Stock Market Result Update on Godawari Power & Ispat for 2QFY2012

Stock Market Result Update on Godawari Power & Ispat for 2QFY2012 with a Buy recommendation and a Target Price of `154 (12 months).

For 2QFY2012, Godavari Power & Ispat (GPIL) reported robust top-line growth; however, its profitability was hit on account of higher iron ore and coal costs.
We maintain our Buy rating on the stock.

Higher volumes and realization drive strong top-line growth: During the quarter, GPIL’s net sales grew by 190.0% yoy to `429cr on account of higher realization and increased sales volume. Pellet, sponge iron, billets and HB wire realizations increased by 51.7%, 30.7%, 23.2% and 25.8% yoy, respectively. Billets, HB wire, ferro alloys, and power sales volumes grew by 108.3%, 30.1%, 24.5% and 21.9% yoy, respectively, during the quarter.

Higher input costs mute profit growth: Raw-material cost as a percentage of net sales stood at 65.8% in 2QFY2012 compared to 49.1% in 2QFY2011, as the rise in iron ore and coal prices more than offset the rise in product prices. Thus, EBITDA margin slipped by 828bp yoy to 12.3% in 2QFY2012 and EBITDA grew by 73.2% yoy to `53cr. Interest and depreciation expenses grew by 145.0% and 51.7% yoy to `25cr and `17cr, respectively. Consequently, net profit increased by only 50.0% yoy to `11cr during the quarter.

Outlook and valuation: Although GPIL’s 2QFY2012 profitability was affected by higher iron ore and coal costs, going forward we expect the company to improve its profitability on the back of increased high-margin pellet sales. At the CMP, the stock is trading at 3.7x FY2012E and 3.0x FY2013E EV/EBITDA. On a P/BV basis, it is trading at 0.5x FY2012E and 0.4x FY2013E estimates.  We maintain our Buy recommendation on GPIL with a revised target price of `154, valuing it at 3.3x FY2013E EV/EBITDA.