Godawari Power & Ispat (Q1 FY13)

CMP Rs130, Target Rs154, Upside 18.5%

• Godawari Power & Ispat (GPIL) on a standalone basis reported an 18.6% yoy jump in its topline to Rs5bn on the back of higher production of pellets & billets coupled with strong realizations across all segments. However, topline was lower by 9.3% qoq on account of lower sponge iron and steel products production. Production of iron ore surged during the quarter to 261,314 tons, up by 243% yoy and 42.7% qoq. The jump in iron ore production was a big positive surprise as the company was behind its target in FY12. Pellet production remained strong during the quarter at 168,700 tons, largely on account of improved supplies from captive iron ore mines. It continued to operate at +100% utilization rates. Sponge iron production decline by 28% qoq as the company was more focused on selling pellets in the external market. Except pellet and sponge iron, all steel product realizations were higher on a qoq basis.

• External sales of pellets jumped by 72.6% on a qoq basis due to lower internal consumption. Sales of sponge iron, billets and ferro alloys declined due to lower production. Sales of all the steel products were quite strong on a qoq basis due to strong demand for long products in the domestic market. Pellet production under Ardent Steel increased 13% qoq due to increase in supply of iron ore. 

• Operating profit for the company was 12% higher on a yoy basis, but 18.7% lower on a qoq basis. The decline in operating profit on a qoq basis was due to an increase in coal costs. Raw material costs as a % of sales increased from 65.6% in Q4 FY12 to 69.2%. However, other expenditure increased on a qoq basis. We have taken the forex loss taken by the company in other expenditure as an extraordinary.

Cost Analysis

• On a consolidated basis, topline for the company increased 22% yoy to Rs6bn on the back of higher production in Ardent steel. Operating profit increased 44% yoy and 12.7% qoq on the back of higher HFAL contribution and increase in production of Ardent steel. PAT too was strong at Rs467mn.

• GPIL’s performance in Q1 FY13 was quite strong on the operational front. Iron ore mining and the pellet plant registered strong performance. However, the impact was nullified to some extent by strong coal prices. We have also increased coal costs for the company on the back of tight domestic coal market. The impact of higher input costs would be cushioned by the jump in pellet production and higher pellet prices. We believe iron ore mining operations and pellet plant would be the value drivers for the company over the next two years. We would wait for the second quarter performance and then upgrade our estimated for FY13 and FY14. The stock trades at a P/E of 4.1x and EV/EBIDTA of 4x for FY13E, which is at a discount to its peers. We maintain our Buy rating on the stock with a 9-month price target of Rs154.