Buy Godawari Power and Ispat - PINC Result Review

Margin expands despite low power tariff!

In Q2FY11, Godawari's (GPIL) revenue declined 7% YoY to Rs1.4bn mainly due to low power sales and tariff. Operating profit grew 65% YoY to Rs287mn despite lower power profit as captive iron ore and better realization boosted steel profitability. OPM expanded by 870bps YoY to 20.1%. PAT grew 185% YoY to Rs71mn.

Project updates: 20MW biomass power plant started trial production; 0.6mntpa pellet plant in GPIL's 75% subsidiary Ardent Steel under stabilisation. See pg3 for status on amalgamation of group companies.

VALUATIONS AND RECOMMENDATION

We expect company's performance to improve gradually from Q3 onwards from higher iron ore and pellet output, commencement of production in 20MW biomass-based power plant and 75% subs. Ardent Steel (not included in our estimates and TP), and better steel profitability. We estimate EBITDA and EPS CAGR of 36% and 49% respectively over FY10-FY12E. However, we reduce our FY11 and FY12 EPS estimates to Rs26 (Rs28) and Rs40 (Rs43) respectively to factor in lower power tariff and steel output. Flexible business model of the company gives us confidence on our earning estimates.

At CMP of Rs201, the stock is attractively valued at 3.6x FY12E EV/EBITDA. We reiterate 'BUY' with a revised target price of Rs276 (4.5x FY12E EV/EBITDA).

Source : Equity Bulls

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