Godawari Power & Ispat Ltd.

(GPIL)

Stock Idea
June 25, 2014

Current

GPIL is Raipur-based Company with dominant presence in the long product

segment of the Steel industry, mainly into mild steel wire. At present, GPIL is an
end-to-end manufacturer of mild steel wires. In the process, the company
manufactures sponge iron, billets, Ferro alloys, captive power, wires rods, steel
wires, Oxygen gas, fly ash brick and iron ore pellets. GPIL is also awarded rights
for Iron Ore and Coal Mining for captive consumption, as a result of which, the
company has managed to traverse the entire value chain (raw material to final
product) in steel wires and become a fully integrated steel manufacturer.

Previous

CMP : Rs.141
Rating : BUY

Rating : NR

Target : Rs.198

Target : NR

(NR-Not Rated)

STOCK INFO
BSE
NSE
Bloomberg
Reuters
Sector
Face Value (Rs)
Equity Capital (Rs Mn)
Mkt Cap (Rs Mn)
52w H/L (Rs)
Avg Daily Vol (BSE+NSE)

Business Model

532734
GPIL
GODPI.IN
GPIL.BO
Steel
10
327.5
4,618
186.7/61.5
53,347

SHAREHOLDING PATTERN

Iron Ore Mining

Coal Mining

Manganese Ore and

Coke

(as on 31st Mar. 2014)

Institutions
Others, Incl Public
Promoters

6.56
28.55
64.89

Source: BSE

STOCK PERFORMANCE (%) 1m

GPIL
-15
SENSEX
1

3m
73
13

12m
82
35

Source: Capitaline, IndiaNivesh Research

GPIL v/s SENSEX

Source: Company Filings; IndiaNivesh Research

260

Investment Rationale

240
220
200
180

Presence across the value chain of the steel industry

160
140

120
100
5/9/2014

5/23/2014

4/25/2014

4/11/2014

3/28/2014

3/14/2014

2/28/2014

2/14/2014

1/3/2014

1/31/2014

1/17/2014

12/6/2013

12/20/2013

11/8/2013

GPIL

11/22/2013

9/27/2013

10/25/2013

9/13/2013

10/11/2013

8/2/2013

8/30/2013

8/16/2013

7/5/2013

7/19/2013

6/7/2013

6/21/2013

5/24/2013

80

Sensex

Source: Capitaline, IndiaNivesh Research

The Company is present across the value chain of the steel industry, which
commences from iron ore at one and extends to HB wires at the other. Besides,
within the energy value chain, the Company has extended its portfolio from
waste heat recovery to biomass to solar energy generation. The Company is
one of the most competitive manufacturers of intermediate and end products
within steel sector, leveraging the benefits of scale, integration and operational
efficiency.

Daljeet S. Kohli
Head of Research

Segment wise revenue (standalone)

Mobile: +91 77383 93371, 99205 94087

Tel: +91 22 66188826
daljeet.kohli@indianivesh.in

SpongeIron

Abhishek Jain
Research Analyst
Mobile: +91 77383 93433
Tel: +91 22 66188832
abhishek.jain@indianivesh.in

IndiaNivesh Research

Segment

FY14(Rs.mn)
3,468

Contribution(%)
23

Billets

3,295

21

HBWire

3,157

20

FerroAlloy

494

Pellets

3,352

22

Power(MW)

177

SegmentTotal

13,943

BYProduct

1,466

Total

15,409

10

Source: Company Filings; IndiaNivesh Research

IndiaNivesh Securities Private Limited

601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800
IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.

Stock Idea (contd...)

Operating margin to improve due to backward integration and increase
in utilization rate
We expect EBITDA margin to expand by 280 bps by FY16E to 16.6% from
13.8% in FY14 due to strong backward integration, increase in utilization rate
(led by demand revival) and resuming Iron ore mining from Boria Tib.

EBITDA and EBITDA margin (SA)

16.7

3500
3000

14.4

18.0

16.6

16.0

13.8

14.0

12.6

Rs Mn

2500

12.0

2000

10.0

1500

8.0
6.0

1000

4.0
500

2.0
0.0

0
FY 12

FY 13

FY 14

EBITDA (Rs Mn)

FY 15E

FY 16E

EBITDA Margin (%)

Source: Company Filings; IndiaNivesh Research

Addition in pellets capacity and resumption of production from ardent

steel would boost revenue

With the new pellet plant in Raipur ((1.2mtpa), the total pellet capacity has
increased to 1.8mt. On the back of addition of the new capacity, the company
is looking at pellet production of 1.50mt (our assumption is 1.1mt) in FY15E
from its Chhattisgarh unit, 67% more than the previous years output of
0.90mt.

The resumption of production from Ardent steel in Q2FY15 would further

add to volume growth of the company. Production at Ardent Steel is likely to
be lower in FY15 as the company went for maintenance shutdown in Q1FY15
for a three-month period.

Revenue from Ardent steel (subsidiary with 75% stake)

Capacities(Metric tn)

FY12

FY13

FY14

FY15E

FY16E

600,000

600,000

600,000

600,000

600,000

50

90

91

92

93

300,588

537,827

546,630

552000

558000

523,971

514,735

529920

535680

7,784

7,349

7496

7721

Utilization Rate(%)
Production(Metric tn)
Sales(Metric tn)
Realisation (Rs/tn)
Revenue (Rs Mn) (Less:Excise Duty)

2359.7

4,079

3,783

3,972

4,136

Iron ore cost (Rs/tn)

3459.7

3,304

3,030

3121

3215

1040.6

1776.9

1656.3

1723

1794

93.8

39.5

46.0

25.1

29.0

1134.4

1816.4

1702.3

1747.8

1799.1

Inventory adjt.(Rs. Mn)

-9.7

-72.4

-50

Employees benefits expenses(Rs. Mn)

65.5

87.5

90.79

95.33

99.26

Other Exp(Rs Mn)

851

1,516

1380.7

1449.9

1509.6

318.13

730.97

659.03

679.26

704.33

Iron Ore cost (Rs Mn)

Other cost(Rs. Mn)
Total Iron Ore cost (Rs Mn)

EBITDA(Rs. Mn)
Source: Company Filings; IndiaNivesh Research

Iron ore mining from Boria Tibu key to profitability:

GPIL has been granted mining lease for 2 iron ore mines at Ari Dongri (which is
already in operation since mid of 2008) and Boria Tibu in Chattisgarh. GPIL started

IndiaNivesh Research

Godawari Power & Ispat Ltd | Stock Idea

June 25, 2014 | 2

Stock Idea (contd...)

development work on Boria Tibu iron ore mine in Chhattisgarh last month and it is
looking at commencing commercial production by November 2014. This mine has
a capacity of 0.7mt per annum with reserves of around 7.0mt-8.0mt. GPIL is also
looking at increasing the capacity of its Ari Dongri iron ore mine from 0.7mt to
1.2mt. Currently, the company is producing 0.4mt of iron ore from Ari Dongri mine
and further ramp-up depends on obtaining the approval for higher capacity.

Cost management and lower capex to improve cash flow

GPIL has adopted various cost-cutting measures. The use of coal in gasified for pellets
in place of costly ignite oil (LDO) is one of those initiatives, which would save
around Rs 1.5 bn for the 1.8mtpa pellet plant and will improve pellet EBITDA. In our
view, without any significant capex in immediate future, it should not face any
problem in servicing the current debt. Besides, a better operating performance
would actually help improve its cash-flow going forward. GPIL is looking at
completing a few projects like coal gasification in Chhattisgarh, and iron ore mining
at Boria Tibu and Ari Dongri. The capex would be around Rs 500mn, while the
company is looking at annual maintenance capex of Rs700mn-Rs800mn.

Increase in realization would add profitability

GPILs product prices had witnessed a decline during FY14 due to low steel demand.
However, the recent INR depreciation against the USD has resulted in some pricing
power to domestic players including GPIL. Sponge iron, steel and pellet prices have
risen since the beginning of October 2013. We expect steel prices to remain higher
compared to FY14, which will provide stability to GPILs earnings going forward.

Financial
Net sales to grow at CAGR of 11% over FY14-16E
We expect standalone net sales to grow at CAGR of 11% over FY11-16E largely on
account of increased steel volumes and increased contribution coming in from pellet
unit; We expect steel (Billets + Finished steel) to contribute ~60% of standalone net
sales and expect contribution from pellet to gradually increase up from 14% in FY13
to 32% in FY16E.

Revenue and Revenue growth (SA)

25000

20000

100

86
19116

18976

17315

17103

60

15409

Rs Mn

80

15000

40
11

10

10000

11

20
0

-19

5000

-20
1.45
1.40
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00

0
1.42

-40
FY 12

1.40

FY 13
Revenue

1.29

FY 14

FY 15E

FY 16E

Growth (%)

Source: Company Filings; IndiaNivesh Research

1.13

1.12

FY 12

FY 13

FY 14

FY 15E

Net debt/equity (x)

Source: Company Filings; IndiaNivesh Research

IndiaNivesh Research

FY 16E

Net Debt /equity ratio would reduced to 1.13x by FY16E

The Companys net debt stood at Rs 10.5 bn at the end of FY14. The company plans
to repay debt from FY16, resulting in debt /equity ratio would reduced to 1.13x by
FY16E vs. 1.42x in FY13. However consolidated net Debt as on March 2014 was Rs.
18.60 bn.

Godawari Power & Ispat Ltd | Stock Idea

June 25, 2014 | 3

Stock Idea (contd...)

Valuation
We expect GPIL to improve its operating profitability on the back of increase in
capacity along with increase in product prices from FY15E. Also, we expect its FY15
earnings to be higher due to higher sales volumes from the recent commissioning
of additional 1.2mn tonne iron ore pellet plant. A key catalyst for the stock would
be commencement of iron ore mining from Boria Tibu. At current market price of
Rs.141, the stock trades at FY16e PE of 4x and EV/EBITDA of 4.5x. We value
standalone business Rs 150 and Ardent steel (subsidiary 75% stake) Rs.48. We have
not incorporated any value for other subsidiaries (Godawari Energy Ltd, Godawari
Clinkers & Cement Ltd) in our model. We recommend BUY on the stock with target
price of Rs. 198.
SOTP Valuation

Valuation metrics

multiple

value

Standlone business

EV/EBITDA(FY16e)

150

Ardent steel

EV/EBITDA(FY16E)

48

Total

198

Source: IndiaNivesh Research

Standalone Financial Statements

Income statement
Y E March (Rs m)
Net sales
Growth %
Expenditure
(Increase)/Decrease in Stock
Raw Material
Employee cost
Purchase of Goods
Operating expenditure
EBITDA
Growth %
EBITDA Margin %
Depreciation
EBIT
EBIT Margin %
Other Income
Interest
PBT
Tax
Effective tax rate %
Adjusted PAT
Growth%
PAT margin %

Balance sheet
FY 12
FY 13
FY 14 FY 15E FY 16E
17315 19116 15409 17103 18976
86.0
10.4
19.4
11.0
11.0
14829.4 16707.1 13290.1 14249.0 15824.1
-437.6
356.1
-5.8
0.0
0.0
12314 13066
9714 10952 12186
380
438
558
619
687
126
74
40
0
0
2447
2773
2984
2678
2952
2485.7
2409
2119
2854
3152
30.0
-3.1
-12.0
34.7
10.4
14.4
12.6
13.8
16.7
16.6
511
523
667
700
735
1975.0
1887
1452
2154
2417
11.4
9.9
9.4
12.6
12.7
30
97
245
70
75
1007
924
1145
1090
1060
998.3
1060
552
1134
1432
209
-182
-7
227
286
20.9
-17.2
-1.3
20.0
20.0
789
1241
559
907
1146
10.7
57.2
-54.9
62.2
26.3
4.6
6.5
3.6
5.3
6.0

Cash Flow
Y E March (Rs m)
FY 12
PBT
998
Depreciation
511
Interest
1007
Others
0
Interest Received
-16
Changes in working capital
-200
Tax
-157
Non-Opearting exp
Cash flow from operations
2143
Capital expenditure
-1429
Pur/ Sale of Investment
11
Interest/Dividend Received
22
(Increase)/Decrease in Investments
-259
Cash flow from investments
-1655
Issue of eq shares/Debenture
800
Loans availed or (repaid)
9
Interest
-1007
Dividend and tax Paid
-93
Cash flow from Financing
-290
Net change in cash
197
Cash at the beginning of the year
101
Cash at the end of the year
391
Source: Company Filings; IndiaNivesh Research

IndiaNivesh Research

Y E March (Rs m)
Share Capital
Reserves & Surplus
Net Worth
Pref shares issued by subs
Total debt
Net defered tax liability
Total Liabilities
Gross Block
Less Depreciation
Net Block
Capital Work in Progress
Investments
Current Assets
Inventories
Sundry Debtors
Cash & Bank Balance
Loans & Advances
Current Liabilities & provisions
Current Liabilities
Provisions
Net Current Assets
Total assets

FY 12
318
5971
6288

FY 13
328
6838
7166

FY 14E
328
7316
7643

FY 15E
328
8141
8469

FY 16E
328
9058
9385

7044
0
13333
9992
2216
6836
1359
2123
4507
2623
821
391
672
1494
1251
243
3014
13333

10147
583
17895
13440
2738
6984
4124
2526
6541
2729
1023
320
2470
2279
2143
136
4262
17895

10696
577
18916
15340
3405
11935
1285
2889
6288
2841
771
144
2532
3481
3427
54
2807
18916

10896
0
19365
16040
4105
11935
692
2889
6304
2250
855
388
2810
2455
2400
54
3849
19365

10596
0
19981
16440
4840
11599
742
2889
7476
2504
949
905
3118
2725
2671
54
4751
19981

FY 12
24.9
40.9
198.0
15.0
24.9
5.5
14.4
4.6
4.2
0.53
2.6
4.0
2.71
0.19
1.1
2.8
17.1

FY 13
37.9
53.9
218.8
11.5
37.9
6.7
12.6
6.5
2.2
0.38
1.5
5.2
3.51
0.14
1.4
4.2
19.3

FY 14E
17.1
37.4
233.3
9.3
17.1
2.7
13.8
3.6
8.3
0.60
3.8
7.2
2.1
0.30
1.4
5.0
18.0

FY 15E
27.7
49.1
258.5
11.5
27.7
4.4
16.7
5.3
5.1
0.55
2.9
5.3
1.77
0.27
1.3
3.8
18.0

FY 16E
35.0
57.4
286.5
12.5
35.0
5.5
16.6
6.0
4.0
0.49
2.5
4.5
4.96
0.24
1.1
3.4
18.0

Key ratios
FY 13
1060
523
924
-5
-76
-726
-341

FY 14E
552
667
1145
0
-245
639
7

FY 15E
1134
700
1090
0
-70
-699
-227

FY 16E
1432
735
1060
0
-75
-485
-286

1358
-3448
25
82
-324
-3665
260
2900
-924
-92
2235
-73
391
319

2765
-1900
0
0
-363
-2263
0
467
-1145
-82
-760
-258
319
144

1928
-700
0
0
0
-700
0
200
-1090
-95
-984
244
144
388

2381
-400
0
0
0
-400
0
-300
-1060
-104
-1463
517
388
905

Y E March
EPS (Rs)
Cash EPS (Rs)
BVPS
ROCE
ROE
RoIC
EBITDA Margin %
Net Margin %
PER (x)
P/BV (x)
P/CEPS (x)
EV/EBITDA (x)
Dividend Yield %
m cap/sales (x)
Net debt/equity (x)
net debt/ebitda (x)
Debtors days

Godawari Power & Ispat Ltd | Stock Idea

June 25, 2014 | 4

Stock Idea (contd...)

IndiaNivesh Securities Private Limited

601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007.
Tel: (022) 66188800 / Fax: (022) 66188899
e-mail: research@indianivesh.in | Website: www.indianivesh.in
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