Equity Analysis Report (NSE:GPIL)

GODAWARI POWER AND ISPAT LTD.

Prepared by:
Vansh Khanuja
vanshkhanuja78@gmail.com
http://thesecurityanalyst.weebly.com
August 12, 2023

DISCLOSURE
I do not have any investments in 'Godawri Power and Ispat ltd. (hereinafter
referred to as ‘The Company’ and/or ‘GPIL’). This report is based upon my reading
of the company’s annual report and other public documents. I have endeavored to
distinguish clearly between facts and opinions and tried my best to include all
necessary information. If, however, I have made any errors, or if any readers have
additional facts that I have not considered, I would welcome hearing from you. As
to opinions expressed here, others may disagree with some or all of them. I urge
anyone interested in the company to read its public filings and to consult whatever
other sources they deem appropriate in order to form their own opinions on the
topics covered in this report.

This report is not intended as investment advice to anyone.

Vansh Khanuja

TABLE OF CONTENTS

1. OVERVIEW AND SUMMARY OF OPINIONS.............................................(1)

2. INDUSTRY ANALYSIS...............................................................................(3)
3. ABOUT THE COMPANY............................................................................(9)
4. BUSINESS ANALYSIS...............................................................................(11)
5. FINANCIAL STATEMENTS ANALYSIS.....................................................(14)
6. VALUATION...............................................................................................(16)
7. REFERENCES...........................................................................................(18)
1 Equity Analysis Report

1. OVERVIEW AND SUMMARY OF OPINIONS

Summary of opinions. The following conclusions are based upon my reading of
the company documents, public filings, financial statements, industry reports and
other public sources (See References).

Steel industry is highly cyclical and steel prices can have a great effect on
profitability and margins. Steel prices are based on a variety of factors
including but not limited to - GDP growth, geopolitical issues, trade relations,
infrastructure growth, interest rates, etc. It is speculative to predict steel prices
and the possibility of lower margins after a bull run has ended and vice versa
needs to be accounted for in the valuation. Linearly projecting current trends
can lead to overly optimistic and/or overly pessimistic values.

Valuation of the industry today in relation to the peak before the financial crisis
of 2007-08 is low in terms of price-book ratio but relying on a single metric can
lead to speculative results. It is essential to not let prior periods' valuation to
act as an anchor as the overall structure of the global economy has changed a
lot since then. The best approach is to conservatively estimate the present
value of all future cash flows while making adjustments for economic cycles
and their effects on the steel industry.

Profits vary year-to-year due to steel prices which are heavily influenced by
China's exports, GDP growth, etc. Many companies faced losses during
2015-16 when China's demand slowed down but China had huge supply of
steel and started to sell it off in the global market at cheap prices which
caused a huge fall in prices. Similar things are probable in the future due to
uncertain demand and supply mismatches which can cause a temporary
slowdown. Strong financial position, competitive advantages to protect the
business and long-term orientation is essential to face such situations.

Godawari Power and Ispat ltd. is a public company engaged in mining of iron
ores, manufacturing of steel and generation of electricity. Presence of more
than two decades in the steel business, strong expertise of the promoter and
captive iron ore mines leased till 2060 at older rates are the major competitive
advantages the company has. The company is rated CRISIL A+/Positive
(Long-term) and is virtually debt-free and the promoter pledge has reduced
from 32.5% to 0, indicating the strong financial position of the company.
 Overview and Summary of Opinions 2

The company has shown high growth rates over the previous 5 years and is
maintaining higher margins than the industry. The company has been
investing heavily in fixed assets to grow further and the FCFs would be lower
for the coming years due to expansion plans. However, the growth would add
value as the company consistently earns high returns on the capital
employed.

The yield on A+ bonds is 11%, this serves as a floor for our discount rate. The
Equity risk premium should not be too high as the company has competitive
edge over other mid-sized steel companies and is financially strong as well.
Using a spread of 200bps, the discount rate to be used in DCF analysis would
be 13%. In order to account for the cyclical nature of the industry and using an
arbitrary Equity risk premium (ERP), a margin of safety of 10% would be used.

A growth rate of 10% for the revenues is fair enough considering the
economic growth would be around 6-7% for India. PBT margin of 15% seems
fair considering the cost advantages the company has. Finally, capex is fixed
for the first 3 years in DCF model at 400Cr and then stays at 5% of revenues.
This was based on depreciation and inflation. The number 5% seems fair
considering asset-turnover ratio of 2 and depreciation charges of 6% of fixed
assets (See Valuation for complete explanation).

The cash flows from operations are 1.5x of the net profits as there are many
non-cash expenses which needs to be accounted for. 1.5x seems a little high
but it is based on historical data.

The resultant value of the company is 8,000 Crore after applying a margin of
safety of 10%. The current market cap of the company is 8,350 Cr. The stock
is trading in the fair value range and the long-term returns should average out
to be around 10-13%. It can be even higher in the short run if the bullish cycle
continues for a few more years but that would be betting on market timing.
The valuation is done to ensure long-term satisfactory returns no matter the
volatility along the way.

Price-to-book of 2.14 and ROE of 22.3% implies a going in return of 10.4%.

Considering the yield of 11% for A+ rates bonds, this seems a bit low. For a
13% yield (discount rate), the P/B should be 1.71 which equates to a price of
475 (current price is 575).
3 Equity Analysis Report

2. INDUSTRY ANALYSIS
Overview. Steel industry is a commodity industry and is highly cyclical in nature.
India is the second-largest steel producer in the world, producing 125.3 MTNs in
2022 (Source: WSA). Demand for steel from different sectors drive this industry.
Consumption of steel by India's infrastructure segment is expected to increase to
11% by FY26.

Growth drivers. Government policies are favourable for the growth of steel
industry. The Government of India has initiated many plans under which huge
capital expenditure is required which will drive infrastructure development and will
hence, drive the steel industry. The Pradhan Mantri Awas Yojana for instance, will
consume around 158 lakh metric tonnes of steel. Moreover, policy allowing 100%
FDI (via the automatic route) in the steel industry has boosted investments.
Between April 2000- December 2022, Indian metallurgical industries attracted FDI
inflows of US$ 17.22 billion.

Easy availability of low-cost manpower and presence of abundant iron ore

reserves make India competitive in the global set-up. India is home to fifth-highest
reserves of iron ore in the world. Government of India plans to achieve steel
capacity build-up of 300 MTPA by 2030 which would require an investment of
US$ 156.08 billion. Several policy measure have been taken to achieve this goal,
the government announced specialty steel production linked incentive (PLI)
scheme in October 2021. Export duty of 30% on iron ore (lumps and fines) was
earlier levied to ensure supply to the domestic steel industry which was increased
to 50% ad valorem for iron ore lumps with more than 58% Fe content; 50% for iron
ore lumps with Fe content below 58% and 45% export duty on iron ore pellets.

Global Statistics. The annual growth rate for crude steel production has been
3% for the 2015-2020 and has since fallen by 280 bps and is now 0.2% for the
period of 2020-2022. This slowdown in growth was primarily due to the outbreak
of the covid-19 virus and several geopolitical issues. However, the demand for
steel has grown in the previous couple of years and a new commodity cycle has
started, we might see an increase in supply soon (Note: there is always a lag
between demand and supply). The major crude steel producing country is China
with 1018 MT of production for the year 2022 followed by India with production of
125.3 MT. [Source: World Steel Association]
 Industry Analysis 4

The steel industry is dominated by China, the commodity cycle during the lead up
to the financial crisis of 2007-08 was due to the demand from the emerging
countries viz. China and India and the supply lag coupled with high interest rates
and lower money supply that followed caused the prices and margins to shrink.
Prices are highly correlated with the stock prices and the price is determined by
the demand for the commodity.

Source: Trading Economics

Why the industry is cyclical? Finished Steel is primarily divided into two forms -
Long products and Flat products. Flat products include plates, hot-rolled strip and
sheets, and cold-rolled strip and sheets; all have a great variety of surface
conditions. Long products are made of either blooms or billets, which are, like
slabs, considered a semifinished product and are cast by a continuous caster or
rolled at a blooming mill. Flat steel is used in a wide range of application, used
mainly in automotive, including exterior body and interior parts. It is also used in
appliances due to its high formability and dent resistant. Its applications also
include products which require good surface finishing. Long steel products are
extensively used in the real estate sector for different applications. The nature of
these industries are cyclical and in tandem with the whole economy and thus, the
steel industry is also affected as demands from these industries go down during
periods of recession.
5 Equity Analysis Report

Valuation over the years. Conventional metrics like the P/E ratio are not suitable
to be used a yardstick to determine how far we are into the economic cycle. For
the steel industry, Price-to-Book ratios are far better in terms of valuation.
Alternatively, EV/EBIDTA can be used after making adjustments for different
accounting treatments. After a huge increase post-covid, the P/B is still far below
the 2008 levels for NIFTY METAL.
NIFTY METAL (P/B)

NIFTY METAL NIFTY METAL P/B

Source: Trendlyne

China's influence. China's steel production was 8 times that of India in the year
2022. However, it is interesting to note that China's total exports have only been
5% of their total production. This means that China's production is consumed
internally and the surplus is exported which drives down the steel prices as China
has cost advantages and its much difficult to compete with China without
imposing import tariffs.Recently, China became a net importer of steel for the first
time in 11 years. [according to a S&P Global news dated 27 Jul, 2020]. The news
article further stated that:

'China imported 2.48 million mt of semi-finished steel products in June, comprising

mainly billet and slab, according to state-owned media citing China Customs data
released on July 25. Added to finished steel imports, it took China's total imports in June
to 4.358 million mt, surpassing June's finished steel exports of 3.701 million mt. This
made China a net steel importer for the first time since the first half of 2009.'

The imports comprised of semi-finished steel products as China recovered quickly

than other countries during the first wave of Covid-19 pandemic. China was still a
net exporter if only the finished steel products were taken into consideration.
 Industry Analysis 6

Current industry trends. After the covid-19 pandemic, the interest rates were
decreased to an all time low all across the world in order to stimulate the
economy. Steel prices spiked after covid because China recovered early from the
pandemic and thus, demand was constant. However, the supply chain issues
owing to global lockdowns caused the prices of various commodities including
steel to rise. Now, in 2023, steel prices are decreasing due to oversupply.
Demand isn't as high as it was in 2020 and 2021.

Source: Trading Economics

The decreased price levels will lead to much lower margins than the previous
years and will obviously impact stock prices. This illustrates the cyclical nature of
the industry, it is difficult to predict demand for a commodity far into the future.
However, the average demand growth over the long run will be in line with the
growth of global economy. Indian government has planned to increase the
capacity to 300 MTPA by 2030 which translates to a growth rate of 13.3% per
annum for the next 7 years. Given the average economic growth of 7%, it is highly
unlikely that this capacity could be achieved. Even using a factor of 1.5, we arrive
at 10.5% only. Moreover, such growth in capacity is of no use if global demand
does not grow or the cost of production is lower than the global average because
then the country would be left with more steel than it needs and it could not export
it without incurring losses. (a similar thing happened to China in 2015-16)
7 Equity Analysis Report

Source: www.worldsteel.com & www.imf.org

The growing capex in the industry can also be a cause for concern if the future
demand is not high enough. A global slowdown could cause huge losses and the
boom of past years means any substantial output cuts would lead to huge job
losses, and potential social instability.

Appendix - How steel is made? Steel is a class of malleable alloys made up of

iron and carbon. Steel is produced by melting iron (in form of pellets, sinter, or
DRI) and reducing its content of carbon down to the desired level. The most
widely used approach is the combination of a blast furnace (BF) with a basic
oxygen furnace (BOF). 45.8% of India's steel production was done through
Oxygen method in 2022 and the rets 54.2% through electrical arc furnace (EAF)
method. [Source: World Steel Association]. Raw materials primarily used are iron
ore, coal, limestone, scrap and energy (95% of the energy input consists of solid
fuels).

The first step to produce steel by means of a primary steel making method
consists of the mining and preparation of raw materials. Iron ore is mostly
obtained from open cast mines, then crushed and concentrated into pellets (small
iron ore balls) or sinter (lumps). Coking coal is mined, washed, and converted into
coke. Scrap iron consists of steel and ferrous products at the end of their lifetime.
 Industry Analysis 8

In the second step, hot metal (or molten iron, also known as pig iron when
solidified) is produced by charging iron ore and coke to a blast furnace or by
reducing iron ore with natural gas in a direct reduction unit. The blast furnace-
based process uses sinter, pellets, lump ore and coke. The direct reduction
process uses pellets, lump ore, and natural gas (or low quality coke) to reduce the
iron ore.

In the third phase the steel is produced by oxidising the hot metal (or direct-
reduced iron (DRI)). Then, steel can be produced using the Basic Oxygen
Furnace (BOF) method, the Electric Arc Furnace (EAF) method or the Induction
Furnace (IF) method. The BOF is a vessel where oxygen is injected into the hot
metal to remove carbon and other impurities. The EAF can take a full charge of
scrap or DRI (mixtures are also possible), and requires electricity to melt the cold
charge. IF Steel Making converts Solid Metallics like Steel Scrap, Sponge Iron,
etc. into Liquid Steel by Induction heating

Finally, the steel is casted into and semi-finished products are formed namely -
billets (a length of metal with round or square cross-section), blooms (similar to
billets, with greater cross sectional area), ingots (blocks) and slabs (a length of
metal with rectangular cross-section). These semifinished products are later rolled
into different shapes. Slabs are converted into thinner steel plates (flat products)
in plate mills or hot strip mills. Other finished shapes (long products) are rolled
from blooms and billets into beams, reinforcing bars, and wire rods through
different types of mills.

This process is highly energy intensive. Many companies have constructed

captive power plants in order to meet the energy requirements.

IF Per capita consumption of steel (in kgs) (India)

27% 80
BOF
45% 60
77.2
74.7

40
74.1
65.25

68.9

EAF 20
28%
0
FY17 FY18 FY19 FY20 FY22
Crude steel production capacity in
Source: elearnmarkets
India (FY20) by route.
9 Equity Analysis Report

3. ABOUT THE COMPANY

Overview. Godawari Power and Ispat ltd. (NSE:GPIL) was established as Ispat
Godawari Ltd in 1999 by Mr B L Agrawal and got its current name in 2001. It is a
Chattisgarh based Steel manufacturing company. The company is mainly
engaged in the business of mining of Iron Ore and Manufacturing of Iron Ore
Pellets, Sponge Iron, Steel Billets, Wire Rods, H.B. Wire and Ferro Alloys along
with generation of Electricity. The company has a market capitalisation of INR
8,107 Cr (as of Aug 16, 2023)[LTP: INR 575/share].

The company has two captive iron ore mines (3 MTPA), pellet plant (2.7 MTPA)
and vertically integrated steel plant in Raipur. The steel plant manufactures
sponge iron (495,000 tonnes), billets (400,000 tonne), Mild Steel round bars
(400,000 tonne), HB wires (400,000 tonne), ferro alloys (16,500 tonne) and pre-
fab structures (110,000 tonne).

The two main operational subsidiaries of GPIL are AFAL and HFAL. HFAL
manufactures ferro alloy (60,500 tonne) and has 30 MW power capacity (20 MW
thermal, 8.5 MW biomass and 1.5 MW windmill). AFAL also has a ferro alloy
manufacturing plant with capacity of 14,500 tonnes and a captive power plant of 8
MW. [Note: AFAL was acquired by the company on June 28, 2022 by purchase of
37,79,220 equity shares of Alok Ferro Alloys Limited (AFAL) at fair value
comprising of 78.96% of the company]

The company has also become net debt free after the covid-19 pandemic and is
CRISIL A+/Positive rated (long-term). [Source: Annual report]

The company had an excellent FY22 mainly due to the high steel prices. The
company reported profits after tax of INR 1351 Cr and revenues totalling INR
5075 Cr. The CAGR growth over the last 4 years for Revenues and PAT were
23.45% and 65.03% respectively. The Profit margin was 26%, indicating how
good the high steel prices were for the industry. The recent quarters have shown a
dip in both margins and growth as steel prices have dropped significantly from
their recent peak and fall in rates due to imposition of export duties. [See Financial
Statement Analysis section for recent quarter results].

(Note: Annual report for FY23 was not available at the time of writing this report.
Key figures for FY22 has been reproduced in the next page)
 About the Company 10

Plant Licensed capacity Production FY22

Iron ore mining 3.050 MT 2.312 MT

Iron ore pellets 2.400 MT 2.399 MT
Sponge iron 0.495 MT 0.494 MT
Steel billets 0.400 MT 0.327 MT
Wire rods 0.400 MT 0.130 MT
HB Wires 0.100 MT 0.018 MT
Ferro alloys 0.016 MT 0.016 MT
Power 73 MW 49 MW
Wire rods 0.214 MT 0.092 MT
HB wires 0.300 MT 0.017 MT
Galvanisation 0.100 MT 0.053 MT

Revenues EBITDA PAT

6,000

4,000

2,000

0
FY18 FY19 FY20 FY21 FY22
Source: Annual report

42% 35% 26%

ROCE EBITDA MARGIN PAT MARGIN

11 Equity Analysis Report

4. BUSINESS ANALYSIS
Product-wise revenue breakup. For the preceding two financial years, the
revenue breakup is as follows -

Source: Annual report

The revenues for FY23 were INR 5,284 Cr, slightly higher than FY22 but the
profits were down from INR 1350.97 Cr to INR 788.68 Cr. This was the result of
lower steel prices realised during this year. Government levied export duty on Iron
Ore (from 0%/30% to 50%), Pellets (from NIL to 45%) and Steel (from NIL to 15%)
in May’2022. This has led to sharp drop in domestic iron ore price. GPIL's
realisation for pellets have dropped by 25-30%. This happened because of fall in
market rates due to imposition of export duty

Capex plans. The company has been investing heavily to bring down the cost of
operations by setting up solar plants to bring down energy costs and the company
is expanding its capacity as well. The following are the capex plans -

As on Nov 2022, the capacity of Iron Ore Mining, Crushing & Beneficiation
facilities to be increased from 2.1MTPA to 3.05MTPA for a total cost of Rs
1250 Mn, expected to commission on H2FY23.
Sponge iron capacity to be increased from 0.5MTPA to 0.6MTPA (Project
completed, State Pollution Board permission awaited)
Power Plant - replacement of Turbines, capacity to remain same at 73MW to
be commissioned by FY23/Q1FY24 at total cost of Rs860Mn
HFAL(Ferro Alloys) : Debottlenecking at cost of Rs250Mn, to be completed by
FY23, capacity remains unchanged at 60,500
GPIL(Khairagarh) - 23MW capacity to be installed for Rs1100Mn to be
commissioned by Q3FY23
 Business Analysis 12

HFAL(Bemetara) - Capacity of 60MW at a total cost of Rs2650Mn to be

commissioned by Q4FY23
Jagdamba Power Plant Acquisition as on 7th June 2022
On 28 June 2022, The Company has acquired 37,79,220 equity shares of
Alok Ferro Alloys Limited (AFAL) at fair value comprising of 78.96%

Moreover, GPIL has plans to set up a greenfield integrated steel plant with
capacity of 1.5-2MT of flat products at an estimated capital outlay of around INR
4,0000 million over the next three-to-five years. By the end of FY24, GPIL will
have solar power capacity of 155MW (including subsidiary). Total capital
expenditures from these solar plants is INR 6250 Million. The company spends
150-200 Cr annually on Power and fuel, this costs should come down
considerably in the future years as a result of this investment thereby increasing
profit margins. The greenfield integrated steel plant of 1.5-2MT of flat steel
products is the most significant as an additional capacity of 2MT would be a
massive upgrade. Also, the projected capital outlays are significant as well, being
INR 400 Cr.

Competitive advantage. GPIL has three major competitive advantages -

1. Captive Iron Mines (2060) : The Government of India started auctioning of iron
ore merchant mines beginning from the year 2020. According to the new rules,
all the merchant mine agreements were valid only till 2020 and companies
needed to bid for mines from then on. However, for captive mines, the rules
were 'Till 2030 or the lease period, whichever is higher'. GPIL was allocated
two mines in the year 2006 with a lease valid till the year 2060. The iron ore
reserves are sufficient to last more than 35 years (more than 165 MT).
Following a change in the regime of a allocation of iron ore resources, the
structure of the Indian iron ore industry has altered. Royalty bids were on an
average around 90-100 Per cent of the iron ore sales selling price, increasing
costs permanently by Rs. 1,500/tonne. Winning bids were at an average
premium of 129 Per cent of the IBM (Indian Bureau of Mines) price, what it
means is that these merchant miners are willing to pay 129 Per cent of the
market price (as published by IBM) and additionally pay 20 Per cent of the
selling price as royalty and District Mineral Fund charges as well as 5 Per cent
GST. The company is aiming to increase the annual production capacity in the
coming years.
13 Equity Analysis Report

2. Integrated Operations : The company is present across the steel value chain.
Operations are backward integrated with two captive iron ore mines that meets
total iron ore requirement. The company has been using its captive power
capacity of 73 megawatt to meet its energy requirements (and an additional
25MW plant acquired recently). External dependence for power will be
negligible after completion of the ongoing 85 MW captive power projects. The
company uses domestic as well as imported coal, and has fuel supply
agreement with Coal India Ltd. Forward integration has led to diversified product
(wire rods, HB wires and pre-fab structures) and revenue profiles, allowing the
company the flexibility to sell products based on realisations. Furthermore,
presence of iron ore beneficiation plant (improves iron content and thus
realisation) and hot rolling mill in the same premises reduces transportation cost
and reheating requirement, thereby supporting operating efficiency and
profitability sustainably.

3. Established market position : Presence of more than two decades in the steel
business and strong expertise of the promoter will continue to support the
business.

Peer comparison. There is no mid-size steel player that can compete with GPIL
today due to its competitive advantages. Either the companies have
shutdown/sold off their steel divisions (Usha Martin ltd. recently sold off its steel
division to Tata Steel ltd.) or making little profits in comparison to their revenues
(Shyam metallics ltd. made only INR 1042 Cr after generating INR 12,610 Cr of
revenues, net margin equates to just 8% in comparison to GPIL's 13.3% for FY23.
Operating margin of different companies
GPIL Tata Steel JSW SAIL
Shyam Metalics
40

30

20

10

0
FY19 FY20 FY21 FY22 FY23
Source: Screener.in
 Financial Statement Analysis 14

5. FINANCIAL STATEMENTS ANALYSIS

Source: Annual report & Author's calculations

Analysis. The revenues have grown consistently, the huge spike after FY21 is
due to higher realisation on sale of products and that is when the PBT as a % of
revenues also rises from 8% to 36% after coming down back at 18. COGS have
grown in line with revenues and have stayed at the 45-50% range as a
percentage. The major reason for Net Profit growing twice as fast than the
revenues is due to the fact that realisation prices have grown at a high rate but
several major costs like power consumption and raw materials cost have grown
only nominally (due to inflation). The long term debt for the company as at
31.03.2023 was only INR 9 Crores, therefore, there is no major risk of default. The
reason Free Cash Flows have not grown considerably over the last few years is
due to the growth of Capital expenditures @40.87% CAGR over the last 5 years.
The capital expenditures should stay constant for 2-3 more years to come
considering the management's expansion plan. The growth is profitable unlike
other commodity expansions due to the competitive advantages the company
have. Until a certain point (where the iron ore reserves requirements are met
through captive mines), the company will enjoy a huge cost advantage.
15 Equity Analysis Report

Although companies like Tata Steel, SAIL & JSW are too large to be compared,
the margins are highly correlated and show how good GPIL margins are on a
relative basis. This proves that GPIL will be relatively the leading cost producer
and up until that point where the margins are sustainable, the company will enjoy
better than average industry returns.

Volume growth. The volume growth over the past 4 years has been really good,
the volume growth is in line with the industry and the effect of volumes growth help
us remove the effects of abnormal price increases. The company can easily
increase the volumes in the future at a similar or better rate and adding a few
percentage points for inflation helps us arrive at a expected growth rate of 8-
10%.The margins are better than the industry average and higher volumes will
translate to higher free cash flows. The capital expenditures however, will be high
in the future as well considering this is a mid-size company and there's a lot of
room to grow from here.

Debt. The company has become virtually debt-free and now holds only 9 Crore
(as of 31.03.2023) in long-term debt. The absence of high finance charges also
adds a few percentage points to the final margins (finance costs were 5-6% of
revenues in FY18 and FY19). Another advantage is to leverage the balance sheet
as and when needed.

Conclusion. The company is financially very strong and can grow at higher than
industry levels over the next 5-6 years. The margins are sustainable due to strong
balance sheet, captive iron ore mines and captive power plants.
 Valuation 16

6. VALUATION

DCF. The valuation for the company would be through the discounted cash flow
model where the value of the company is the sum of all future cash flows. There
are certain variables which are essential to use the DCF model which are
explained below along with the rationale behind their assumed value :-

Discount rate.This is the required rate of return for the investor and this rate is
used to calculate the present value of all the future cash flows. The company is
rated A+/Positive (Long-term) by CRISIL and the yield on A+ rated bonds is
around 11%. This figure serves as the floor for our discount rate. An equity risk
premium of 200bps seems enough as the company has many competitive
advantages and is financially strong. The resultant discount rate to be used for
DCF analysis is 13%. [Note: I am not using beta to calculate cost of equity and
then calculate the WACC as beta relates risk to volatility. This is in
contradistinction to the value investing philosophy, although the premium of
200bps sounds arbitrary, it is much better than using beta]

Perpetual growth rate. Cash flows are projected for 'n' number of years in a DCF
model after which they are assumed to grow perpetually at a constant rate. For
our analysis, this rate should account for economic growth and inflation. As India
is a developing country, a perpetual growth rate of 4-5% should be reasonable. To
be conservative, I will use 4% as a perpetual growth rate.

Revenues growth rate. The rate at which revenues will grow, for this analysis,
revenues growth rate will be consistent at 10% for the next 10 years. There will be
periods of high growth followed by recessions where growth might be negative
even at same volumes if steel prices go down. This makes revenue projection
unreliable and linearly forecasting the past data is not ideal. However, given the
expansion plans of the company, it is safe to assume that the company can grow
at 10% for the next 10 years.

PBT Margin. PBT margin will depend on a variety of factors and is currently on
the higher end. The current margins cannot be sustained for longer periods. For
this analysis, I am assuming a PBT margin of 15% for the first 5 years and 12% for
the next 5. Margins remain really low for the down years but as the company has
cost advantages, anything lower than 12% does not seem reasonable.
17 Equity Analysis Report

Tax rate. Tax rate will be constant at 28% as there are certain deviations between
accounting tax and actual taxes paid. In the long run, the average tax as a
percentage of PBT is 25-30% so I'm using 28% as the tax rate.

Capex. Capex for this company will not stay constant, for the first 3 years, I will
400 Cr as the capex and then capex be based on a percentage of sale.
Capex/sales ratio is not suitable as the steel prices affect the revenues figure so
using capex/sales can be misleading. However, depreciation on an average turns
out to be 6% of fixed assets, and asset turnover ratio for the company ranges from
1.5 - 3. So taking asset turnover ratio as 2 for the long run, this means that for
every dollar of fixed asset, how much sales are generated. We can use 5% of total
revenues to find out capex after year 3 [3% for depreciation charged and 2% to
account for growth and inflation]. CFFO is 1.5x of net profits (based on past data)

Source: Author's calculations

Conclusion. The fair value range for the stock is INR 8,022 Cr - 8,913 Cr, and the
stock is currently trading at 8,355 Cr. In my opinion, the stock is fairly valued and
the long-term returns from this stock can average 10-13%. The stock can grow at
lower rates for a long time if a recession comes and it takes a while for the
economy to revive; to make money in cyclical stocks, you either need to time the
market perfectly well or hold on for long-term and eliminate the effects of the
economic cycle. The former would be a form of speculation for the average
investor, the latter is the best option to make money in cyclical stocks for the
average investor. ROE of 22.3% and P/B of 2.14 implies a going in return of
10.4%
 References 18

7. REFERENCES
Money Control - GPIL [2023], Available from
https://www.moneycontrol.com/india/stockpricequote/steel-sponge-
iron/godawaripowerispat/GPI7
Screener.in. - GPIL [2023], Available from
https://www.screener.in/company/GPIL/consolidated/
BBC, [April, 2016], Available from https://www.bbc.com/news/business-
36099043
Kaminski, Jacek, [January, 2011] ,Iron and steel industry - A global market
perspective, Available from
https://www.researchgate.net/publication/265664279_The_iron_and_steel_in
dustry_A_global_market_perspective/link/5559929108ae6943a876c419/dow
nload
Trading economics -Steel charts [2023], available from
https://tradingeconomics.com/
Trendlyne - Nifty Metal [2023], Available form
https://trendlyne.com/equity/1904/NIFTYMETAL/nifty-metal/
Godawari Power and Ispat - Annual reports & Quarterly statements , Available
from https://www.godawaripowerispat.com/
World Steel Association report, WSA [2023], Available from
https://worldsteel.org/
The Hindu Business Lines, [May, 2021], Available from
https://www.thehindubusinessline.com/opinion/how-ore-auctions-undermine-
market/article34544306.ece
CRISIL - GPIL Rating Rationale [2022], Available from
https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Godawari
PowerandIspatLimited_December%2013,%202022_RR_302730.html

(Accessed August, 2023)

 DISCLAIMER

I am not a SEBI registered investment advisor. All the reports are strictly for
entertainment and educational purposes only. The reports are not intended as an
investment advice to anyone. While due care has been taken during the
compilation of this report to ensure that the information is accurate to the best of
my knowledge and belief, the content is not to be construed in any manner
whatsoever as a substitute for professional advice. I neither recommend nor
endorse any specific products or services that may have been mentioned in this
presentation and nor do I assume any liability, damages or responsibility for the
outcome of decisions taken as a result of any reliance placed on this report. I shall
not be liable for any special, direct, indirect or consequential damages that may
arise due to any act or omission on the part of the user due to any reliance placed
or guidance taken from any portion of this report.

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