Buy Godawari Power and Ispat Ltd - Volume disappointment; integration benefits! – PINC Result Review

Volume disappointment; integration benefits!

In Q1FY11, Godawari Power's (GPIL) operating profit improved by 27.4% YoY to Rs361mn as steel business turned profitable on better realization and benefit of backward integration. OPM expanded by 360bps YoY to 18.4%. Adjusted PAT at Rs126mn grew by a subdued 5.6% YoY due to higher interest and depreciation expenses.

Backward integration: Captive iron ore output increased to 142kt, aided by commencement of Boria Tibu mines in Q1FY11. Output from 0.6mntpa pellet plant increased 14% QoQ to 55kt.

Project updates: GPIL's 75% subsidiary Ardent Steel commissioned 0.6mntpa pellet plant in July; 20MW biomass power plant expected to commission in Q2FY11.

VALUATIONS AND RECOMMENDATION

We expect Godawari Power to benefit from revenue CAGR of 25% over FY10-FY12E and expansion of OPM from 15.8% in FY10 to 19% in FY12E driven by benefits of captive iron ore, 20MW CPP and improved steel realization. Consequently, we expect EBITDA CAGR of 37% and EPS CAGR at 54% over FY10-12E. Further, GPIL is better placed to endure steel cyclicality due to flexible business model of selling merchant power, when profitability of Steel/Ferro alloys is low.

At CMP of Rs236 the stock is trading at 3.8x FY12E EV/EBITDA. We reiterate 'BUY' on the stock with a target price of Rs298 (4.5x FY12E EV/EBITDA).

Source : Equity Bulls

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