>Godawari Power & Ispat Ltd (ICICI DIRECT)

Powering through integration…
Godawari Power and Ispat Ltd (GPIL) is the flagship company of the Hira Group of Industries that is based in Raipur, Chhattisgarh. While the group has a good presence in the long product segment of the domestic steel industry, with products including sponge iron, steel billets and HB
wire, the power business has been getting more attention in the recent past. GPIL has also been slowly transforming itself into a backward integrated entity with captive iron ore production being ramped up and thermal coal mining awaiting forest clearance. On the back of strong backward integration, we believe the bottomline will grow at a CAGR of 35% during FY10E-FY12E to ~Rs 115 crore in FY12E through margin expansion from ~12% in FY09 to ~22% in FY12E. The topline is, however, likely to grow at a comparatively moderate CAGR of 8% over FY10E to Rs 1010 crore in FY12E.

Backward integration to boost margin expansion
The company has reserves of ~15 MT of iron ore and ~63 MT of coal with it. Iron ore mining has already started and is likely to meet ~85% and ~90% of the captive requirement during FY11E and FY12E. This would help the company to save ~Rs 169 crore in FY12E. In turn, this would
directly contribute to the bottomline by way of expanding the EBITDA margin to ~22% in FY12E. Thus, it is going to be a key trigger for the stock despite a comparatively muted growth in topline.

Focus on power segment to hedge risk in steel business
GPIL has consciously focused on the power segment. We believe it would continue to utilise power as a hedge against possible downsides in steel business. With the expansion of its power capacity to 73 MW the revenue contribution of power would remain stable at ~Rs 136 crore (13% in FY12E). The power business is expected to earn EBITDA margin of ~45% in FY12E on higher usage of waste heat recovery gas and bio mass.

Valuations
At the CMP of 200.5, the stock is trading at 3.8x its FY11E EV/EBITDA and 5.4x its FY11EPS of Rs 36.9. Looking at the potential value unlocking, we value the stock at 4.5x its FY11E EV/EBITDA. Thus, we are initiating coverage on Godawari Power and Ispat Ltd with a STRONG BUY rating and a target price of Rs 254/share for an investment horizon of 12-15 months.

To read the full report: GODAWARI POWER