Stock Market Result Update on Godawari Power & Ispat for 1QFY2012

Stock Market Result Update on Godawari Power & Ispat for 1QFY2012 with a Buy recommendation and a Target Price of `221 (12 months).

For 1QFY2012, Godavari Power & Ispat (GPIL) reported robust top-line growth, however its profitability was hit on account of higher iron ore and coal costs. Further, higher interest expenses impacted its bottom-line growth for the quarter.

Rising input costs hit margins: GPIL’s net sales grew by 152.0% yoy to `494cr on account of higher realisation, increased sales volumes and merger with Hira Industries and R.R. Ispat. Average realisation for sponge iron, HB wires, pellets and billets grew by 26.3%, 17.6%, 14.3% and 6.6% yoy, respectively. Billet sales volume for 1QFY2012 was substantially higher at 30,476 tonnes vs. 533 tonnes in 1QFY2011. Pellet sales volume stood at 43,625 tonnes vs. 8,591 tonnes in 1QFY2011. Raw-material cost as a percentage of net revenue rose to 66.7% in 1QFY2012 vs. 62.2% in 1QFY2011. Thus, although EBITDA grew by 110.5% yoy to `76cr, EBITDA margin contracted by 303bp yoy to 15.4%. Interest expenses increased by 169.9% yoy to `27cr. Consequently, net profit for the quarter increased by 143.5% yoy to `31cr.

Outlook and valuation: Although GPIL’s 1QFY2012 profitability was affected by higher iron ore and coal costs, going forward we expect GPIL to further improve its profitability on the back of increased high-margin pellet sales. A key catalyst for the stock would be commencement of iron ore mining from Boria Tibu. At the CMP, the stock is trading at 3.6x FY2012E and 2.4x FY2013E EV/EBITDA. On a P/BV basis, it is trading at 0.6x FY2012E and 0.5x FY2013E estimates. We maintain our Buy view on GPIL with a revised target price of `221, valuing it at 3.0x FY2013E EV/EBITDA.