements for creation of fresh capacity are adequately met. India also maintained its lead position as the world's largest producer of direct reduced iron or sponge iron. Sponge iron production for sale was 20.8 million tonnes in 2008-09 which was higher by 2.1% over 2007-08. The country is likely to achieve a crude steel production capacity of 124 million tonnes by the year 2012. The National Steel Policy 2005 had projected an annual steel consumption growth of 7 % based on a GDP growth rate of 7-7.5% and production of 110 million tonnes of crude steel by 2019-20. Going by the existing growth trends these estimates are likely to be exceeded and it is envisaged that in the next five years, demand will grow at higher annual average rate of over 10% as compared to around 7% growth achieved between 1991-92 and 2005-06. Production for sale of total finished steel at (alloy + non-alloy) was at 38.961 million tonnes during April to November, 2009 as against 38.024 million tonnes in corresponding period of 2007-08 a growth of 2.5%. Consumption of total finished steel (alloy + non-alloy) was at 34.304 million tonnes during April to November 2009 as against 33.995 million tonnes in corresponding period of 2007-08, a growth of 6.8%. Indian domestic steel prices have been exhibiting upward sentiments over the last one month. Prices have risen and are expected to stay stable. The increase in liquidity and accelerated infrastructure development has augmented the demand of crude steel or sponge iron. This creates a promising growth environment for the steel sector. Companies that are backward integrated and are increasing capacities will benefit from this continued surge in demand of metals. We believe Godawari Power and Ispat Ltd is one such company that has integrated operations and is on the growth path. At the same time, the management is not over aggressive and has excellent cash flow management capabilities. FINANCIAL ANALYSIS Top line to grow over next two years We expect the topline of GPIL to grow from Rs. 10,355.4 Mn in FY09 to Rs. 11,800 Mn in FY11E. Even though commodity prices have corrected sharply and realizations have come down, we expect a growth in the top line due to increased sales volumes of its products. In FY10E, we expect a slight drop in its revenues on account of sharp drop in realization of steel products and cessation of production at its Steel Billet and Ferro Alloy plants. We expect GPIL s revenues to be supported by wires division which has not witnessed a slowdown during the recessionary environment. We expect GPIL to report revenues of Rs. 9,186.3 Mn and Rs. 11,799.8 Mn in FY10E and FY11E respectively. January 13, 2010 3
12,000 Sales (Rs. Mn) 10,000 8,000 6,000 4,000 2,000 Pellets Power HB Wire Steel - Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Operating Profit to see a 40% CAGR in the next two years. GPIL reported an operating profit of Rs. 1225.6 Mn in FY09 and an operating profit of 490 Mn in H1FY10. Like other steel converters in H2FY09, GPIL had to cope with order cancellation, price contraction, low order inflow, pressure on margins, negative cash flows and pressure on liquidity. However, it has now cleared off the high cost inventory and maintained cash flows by selling surplus power on the grid. Thus the company has coped well in the tight economic situation and recessionary environment. Its strategy to stop steel production and sell power in the open market worked well. In FY09 steel contributed only about Rs. 260 mn, while power contributed Rs. 928 Mn to its EBIDTA. We expect GPIL to deliver an operating profit of Rs. 1259.1 Mn and Rs. 2406.2 Mn in FY10E and FY11E. We expect power to continue to be a major portion of its profits. 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 - EBIDTA (Rs. Mn) & Margins 1,614.19 17.9 19.5 793.48 2,406.20 1,225.60 1,259.09 20.4 13.7 11.8 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 EBIDTA Margin 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - January 13, 2010 4
EBIT Break-up (Rs. Mn) 2,500.00 2,000.00 1,500.00 1,000.00 500.00-884.85 453.20 749.70 926.00 714.10 678.72 1,189.79 273.90 206.90 213.72 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Power Steel OUTLOOK & VALUATION Godawari Power and Ispat Ltd is one of the largest sponge iron producers in the country with a capacity of 0.5 Mn tonnes. In the scenario of fluctuating steel prices and volatile demand, GPIL stands strong owing to its backward integrated operations. Taking an early step towards backward integration, GPIL mines it own iron ore and expects to start its pelletisation plant very soon. The company has been allotted coal mines, in a joint venture, out of which GPIL s share is 63 mn tones. It expects to start its coal mining in about a year s time. With GPIL s backward integration coming on track, we expect significant cost saving by way of cost of raw materials. This will directly impact is EBIDTA and bottom line. A further uptick in the steel prices will only add positively to the profits to the company. We expect GPIL to report an APAT of Rs. 543 Mn and Rs. 1355 Mn in FY10E and FY11E respectively. i.e. while its APAT is expected to fall by 15% in FY10, we expect it to grow by 150% in FY11. At the CMP of Rs.224, the stock currently trades at 4.7x its FY11E earnings. We retain our positive view on the stock & recommend a Buy with a target of Rs. 340 (7x its FY11E Earnings and 5 x EV/EBITDA) January 13, 2010 5
QUARTERLY RESULTS (Standalone) (Rs.mn) PROFIT & LOSS (standalone) (Rs. mn) Y/E March H1 H1 Q2 Q2 FY09 FY10 FY09 FY10 Net Revenue 6,520.5 3,700.4 2,169.3 1,531.1 % Ch. YoY 87.1 (43.2) (32.3) (53.8) RM Cons. 5,037.6 2,981.2 1,708.8 1,272.4 % Ch. YoY 89.5 (40.8) (27.0) (52.8) % STO 77.3 80.6 78.8 83.1 Staff costs 57.6 74.9 35.3 39.6 % Ch. YoY 36.8 30.0 40.1 22.2 % STO 0.9 2.0 1.6 2.6 Other Exp. 372.8 306.1 159.8 146.3 % Ch. YoY 53.7 (17.9) (10.1) (25.0) % STO 5.7 8.3 7.4 9.6 Total Exp. 5,431.1 3,210.5 1,853.1 1,357.4 % Ch. YoY 96.4 (40.9) (29.8) (51.4) % STO 83.3 86.8 85.4 88.7 EBITDA 1,089.4 489.9 316.2 173.7 % Ch. YoY 51.6 (55.0) (44.0) (66.9) % Margin 16.7 13.2 14.6 11.3 Interest 159.8 150.0 72.5 77.5 % Ch. YoY 19.0 (6.1) (14.9) 3.9 % STO 2.5 4.1 3.3 5.1 EBDT 929.6 339.9 243.7 96.2 % Ch. YoY 59.0 (63.4) (49.2) (78.6) % Margin 28.5 17.5 11.2 6.3 Depreciation 137.1 149.3 76.2 73.1 % Ch. YoY 22.2 8.9 12.1 5.8 % STO 2.1 4.0 3.5 4.8 PBT excl. OI 792.5 190.6 167.5 23.1 % Ch. YoY 67.8 (75.9) (59.3) (93.9) % Margin 12.2 5.2 7.7 1.5 Other Income 27.0 10.9 4.0 6.9 % Ch. YoY 335.5 (59.6) (79.2) (11.5) PBT incl OI 819.5 201.5 171.5 30.0 % Ch. YoY 71.3 (75.4) (60.2) (92.3) % Margin 12.6 5.4 7.9 2.0 Tax 94.0 41.0 35.9 5.1 % Ch. YoY 71.5 (56.4) (28.6) (88.3) % PBT 22.9 20.3 20.9 17.0 APAT 725.5 160.5 135.6 24.9 % Ch. YoY 71.2 (77.9) (64.4) (92.8) % Margin 11.1 4.3 6.3 1.6 Extraordinary 27.1 Exp./ (Inc) - - - RPAT 698.4 160.5 135.6 24.9 % Ch. YoY 64.8 (77.0) (64.4) (92.2) % Margin 10.7 4.3 6.3 1.6 Source: Company, SFSPL Research Estimates Y/E March FY08 FY09 FY10E FY11E Net Revenue 8,292.7 10,355.4 9,186.3 11,799.8 % Ch. YoY 87.6 24.9 (11.3) 28.5 RM Cons. 5,906.7 8,394.0 7,044.2 8,334.1 % Ch. YoY 82.0 42.1 (16.1) 18.3 % STO 71.2 81.1 76.7 70.6 Staff costs 94.5 124.8 149.8 179.7 % Ch. YoY 91.3 32.1 20.0 20.0 % STO 1.1 1.2 1.6 1.5 Other Exp. 660.3 611.0 733.2 879.8 % Ch. YoY 101.7 (7.5) 20.0 20.0 % STO 1.1 1.2 1.6 1.5 Total Exp. 6,678.5 9,129.8 7,927.2 9,393.6 % Ch. YoY 84.1 36.7 (13.2) 18.5 % STO 80.5 88.2 86.3 79.6 EBITDA 1,614.2 1,225.6 1,259.1 2,406.2 % Ch. YoY 103.4 (24.1) 2.7 91.1 % Margin 19.5 11.8 13.7 20.4 Interest 303.2 341.7 393.0 471.5 % Ch. YoY 158.6 12.7 15.0 20.0 % STO 3.7 3.3 4.3 4.0 EBDT 1,311.0 883.9 866.1 1,934.7 % Ch. YoY 93.9 (32.6) (2.0) 123.4 % Margin 15.8 8.5 9.4 16.4 Depreciation 242.5 264.2 317.0 396.3 % Ch. YoY 123.1 8.9 20.0 25.0 % STO 2.9 2.6 3.5 3.4 PBT excl. OI 1,068.5 619.7 549.1 1,538.4 % Ch. YoY 88.3 (42.0) (11.4) 180.2 % Margin 12.9 6.0 6.0 13.0 Other Income 12.8 104.0 109.2 114.7 % Ch. YoY (42.9) 714.7 5.0 5.0 PBT incl OI 1,081.2 723.7 658.3 1,653.0 % Ch. YoY 83.3 (33.1) (9.0) 151.1 % Margin 13.0 7.0 7.2 14.0 Tax 131.4 79.0 115.2 297.5 % Ch. YoY 93.9 (39.9) 45.8 158.3 % PBT 12.2 10.9 17.5 18.0 APAT 949.8 644.7 543.1 1,355.5 % Ch. YoY 81.9 (32.1) (15.8) 149.6 % Margin 11.5 6.2 5.9 11.5 Extraordinary Exp./ (Inc) - 71.1 - - RPAT 949.8 573.6 543.1 1,355.5 % Ch. YoY 81.9 (39.6) (5.3) 149.6 % Margin 11.5 5.5 5.9 11.5 January 13, 2010 6
BALANCE SHEET (Standalone) (Rs.mn) FINANCIAL RATIOS (Standalone) As on 31 st Mar. FY08 FY09 FY10E FY11E SOURCES OF FUNDS Share Capital 280.7 280.7 280.7 280.7 Reserves 3,560.1 4,166.1 4,709.1 6,064.6 Sh.Holders Funds 3,873.1 4,446.7 4,989.8 6,345.3 Minority Interest - - - - Total Debt 2,842.1 3,550.0 3,585.5 3,227.0 Total Liabilities 6,715.3 7,996.7 8,575.3 9,572.3 Fixed Assets 3,963.8 4,873.1 5,628.3 6,082.0 Goodwill on Consolidation - - - - Investments 319.7 319.7 319.7 319.7 Sundry Debtors 476.1 594.5 527.4 677.4 Cash and Bank 634.0 356.1 506.2 702.9 Loans & Adv. 363.3 508.7 457.8 412.0 Inventory 1,660.4 2,202.4 1,853.1 2,192.4 Current Assets 3,133.9 3,661.6 3,344.4 3,984.7 Current Liabilities 562.4 746.0 627.7 742.6 Provisions 139.6 111.7 89.4 71.5 Curre.Liabilities 702.1 857.7 717.0 814.1 Net Curr. Assets 2,431.8 2,803.9 2,627.4 3,170.6 Def. Tax Assets (Net) - - - - Misc. Expenditure - - - - Total Assets 6,715.3 7,996.7 8,575.3 9,572.3 Source: Company, SFSPL Research Estimates Y/E March FY08 FY09 FY10E FY11E Growth (%) Net Sales 28.5 24.9 (11.3) 28.5 Adjusted Net Profit 149.6 (32.1) (15.8) 149.6 EBITDA 91.1 (24.1) 2.7 91.1 EPS 149.6 (39.6) (5.3) 149.6 CEPS 103.7 (29.7) 2.7 103.7 Gross Fixed Assets 14.0 22.9 20.0 14.0 Capital Employed 11.6 19.1 7.2 11.6 Valuation EPS (Rs.) 33.8 20.4 19.3 48.3 CEPS (Rs.) 42.5 29.8 30.6 62.4 BVPS (Rs) 138.0 158.4 177.8 226.1 PER (x) 6.6 11.0 11.6 4.7 PEG (x) 0.1 (0.3) (2.2) 0.0 P/CEPS (x) 5.3 7.5 7.3 3.6 P/BV (x) 1.6 1.4 1.3 1.0 EV/EBITDA (x) 5.3 7.8 7.5 3.7 EV/Net Sales (x) 1.0 0.9 1.0 0.7 Profitability ROCE (%) 19.2 12.9 10.5 19.2 ROE (%) 21.4 14.5 10.9 21.4 EBIDTA Margin(%) 20.4 11.8 13.7 20.4 EBDTA Margin (%) 16.4 8.5 9.4 16.4 NP Margin (%) 11.5 6.2 5.9 11.5 Tax/PBT (%) 18.0 10.9 17.5 18.0 Turnover Debtor Days 21 21 21 21 Creditor Days 25 26 25 23 N. Fixed Assets (x) 2.1 2.1 1.6 1.9 Total Assets (x) 1.2 1.3 1.1 1.2 January 13, 2010 7
Rating Scale This is a guide to the rating system used by our Equity Research Team. Our rating system comprises of six rating categories, with a corresponding risk rating. Risk Rating Risk Description Low Risk Medium Risk High Risk Predictability of Earnings / Dividends; Price Volatility High predictability / Low volatility Moderate predictability / volatility Low predictability / High volatility Total Expected Return Matrix Please Note Rating Low Risk Medium Risk High Risk Buy Over 15 % Over 20% Over 25% Accumulate 10 % to 15 % 15% to 20% 20% to 25% Hold 0% to 10 % 0% to 15% 0% to 20% Sell Negative Returns Negative Returns Negative Returns Neutral Not Applicable Not Applicable Not Applicable Not Rated Not Applicable Not Applicable Not Applicable Recommendations with Neutral Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses). ** Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we have enhanced our return criteria for such stocks by five percentage points. Desk Research Call is based on the publicly available information on the companies we find interesting and are quoting at attractive valuations. While we do not claim that we have compiled information based on our meeting with the management, we have taken enough care to ensure that the content of the report is reliable. Although we have christened the report as Desk Research Calls (DRC), we intend to release regular updates on the company as is done in our other rated calls. Additional information with respect to any securities referred to herein will be available upon request. This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, re-circulated, published in any media, website or otherwise, in any form or manner, in part or as a whole, without the express consent in writing of Sushil Financial Services Private Limited. Any unauthorized use, disclosure or public dissemination of information contained herein is prohibited. This report is to be used only by the original recipient to whom it is sent. This is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken in preparing the above, we claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk. This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. The information, on which the report is based, has been obtained from sources, which we believe to be reliable, but we have not independently verified such information and we do not guarantee that it is accurate or complete. All expressions of opinion are subject to change without notice. Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof. January 13, 2010 8