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Godawari Power and Ispat Ltd – BUY

December 11, 2007

Godawari Power and Ispat Ltd [GPIL] completed its second phase of expansion. With this the company increased its capacity of sponge iron to 495,000 tpa (110%yoy), steel billets to 400,000 tpa (60%yoy) and HB wire rod to 120,000 tpa (90%yoy). With demand expected to remain strong in the next two years, expect GPIL’s output to register 66.1% CAGR for sponge iron, 30.5% CAGR for billets, 26.7% CAGR for HB wires and 17.5% CAGR for ferro alloys over FY07-09.

At prevailing price of Rs14,700/ton, which is higher by 15% yoy, GPIL earns a contribution of ~25-28% on sponge iron sales as compared to ~15-18% on billet sales due to high cost of power in the value addition process.Expect sponge iron sales contribution in revenues to significantly increase from 9.2% in FY07 to 17.1% in FY08 and 14.9% in FY09.

GPIL’s focus has been on securing captive resources. GPIL has received the mining license for iron ore at Boria Tibbu and Ari Dongari in Chattisgarh with reserves of 15mn tons, which is expected to decrease iron ore costs by ~Rs1,500/ton. Company expects to start commercial production within six months after receiving the forest clearance.

Valuation and Recommendation:
At CMP of Rs312, the stock trades at P/E of 8.1x and 6.1x on consolidated EPS of Rs38.9 in FY08E and Rs52.4 in FY09E respectively. IndiaInfo Line recommend a BUY with a target price Rs 420, which implies a P/E multiple of 8x on FY09E consolidated EPS.

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