Godawari Power & Ispat - Realizations under pressure, TP cut, maintain buy - Centrum

Godawari Power & Ispat's (GPIL) operational performance was largely on expected lines with EBITDA at Rs760mn and margin of 14.9%. We were disappointed with a sharp drop of ~59% in iron ore production and ~22% in pellets but higher power sales surprised positively. Steel product realizations drop was more than expected at 4-7% QoQ across product categories. We expect growth in pellet volumes through 1.2mtpa expansion (which got commissioned ahead of schedule) to provide support to operating profits and margins. We revise our realization estimates lower and reduce our earnings estimates for FY14E/15E by 12.2%/19.8%. We continue to like the operations of the company (with flexible product mix) and maintain buy with a reduced target price of Rs111.

Volumes drop in pellets and steel realizations weaken further: Iron ore production was lower by ~59% YoY to 1.07 lakh tonne and pellet production fell 22% YoY to 1.31 lakh tonne due to maintenance shutdowns. Sponge iron sales were higher by ~18% YoY to 47.6kt as more pellets were consumed within the company. Pellet merchant sales were lower by ~57% YoY and steel product realizations continued to fall amidst weak demand and were lower QoQ by 4-7% across product categories. Power sales continued to be strong at 19mn units (up ~41% YoY).

EBITDA largely in line: EBITDA at Rs760mn was flat QoQ, but marginally higher than our estimate of Rs747mn. Due to pressure on realizations across products and higher share of low margin sponge iron sales, EBITDA margin stood at 14.9% (lower by 330bps YoY).

Pellet expansion commissioned ahead of schedule: GPIL's pellet expansion project of 1.2mtpa at Chhattisgarh was commissioned ahead of schedule and management expects ~0.8 MT additional pellet volumes from the plant in FY14E. Solar power project of 50 MW has also been commissioned and we have factored in earnings from this in H2FY14E with PLF of ~27%. Iron ore production has been lower but management remains confident of maintaining ~0.7MT in FY14E. Tax outgo was lower on continuation of tax write back on power operations earnings for the last few years (which were exempted under AITA) and management has indicated ~Rs460mn tax write back entitlement available for the same as at FY13 end. We have revised our pellet volume estimates upwards and iron ore production and blended realizations for pellets and steel products downwards due to continued pressure on steel prices. As a result, our consolidated EBITDA estimates for FY14E/15E have been revised downwards by 14.1%/17.6% respectively. We revise our FY14E EPS estimate downwards by ~12% to Rs36.6.

Valuations: We continue to like the operations of the company with captive iron ore, power and pellets backed flexible steel portfolio and reiterate our view that GPIL is one of the best diversified midcap steel stocks with consistent performance and attractive valuations. We however remain concerned on the company's investments in solar power and the highly leveraged balance sheet. We value the company at 4x FY15E EV/EBITDA and maintain buy with a reduced target price of Rs111 from Rs148 earlier. Key risks include further drop in realizations of steel products, lower than expected PLF at the 50 MW solar power plant and lower captive iron ore production.

Source : Equity Bulls

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