Strong realisations continue to bolster topline by 86.1% yoy
Rising raw material costs lead to a 520bps yoy drop in OPM
GPIL plans to sell higher amount of sponge iron than billets in the next two
quarters
Iron ore mining expected to start in Q3 FY09, earlier than expected
The company announces a buyback at a price not exceeding Rs135 per share
Strong realisations bolster revenue
Godawari Power and Ispat Ltd. (GPIL) reported an 86.1% yoy growth in Q1FY09 at
Rs3.3bn on the back of strong realisations. Steel prices remained strong during the
quarter, up by 60-100% yoy on various products. However, on a qoq basis, the
topline remained flat at 3.5% due to lower billet and wire rod sales. The company
increased its sales of captive power following higher returns. Sales of billets and
wire rods were 7-8% lower on a qoq basis. The company, in Q2 FY09, sold ~10MU
of power with an average realisation of Rs6.5 per unit.
Rising raw material costs lead to a 520bps yoy drop in OPM
Operating profit during the quarter rose 39.9% yoy to Rs525mn. OPM during the quarter remained under pressure due
to rising raw material costs. The raw material market remained tight leading to a jump in prices. GPIL has no captive
resources, leading to a jump in raw material prices. Iron ore and coal prices have doubled in the last one year causing a
fall of 520bps in OPM to 15.8% in Q2 FY09. On a qoq basis, OPM fell 180bps as landed costs of iron ore jumped to
Rs5,400 per ton from Rs4,500 per ton in Q1 FY09. Landed cost of coal were Rs3,000 per ton, same as that of last
quarter. Raw material costs as a % of sales rose to 77.3% in Q2 FY09 from 76% in Q1 FY09 and 69.1% in Q2 FY08.
New projects online, to be completed by Q2FY10
The company in Q1 FY09 received the approval from Ministry of Environment & Forest for Mining of Iron Ore in Ari
Dongri Mines in Chhattisgarh. Mining is expected to start from Q3 FY09, earlier than expected. The company also plans
to build an iron ore crushing plant with a capacity of 1.2mtpa, a beneficiation plant with a capacity of 0.1mtpa and a
pelletization plant with a capacity of 0.6mtpa with railway siding and other infrastructure development, at a cost of
Rs2.35bn. Execution of the plan is on schedule and is expected to start production in Q2 FY10. The company has also
decided to set up another iron ore palletisation plant with a capacity of 0.6mtpa in Orissa through a Joint Venture in the
name of Ardent Steel Ltd., in which the company will have a 75% stake.
Company announces a buyback at a price not exceeding Rs135 per share
The company has announced to buy back equity shares at a price not exceeding Rs135 per share. The aggregate
amount to be spent on buy back of the equity shares shall not exceed Rs360mn, which is 9.37 % of the paid-up capital
as on March 31st, 2008. The company will buy back minimum 3,00,000 equity shares
Outlook
GPIL has been proactively taking steps to maximize its return on capital. Due to a slowdown in the demand for the
billets, the company reduced its production and started to sell power. Owing to the global financial crisis, demand for
steel products has reduced drastically. We expect the demand to be higher from the current levels in the next two
months. Steel and steel product prices have fallen more than 30% in the Asian markets. We expect steel realisations to
fall 30% from the current levels in Q3 FY09 and remain constant for the rest of the year. The company’s captive iron ore
mine will aid in decreasing the raw material cost pressure. Despite a fall in steel realisations, the company’s OPM is
expected to expand in FY10.
At CMP of Rs75, the stock trades at P/E multiple of 1.9x and 2.0x on estimated earnings of Rs39.5 in FY09E and Rs37.5
in FY10E, respectively. We recommend a BUY with a target price Rs110 based on an EV/EBIDTA multiple of 2.5x FY10E
EBIDTA of Rs1.86bn.
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