>GODAWARI POWER & ISPAT LIMITED (INVESTSMART)

Background
GPIL is a steel producer located in Siltara, Chattisgarh which has achieved significant backward integration through its iron ore assets, pellet plant and captive power plant. Also, as part of a consortium, GPIL has also been allotted a captive non-coking coal block in which GPIL’s share of reserves is about 63mn tonnes. Its product portfolio includes sponge iron, steel billets, steel wires and ferro alloys.

Key Highlights
■ Iron ore mines to drive margin expansion and earnings growth, and also de-risk the business model: Godawari Power & Ispat Ltd. (GPIL) has 2 iron ore mines in Chattisgarh with combined reserves of 15mn tonnes. Ari Dongri Mine has recently been commissioned in May’09 whereas Boria Tibu is expected to get commissioned in Q4FY10. We estimate that GPIL’s iron ore assets will contribute about Rs540mn and Rs1.35bn to its operating profit in FY10 and FY11 respectively. Thus, GPIL’s mining assets will be the key driver of margin expansion and earnings growth over FY10-11 and will also de-risk the company’s business from the fluctuations in availability and prices of raw material.

■ Pellet plant – A perfect complement to its iron ore mines: GPIL’s 600000 tonnes p.a. pellet plant along with crushing and beneficiation plants are expected to be operational by October 2009 onwards. The iron ore mines are expected to generate iron ore fines at an average of 50% of the total mined output. The fines thus generated will be utilized for making pellets for captive use instead of selling it. This would translate into cost savings in terms of reduced sized ore requirement. We estimate that GPIL’s pellet plant at Siltara, Chattisgarh will contribute about Rs151mn and Rs281mn to its operating profit in FY10 and FY11 respectively.

■ Captive Power to be a major source of revenue in FY10: GPIL, which has a captive power capacity of 53MW, had shut down its ferro alloys and steel billets plant during Q3FY09 due to a depressed market and started selling most of its power on spot basis. Selling power on spot basis is proving to be more lucrative than producing ferro alloys and billets currently. Thus, GPIL’s captive power facilities are not only serving as a means of reduced cost of production but also as an additional revenue stream.

■ Good Volume Growth in FY11: In H1FY08, GPIL had commissioned its phase-II expansion which had almost doubled its capacities. The full benefits of the expansion will be seen in FY11 as production has been curtailed over FY09-10 on account of better profitability from selling power on spot basis. Volume growth will be one of the key drivers of earnings growth in FY11.

■ Captive Coal mine- As part of a consortium, GPIL has been allotted acaptive non-coking coal block of 243mn tonnes in which GPIL’s share of reserves is about 63 tonnes. This is expected to be commissioned in FY11-12. This will lead to cost savings in the long term.

■ Attractive Valuations: GPIL is currently trading at a consensus P/E and EV/EBITDA of 3.9x and 3.5x FY10E respectively. Going forward, cost savings from its iron ore mines and pellet plant, and volume growth in FY11 will drive earnings growth over FY10-11. Also the iron ore mines will de-risk the company’s business from the fluctuations in availability and prices of raw material. We believe that GPIL’s valuations are quite attractive. Applying a 40% discount to the average of the consensus FY10 P/E of major domestic steel companies, we value GPIL at about Rs162.9 per share. This implies a potential return of about 44.2% from CMP. We are positive on GPIL’s prospects and recommend taking exposure in it.

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