Godawari Power & Ispat - 2QFY23 Result Update - Subdued Performance... Strong Recovery ahead

Mr. Arafat Saiyed - Senior Research Analyst at Reliance Securities

Godawari Power & Ispat's (GPIL) reported a subdued 2QFY23 performance with EBITDA margin coming in at 19.3%, vs. our estimate of 22.5%. Revenue de-grew by 4% YoY (down 19% QoQ) to Rs12bn, as against our estimate of Rs12.5bn due to lower realizations as Steel prices corrected by over 20% QoQ and exports plummeted significantly post increasing export duty by GoI during 1QFY23. EBITDA de-grew by 44% YoY and 46% QoQ to Rs2.3bn, 17.7% below our estimate of Rs2.8bn due to higher RM cost, while margins stood at 19.3% (down 1,400bps YoY/down 955bps QoQ), 322bps below our estimate of 22.5%. GPIL reported a PAT of Rs1.76bn (down 40% YoY/down 42% QoQ), as against our estimated PAT of Rs1.8bn. With the imposition of export tax on iron ore pellets from nil to 45%, exports of pellets have become unviable and impacted domestic pellet prices significantly. We believe pricing pressure to continue over medium term and margins would remain under pressure in 2HFY23. However, due to better quality, we expect GPIL's sales volumes to remain healthy and would improve steadily. Factoring much stronger than expected 2QFY23 volumes and improvement ahead, we increase our pellet sales volume by 36%/11% for FY23E/FY24E. Moreover, the company aims to increase production/sales of sponge iron and other semi-finished steel products. We have increased our overall EBITDA estimates by 31%/16% for FY23E/FY24E. We maintain our positive stance on GPIL considering a) strong demand domestically for the company's high-grade pellets that command a premium of ~Rs1,800/tonne, b) debt-free balance sheet and, c) current export duty on pellets could be short lived. By FY24E, GPIL is slated to have net cash to the tune of Rs15bn (~40% of current market capitalisation). This we believe would support valuation. In view of healthy volumes, margin expansion and attractive valuation, we maintain our BUY rating on GPIL, with a revised 12-month SOTP-based Target Price of Rs415 (from Rs440 earlier).

Better Outlook and Margin Improvement ahead on Lower Input Cost

The company has revised its iron ore pellet production from 2.4MT to 2.6MT for FY23 on the back of government approvals on capacity addition. In 1HFY23, the company has already achieved 50% (~1.3MT) of its revised guided production volumes. The company indicated that the international iron ore prices post correction are expected to be in the range of ~US$80-US$120 for the rest of FY23. Also, the import of iron ore from china has reduced 33% YoY during Jan-Sept'22 due to weak domestic demand and production cut. The realization for Ferro alloys reduced drastically as the market prices for ferro alloys have gone down significantly. Coal prices have corrected by ~US$100 in last 6 weeks hence the company is building its inventory to take advantage of the low prices. Falling input prices would aid margin expansion ahead.

Outlook & Valuation

GPIL reported a subdued EBITDA performance during the quarter under review, due to higher input prices. Going forward, while we expect realization and EBITDA to remain under pressure, they are expected to remain above the cycle average in FY23E/FY24E. Also, at 2x FY24E EV/EBITDA, the stock is trading at a discount to its last decade average multiple of ~4.8x, thus offering comfort. We maintain our BUY rating on GPIL, with a revised 12-month SOTP-based Target Price of Rs415 (vs. Rs440 earlier), valuing the stock at a revised EV/EBITDA multiple of 3.5x (from earlier 4x) FY24E EBITDA to Rs285/share and adding subsidiary value of Rs30/share in addition to net cash of Rs100/share.

Source : Equity Bulls

Keywords

GodawaiPowerandIspat Q2FY23 ResultUpdate RelianceSecurities