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Tuesday, December 19, 2017


Edelweiss Investment Research - Godawari Power & ISPAT Ltd. Target INR 395

Edelweiss Investment Research

Godawari Power & ISPAT Ltd. – Pellets to wallets

CMP INR 232; Mcap INR 820 cr; Target INR 395; Trading BUY
Godawari Power & ISPAT Ltd (GPIL) is set to ride a structural demand shift from low to high quality iron ore, led by China. GPIL’s primary product, pellets, is a high value-added iron ore, used in both blast furnaces and DRI plants. GPIL, 4th largest non captive player, is a low cost producer of pellets in India with 2.1mn tons capacity in Chhattisgarh. 

Rising demand from Indian DRI producers has resulted in >20%/30% growth in domestic pellet production/realisations YoY. GPIL’s subsidiary in Odisha, Ardent Steel (0.6mn tons), is witnessing huge demand traction from China with volumes rising by 100% in Jan-Oct 17. We expect consol. revenues to grow at a CAGR of 9.9% between FY17-20E while EBIDTA is expected to grow 2.8x to INR 812cr in FY20E aided by backward integration through captive iron ore mines. 

Improving cash flows will also reduce debt by INR500 crore to FY20E. We are valuing GPIL at a mid-cycle EV/EBIDTA of 5x on FY19E basis to arrive at a TP of INR395, an upside of 70% from current levels.

Key Data Points

Expected Growth FY17-20E
·         Sales : 11% CAGR
·         EBITDA Margin Improvement: 17.7 % points
·         PAT: FY20E – INR 326cr v/s FY17- loss of INR 76cr
·         Demand for high quality iron ore is on the rise in China as: (i) sintering facilities are shutting down under tougher pollution control regulations; and (ii) shortage of 65%Fe iron ore lumps continues across the world

·         The pellets market in India has grown at a CAGR of 12.6% between 2014-17 to ~48mn tons. Since the top 4 players Essar, JSPL, JSW and Tata Steel, consume >75% of their production for captive purpose (at 24mn tons), only 50% of Indian pellets are either sold to other steel manufacturers or exported.

·         Demand for pellets in the Indian market is expected to grow at high double digits due to rising demand from EAF manufacturers and shortage of high quality iron ore across India. Indian players had exported 3.5mn tons pellets in CY16 to China; recent exports have already hit 6.5mn tons between Jan-Oct 17 and are growing at a rate of 1mn tons a month

Key Highlights

·         We expect the burgeoning international/domestic demand for pellets to lead to a huge delta in EBIDTA margin for GPIL.

·         We expect the company’s consolidated EBIDTA to grow from INR 291 crore in FY17 to INR 815 crore in FY20E while the contribution of pellets should grow from just 31% in FY17 to 59% in FY20E respectively. The ramping of two captive iron ore mines is expected to provide backward integration to the extent of 100% in FY20E (currently 70%).

·          Improving cash flows is expected to enable the company to reduce debt by INR 500 crore by FY20E.
We are valuing the stock at a mid-cycle EV/EBIDTA multiple of 5x on FY19E basis, a 25% discount to the large steel players. We recommend a ‘Trading BUY’ on the stock with a TP of INR 395 share, an upside of 70% from current levels.


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