Buy Godawari Power; target of Rs 220: IIFL

“We met the management of Godawari Power & Ispat Ltd (GPIL) to get an update on its mining operations and the two pellet plants. Over the next two years, we believe, these two units would be the value drivers for the company. GPIL has managed to ramp up its mining operation at Ari Dongri; achieving ~0.21mn tons in Q4 FY11 and we expect it to touch 0.17mn tons in Q1 FY12E. Pellet production too was strong in Q1 FY12 achieving higher utilization rates. However, under in its 75% subsidiary Ardent Steel, the pellet plant is facing the same teething problems it had come across in the standalone entity. We expect steel business to drive earnings for GPIL due to the prevailing lower power merchant rates.”

“GPIL has managed to ramp up its iron ore mining operations at Ari Dongri in H2 FY11 to match the rising demand from its pellet and sponge iron plant. The company managed to touch an output of 0.21mn tons in Q4 FY11 and is expected to touch ~0.16mn tons in Q1 FY12. The management is quite confident of achieving 0.6mn tons in FY12. Even though, the company has received all clearances for the Boria Tibu mine, it is still awaiting the surface rights from the forest department. We expect the mine to be operational in H2 FY12 and would contribute only 40,000 tons in FY12.”

“GPIL, over the last three years, has been tactfully changing its business mix to gain maximum profitability. We believe over FY11- 13E, power business share would reduce on account of the subdued power tariffs and earnings would be largely driven by its steel business. We expect sponge iron production to jump 27% and billet production to rise 50% over the period FY11-13. Led by a combination of captive iron ore mining, jump in pellet sales and higher steel volumes, we expect the company’s operating profit to jump from Rs2.3bn in FY11 to Rs3.5bn in FY13. Bottomline is expected to surge 64% from Rs859mn in FY11 to Rs1.4bn in FY13. The stock trades at a P/E of 4.8x & 3.6x and EV/EBIDTA of 4.6x & 4x for FY12E and FY13E respectively, which is at a discount to its historical average. We believe that the stock is attractively valued considering the strong backward integration and recommend a BUY with a 9-month price target of Rs 220,” says IIFL research report.

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