Aditya Birla Money

Result Update | Metals & Mining | 09 August 2010

8

Last Closing Target Upside

Godawari Power & Ispat Ltd. (GPIL) – Results below expectations; cutting Rating Price (Rs) Price (Rs) %
estimates; valuations, however, remain compelling: reiterate BUY Buy 229.7 301 31.0
Source: ABML Research
Godawari Power & Ispat Ltd. (GPIL) Q1FY11 results were below our expectations on account
of (1) lower production volumes of sponge iron and pellet as it faced technical problems in the Risk Return Matrix
sponge iron kilns and stabilisation issues in the pellet plant and (2) underutilisation of iron ore
from its Ari Dongri Mine as high proportion of magnetite iron ore output posed problems in the

Low Medium High

sponge iron kilns and (3) lower sales due to poor market sentiment as cheaper priced imports
from China reduced domestic steel companies’ market share.

Return
Key Highlights
 GPIL’s net sales declined 7.1% YoY and 24% QoQ to Rs1.8bn on account of lower Low Medium High
production volume of sponge iron, pellet and steel billets Risk

 Despite lower sales, GPIL’s EBITDA grew 25.2% YoY but declined 23.5% QoQ to Source: ABML Research

Rs354.3mn. EBITDA margins were up 512bps YoY and 13.4bpsQoQ due to the benefit of
captive iron ore and pellets and higher product realisations and higher power sales QoQ. Company Data
Production of billets was stopped to benefit from high power prices. GPIL sold power at BSE Code 532734
an average price of Rs5.14 per unit during the quarter NSE Code GPIL
 GPIL’s standalone net profit was up 2.5% YoY and down 41.4% QoQ to Rs132.1mn Equity Capital (Rs mn) 280.7
Face Value (Rs) 10
 Production of sponge iron was down 23.4% QoQ and 11.9% YoY to 61,535 tonnes while
Market Cap (Rs mn) 644.8
production of steel wires was down 16.9% QoQ and 28.7% YoY to 14,193 tonnes
Avg Daily Volume (Qtly) 291,829
 Iron ore and pellet production were both up 10.9% and 14.7% QoQ to 141,984 tonnes
52 week H/L (Rs) 319.9/92
and 55,396 tonnes respectively
Source: NSE, BSE
 During the quarter, sponge iron realisations stayed flat at Rs15365 per tonne
Shareholding (%)

Outlook and Valuations Holders Jun 10 Mar 10 Dec 09

 Outlook for Indian steel industry to improve in H2FY11: Going forward, we expect the
Promoters 58.97 58.97 58.97

outlook for steel industry to improve in H2FY11 as the excess inventory in China gets FIIs 7.43 6.83 5.94
released over August-September’10. Improvement in domestic steel demand post MFs/Banks & FI’s 5.99 8.38 5.82
monsoon and reduced pressure from Chinese steel exports should push up domestic steel Public & Others 27.61 25.82 29.27
sales and prices in India (refer page-2)
Source: NSE
 Cutting earnings estimates: The technical problems faced in production of sponge iron
and pellets are likely to continue in Q2FY11. This is likely to lead to lower production than Chart: GPIL vs. Sensex
our earlier estimates. Also, iron ore is likely to be partly purchased from outside till iron ore
300
from Boria Tibu begins and gets ramped up. This is likely to lead to higher raw material
250
Relative Performance

costs than estimated. On improved outlook of sponge iron and steel prices, realisations
200
are likely to be higher than our earlier estimates. Factoring in lower production, higher raw
150
material costs and higher realisations (refer table 1 & 2 on page-2), we cut our earnings
100
estimates for FY11 and FY12 by 23.2% and 11.8% to Rs37.4 and Rs57.1 respectively
50

 Valuations remain compelling; reiterate BUY: GPIL is currently trading attractively at a 0

Aug-09 Nov-09 Feb-10 May-10 Aug-10
standalone P/E and EV/EBITDA of 4.0x and 2.8x FY12E respectively. We expect a CAGR
of 76.5% in GPIL’s standalone earnings over FY10-12 to Rs57.1. Its story of increasing GPIL Return Sensex Return
 
raw material integration over FY11-1FY12 through ramp-up of iron ore and pellet
Source: NSE
production remains intact. Despite cut in our earnings estimates, valuations remain
compelling. Strong earnings growth, robust business model and attractive valuations make Analyst Details
us remain positive on the prospects of GPIL. We continue to value standalone GPIL at a  
P/E of 5x FY12E (Rs285.3 per share). Adding the value of Rs15.6 from its pellet JV in Akhil Jain
Orissa --Ardent Steel--we arrive at a fair value of Rs301 per share for GPIL. We, thus cut 022-42333540
our target price per share for GPIL by 11.2% from Rs339 to Rs301, implying a potential
akhil.jain@adityabirla.com
return of ~31.0% from the last closing price. We reiterate our BUY rating on GPIL

Financial Snapshot (Rs mn)

YoY YoY YoY EPS YoY EBITDA RoE RoCE P/E EV/EBITDA P/B
In Rs mn Sales (%) EBITDA (%) PAT (%) (Rs) (%) (%) (%) (%) (x) (x) (x)

FY10 7,764 1,226 514 18.3 15.8 11.1 9.5 12.5 8.3 1.3
FY11E 9,221 18.8 2,081 69.7 1,050 104.2 37.4 104.2 22.6 19.7 15.3 6.1 4.5 1.1
FY12E 11,683 26.7 2,884 38.6 1,602 52.6 57.1 52.6 24.7 24.8 19.7 4.0 2.8 0.9
Source: ABML Research

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 Aditya Birla Money
Result Update | Metals & Mining | 09 August 2010

Pressure from Chinese steel exports to reduce; outlook for Indian steel industry to improve in H2FY11
We expect cutback in Chinese steel production to aid the excess inventory in China to get released over August-September’10. Due to
slowing Chinese steel demand, economically unsustainable domestic steel prices and loss of export competitiveness due to removal of
export incentives, we have already seen China cut its production 4.2% MoM to 53.8mn tonnes in June 2010. We expect balance in China
steel demand supply situation, higher domestic steel Chinese prices and removal of export incentives to reduce the pressure from Chinese
steel exports for Indian steel producers. We have already seen Chinese domestic steel prices bottom out in mid July’10 and begin an
upward trend since then. In the last 20 days, domestic Chinese HR steel and steel rebar prices have both risen ~9% each to $628 per
tonne and $614 per tonne respectively (refer Chart-1 and Chart-2 below). We expect pick up in domestic steel demand post
monsoon and reduced pressure from Chinese steel exports to push up domestic steel sales and prices in India.

After falling to economically unsustainable levels, Chinese domestic steel prices begin an upward trend since
mid July’10

Chart 1: China domestic HRC prices Chart 2: China domestic rebar prices

Chinese dom estic HRC prices Chinese domestic rebar prices

700 680
670 650
$ per tonne

640
$ per tonne

620
610 590
580
560
550
530
520
500
7-Jul
14-Jul
21-Jul
28-Jul
2-Jun
9-Jun
16-Jun
23-Jun
30-Jun
5-May
12-May
19-May
26-May

5-May

17-May

27-May

8-Jun

23-Jun

5-Jul

15-Jul

27-Jul
Source: Bloomberg Source: Bloomberg

Table 1: GPIL’s revised production volume assumptions

Production (in tonnes) Capacity FY11E (revised) FY11E(old) % change FY12E (revised) FY12E(old) % change
Sponge iron 495,000 292,050 321,750 -9 331,650 346,500 -4
Steel billets 400,000 100,000 120,000 -17 180,000 180,000 0
Steel wires 120,000 72,000 84,000 -14 86,400 86,400 0
Ferro alloys 16,500 3,300 3,300 0 3,300 3,300 0
Power (in mn units) 639 364 401 -9 445 471 -6
Source: ABML Research

Table 2: GPIL’s revised product realisation assumptions

Realisations (in Rs per tonne) FY11E (revised) FY11E(old) % change FY12E (revised) FY12E(old) % change
Sponge iron 15,930 15,488 3 15,963 15,526 3
Steel billets 25,644 25,170 2 25,757 25,294 2
Steel wires 31,047 30,574 2 31,534 31,071 1
Ferro alloys 45,400 45,400 0 44,424 44,424 0
Power (Rs per unit) 4.4 4.1 6 4.4 4.1 6
Source: ABML Research

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 Aditya Birla Money
Result Update | Metals & Mining | 09 August 2010

Unaudited Standalone Financial Results (Q1FY11) - GPIL

Quarterly Results Table

Rs mn Q1FY11 Q1FY10 YoY% Q4FY10 QoQ%
Net Sales 1,782.6 1,919.0 -7.1 2,345.3 -24.0
Total Expenses 1,428.3 1,635.9 -12.7 1,882.3 -24.1
Inc / Dec in stock -90.5 -10.9 730.3 -91.7 -1.3
Raw material consumed 1,167.3 1,495.5 -21.9 1,592.3 -26.7
Manufacturing expenses 298.9 119.9 149.3 331.1 -9.7
Staff cost 52.6 31.4 67.5 50.6 4.0
EBIDTA 354.3 283.1 25.2 463.0 -23.5
Adj. EBITDA 354.3 283.1 25.2 463.0 -23.5
Other Income 2.3 13.3 -82.7 8.7 -73.6
PBIDT 356.6 296.4 20.3 471.7 -24.4
Interest 91.2 69.8 30.7 101.2 -9.9
Depreciation 100.4 71.3 40.8 98.4 2.0
Extraordinary Item 0.0 0.0 0.0
PBT 165.0 155.3 6.2 272.1 -39.4
Tax 32.9 26.4 24.6 46.6 -29.4
PAT 132.1 128.9 2.5 225.5 -41.4
Adj PAT 132.1 128.9 2.5 225.5 -41.4
Equity 280.7 280.7 0.0 280.7 0.0
EPS 4.7 4.6 2.5 8.0 -41.4
Adj. EPS 4.7 4.6 2.5 8.0 -41.4

Key Ratios (%)

EBIDTA Margin 19.9 14.8 19.7
Adj EBIDTA Margin 19.9 14.8 19.7
Interest / Sales 5.1 3.6 4.3
Tax / PBT 29.9 26.3 21.4
NPM 7.4 6.7 9.6
Source: Company data, ABML Research

Risk factors
 Prolonged period of weak global economic conditions, leading to a prolonged slump in steel & metallics demand and prices.
 Lower volume growth
 Lower iron ore production (Maoist activities could cause disruptions)
 Lower pellet production
 Rupee appreciation

Recommendation summary

Last Target
Date Reports Rating Upside %
Closing Price (Rs) Price (Rs)
20-07-10 Initiating Coverage Buy 231.9 339 46.2
06-08-10 Result Update (Q1FY11) Buy 229.7 301 31.0
Source: ABML Research

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 Aditya Birla Money
Result Update | Metals & Mining | 09 August 2010

Standalone Financials – Godawari Power & Ispat Ltd. (GPIL)

Profit & Loss Balance Sheet

In Rs mn FY09 FY10 FY11E FY12E In Rs mn FY09 FY10 FY11E FY12E
Net sales 10,355 7,764 9,221 11,683 Equity capital 281 281 281 281
YoY (%) 25 (25) 19 27 Reserves 4,084 4,516 5,370 6,691
Total expenses 9,130 6,538 7,140 8,800 Net worth 4,365 4,797 5,651 6,971
Inc/dec in stock 22 (109) (109) (109) Preference capital 0 0 0 0
Raw material cost 8,372 5,703 6,181 7,684 Total borrowings 3,318 3,915 3,315 2,415
Staff cost 125 173 214 243 Deferred tax 0 0 0 0
Operating expenses 509 668 748 857 Total liabilities 7,682 8,712 8,966 9,386
Other expenses 102 102 105 124
EBIDTA 1,226 1,226 2,081 2,884 Asset Block 5,514 6,407 6,325 6,135
YoY (%) (24) 0 70 39 Investments 446 715 896 896
EBIDTA (%) 12 16 23 25 Goodwill 0 0 0 0
Depreciation 264 316 409 490
Non-operating income 104 30 34 54 Current assets 2,463 2,554 2,674 3,506
EBIT 1,065 940 1,706 2,448 Inventories 1,348 1,586 1,467 1,808
Interest 342 320 394 312 Debtors 303 358 393 497
Extraordinary income/(expenses) (71) 0 0 0 Cash 410 137 496 798
PBT 653 620 1,312 2,135 Loans and advances 402 473 318 403
(-) Tax 79 106 262 534
Current Tax 79 106 262 534 Current liabilities 556 779 747 902
Deferred Tax 0 0 0 0 Provisions 185 186 182 248
Tax/ PBT (%) 12 17 20 25
PAT 574 514 1,050 1,602 Net current assets 1,723 1,589 1,745 2,356
YoY (%) (40) (10) 104 53 Miscellaneous expenses 0 0 0 0
Adjusted net profit 636 514 1,050 1,602
YoY (%) (33) (19) 104 53 Total assets 7,682 8,712 8,966 9,386

Key Ratios Cash Flow

FY09 FY10 FY11E FY12E In Rs mn FY09 FY10 FY11E FY12E
EPS (Rs) 20.4 18.3 37.4 57.1 Net profit 574 514 1,050 1,602
Adjusted EPS (Rs) 22.7 18.3 37.4 57.1 Depn and w/o 264 316 409 490
CEPS (Rs) 29.8 29.6 52.0 74.5 Change in working cap 485 (139) 204 (309)
Book value (Rs) 155.5 170.9 201.3 248.4 Non-operating income 104 30 34 54
Dividend per share (Rs) 2.5 2.5 6.0 8.6 Others 71 0 0 0
Net debt-equity (x) 0.7 0.8 0.5 0.2 Operating cash flow 1,290 661 1,628 1,728
ROCE 12.9 9.5 15.3 19.7
ROE 15.3 11.1 19.7 24.8 Non-operating income 104 30 34 54
Capex (1,814) (1,210) (326) (300)
Valuations Investments (126) (270) (180) 0
PE (x) 6.1 4.0 Others -71 0 0 0
Cash PE (x) 4.4 3.1 Investing cash flow (1,907) (1,450) (473) (246)

Price/book value (x) 1.1 0.9 Dividend (82) (82) (196) (281)
Dividend yield (%) 2.6 3.7 Equity 0 0 0 0
P/sales 0.7 0.6 Debt 476 597 (600) (900)
EV/sales (x) 1.0 0.7 Others 0 0 0 0
EV/EBITDA (x) 4.5 2.8 Financing cash flow 393 515 (796) (1,181)
Net change in cash (224) (273) 360 301
Opening cash 634 410 137 496
Closing cash 410 137 496 798
Source: ABML Research, company data

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 Aditya Birla Money
Result Update | Metals & Mining | 09 August 2010

Research Team
Vivek Mahajan
Head of Research
022-42333522
vivek.mahajan@adityabirla.com

Fundamental Team
Avinash Nahata Head of Fundamental Desk 022-42333459 avinash.nahata@adityabirla.com
Akhil Jain Metals & Mining 022-42333540 akhil.jain@adityabirla.com
Sunny Agrawal FMCG/Cement 022-42333458 sunny.agrawal@adityabirla.com
Sumit Jatia Banking & Finance 022-42333460 sumit.jatia@adityabirla.com
Shreyans Mehta Construction/Real Estate 022-42333544 shreyans.m@adityabirla.com
Dinesh Kumar Information Technology/Auto 022-42333531 dinesh.kumar.k@adityabirla.com
Pradeep Parkar Database/Production 022-42333597 pradeep.parkar@adityabirla.com

Quantitative Team
Rizwan Khan Technical and Derivative Strategist 022-42333454 rizwan.khan@adityabirla.com
Devarajan.S Derivatives Analyst 022-42333534 devarajan.s@adityabirla.com
Rahul Tendolkar Derivatives Analyst 022-42333532 rahul.tendolkar@adityabirla.com
Kunal Bothra Technical Analyst 022-42333537 kunal.bothra @adityabirla.com

Advisory Support
Lalitha.MR Advisory Desk – Retail 044-39181903 lalitha.r@adityabirla.com
Indranil Dutta Advisory Desk – HNI 022-42333494 indranil.dutta@adityabirla.com

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 Aditya Birla Money
Result Update | Metals & Mining | 09 August 2010

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Analyst holding in the stock: NIL

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