Godawari Power and Ispat

Profits from its iron-ore mines and the pelletisation plant provide significant upside potential for GPIL

THE upsurge in stock markets saw the prices of many frontline metal stocks more than treble in the past nine months. However,quite a few stocks in the small-cap space have failed to fire the street. Godawari Power & Ispat (GPIL) is one such case which suffered badly in early 2009 from lower steel prices and economic slowdown. However, the commissioning of its long-pending iron-ore mines and pelletisation plant in curent fiscal, along with the surge in spot iron-ore prices, is expected to boost earnings significantly.

The stock looks undervalued and provides upside potential in the near term. Investors looking to invest in small-cap metal space may consider this stock with an investment horizon of around two years.

BUSINESS

GPIL manufactures mild steel wire, which is used as binding wire and barbed wire. It has a current annual capacity of 1.2 lakh tonne of steel wire. The company has stopped producing steel billets, which is used as a raw material in wiremaking and available at a very low price in the open market. In turn, it has started selling its surplus power, otherwise used in billet making.

GROWTH DRIVER

The company has been allotted two iron-ore mines, with an estimated reserve of 15 million tonne, in the state of Chhattisgarh. The first one was commissioned in May and the second one will be commissioned at the end of 2009. Annual production from both the mines is expected to be in the range of 6-8 lakh tonne from FY ’11 onwards. The company is also setting up a pelletisation plant of 6 lakh tonne capacity, which is expected to get commissioned in October. The captive mines and pelletisation plant will bring down the cost of iron ore to almost one-third last year’s level.

FINANCIALS

The company’s revenue has more than quadrupled in the past three years to Rs 1,100 crore. Its operating margin contracted by 300 basis points, on a year-on-year basis, to 14.6% in the Jun ’09 quarter. However, its profitability is expected to improve in the coming quarters and the operating margin will increase to a little more than 20% in the current financial year, largely due to the captive iron-ore mines.

VALUATION

The company will save around Rs 3,000 per tonne of iron-ore consumed. As per the current plan, it will receive around 3.5 lakh tonne of iron ore, for sponge iron production, from captive mines in FY ‘10. This figure is expected to double in FY ‘11. The savings arising out of this would improve the earning per share by Rs 28 and Rs 55 in FY ’10 and FY ’11 respectively. At the current price level, it translates into a price-earning multiple of 2.8 and 1.8 for FY ’10 and FY ’11, respectively. This provides significant upside potential considering the fact that the stock has historically traded at a price earning multiple range of 7-12. Investors with a short to medium term horizon can consider adding this stock to their portfolio.