Buy Godawari Power; target Rs 134: Arihant capital markets

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Buy Godawari Power; target Rs 134: Arihant capital markets

Arihant capital markets is bullish on Godawari Power & Ispat (GPIL) and has recommended buy rating on the stock with a target price of Rs 134 in its January 20, 2012 research report.

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Arihant capital markets is bullish on Godawari Power & Ispat (GPIL) and has recommended buy rating on the stock with a target price of Rs 134 in its January 20, 2012 research report.

"Godawari Power & Ispat (GPIL) is one of the few steel producers in India with backward integration into iron ore and met 85% (FY11) of captive iron ore requirement. We estimate company to be the main beneficiary of ongoing mining issues where supplies of iron ore has deteriorated and prices strengthen despite them falling globally."

"GPIL's 0.6mn tonne pellet unit got commissioned during 4QFY10. Initially plant was running at lower utilization levels owing to teething issues, which subsequently got rectified resulting in improved utlisation. We estimate pellet volumes to increase 133% yoy and 14% yoy in FY12E and FY13E. For its 0.6mtpa pellet unit at Ardant Steel (75% subsidiary), we expect utilization levels to improve gradually and expect it to reach 35% in FY12E and 90% in FY13E. Accordingly, we are factoring in pellet volume growth of 284% yoy and 157% yoy in FY12E and FY13E at Aradnt steel."

"Until now GPIL was able to garner higher EBITDA margins through arbitrage switch between power and steel, as merchant power tariffs were higher and fuel cost lower. With decline in merchant tariffs and substantial jump in fuel cost, merchant power sale has become unprofitable. With revenues from merchant power sales expected to decline, we expect company to once again focus on steel business and expect volumes to improve going forward. We expect steel volumes to increase 5% yoy in FY12E and 3.2% in FY13E, respectively."

"At current market price of Rs 105/share, the stock trades at PE(x) of 2.5x and EV/EBITDA(x) 3.9x times its FY13E EPS and EBITDA, respectively which is at ~35% discount to large steel companies. GPIL's current valuation looks attractive in our view, given its backward integration and increased emphasis on value addition that would help maintain margins even during troubled times. We initiate on Godawari power and Ispat with buy recommendation and price objective of Rs 134 per share," says Arihant capital markets research report.

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To read the full report click on the attachment