Angel Broking recommends Accumulate on Godawari Power & Ispat with a Target Price of Rs 78 (12 months)

For 3QFY2014, Godawari Power and Ispat (GPIL) reported a decline in both top-line and bottom-line (due to higher depreciation and interest costs on account of capitalization of solar power plant during the quarter). Nevertheless, we recommend Accumulate on the stock.

Lower volumes and realizations dent top-line performance: GPIL's net sales declined by 7.6% yoy to Rs. 557cr on account of lower sales volumes and realizations. Billets and HB wires sales volume declined 46.9% and 4.6% yoy to 26,721 and 21,216 tonne respectively. Average realization for sponge iron, HB Wire and billets declined by 10.2%, 8.4% and 8.9% yoy respectively.

Higher depreciation and interest dents PAT: The company's EBITDA increased by 53.0% yoy to Rs. 107cr due to lower raw material costs. However, the company's interest expenses increased by 71.0% yoy to Rs. 51cr and depreciation expenses increased 91.5% yoy to Rs. 34cr due to capitalization of the solar power plant in the quarter. The company reported an exceptional gain of Rs. 10cr related to royalty write-backs; hence the company reported an adjusted net loss of Rs. 6cr compared to a net profit of Rs. 18cr in 3QFY2013.

Other updates: The company commissioned production of its 50MW solar power plant during 3QFY2014 after a successful trial run during 2QFY2014.

Outlook and valuation: We expect GPIL to improve its operating profitability on the back of increase in product prices from FY2015. Also, we expect its FY2015 earnings to be higher due to higher sales volumes from the recent commercial commissioning of an additional 1.2mn tonne iron ore pellet plant. A key catalyst for the stock would be commencement of iron ore mining from Boria Tibu (although not factored in our estimates). We recommend an Accumulate rating on GPIL with a revised target price of Rs. 78, valuing it at 4.0x FY2015E EV/EBITDA.

Source : Equity Bulls

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