Stock Review: Godawari Power & Ispat

Godawari Power & Ispat can be a good long-term bet given its improving Ebitda margins in the steel business and contribution from power business

 

GODAWARI Power & Ispat (GPIL) is an integrated steel manufacturer and has presence in the long product segment of the steel industry. The company is set to benefit from its captive iron ore resources, backward integration initiatives and increased contribution from its power business going forward. Long-term investors can bet on this stock.

BUSINESS:

GPIL, owned by Raipur-based Hira Group of Industries, is an end-to-end maker of mild steel wires. It manufactures sponge iron, billets, ferro alloys, steel wires, pellets and captive power. GPIL holds rights for iron ore and coal mining for captive consumption, as a result of which, it has managed to traverse the entire value chain in steel wires and is now a fully-integrated manufacturer. The main activity of GPIL involves production of sponge iron and steel billets. It has sponge iron capacity of 0.5 MT and billet capacity of 0.4 MT. It also has 53 mega watt of power generation facility.

GROWTH DRIVERS:

GPIL's captive iron ore mine at Ari Dongri in Madhya Pradesh is expected to produce 0.9 MT of iron ore in FY12 from 0.3 MT. The landed cost of ore from these mines is around 1,500 per tonne, which is far lower than market price of around 3500 per tonne. It will also be benefited by its pelletisation plant, which was commissioned in FY10. GPIL is adding 20 MW bio mass plant in the December 2010 quarter. The company sold around 50% of power generated to grid in FY10. Power generation and selling is a profitable business as the cost of production from captive operations is low. Further, it generates 80% of the total power from the waste heat recovery system, which is far more economical than coal-based method. Higher contribution from its power business is likely to aid margins in the future. GPIL commissioned its 0.6 MT pellet plant in March 2010. The plant is running at a capacity utilisation of less than 40%. With its own mines and pelletisation plant the company has a further room to reduce its cost of production which would improve operating profitability.

FINANCIALS:

In the September 2010 quarter, the company reported net sales of 148 crore up 10 %, while net profit increased 60% to 7 crore due to lower raw material cost. The company's backward integration initiatives have started paying back as operating margin increased by 8 percentage points in the September quarter compared to the year ago. Its aggressive capex has, however, increased its financial leverage with its debt-equity ratio hovering around one from 0.77 in FY09. However, it would not cause worry since interest coverage ratio at 3, the company's earnings seems to be sufficient to service the current level of debt.

VALUATIONS:

At the current price of 192, the stock is trading 9.5 times its trailing 12 month earning per share. It is at a discount to most of its peers like Usha Martin and Lloyds Metal, which trade at, price multiples of around 20. At the current price, GPIL can be a good long-term bet given it's improving Ebitda margin in steel business and increased contribution from its power business.