Godawari Power & Ispat (GPIL) started operations at its Ari Dongri mines in May 2009, with initial reserves of 10 million tonnes. In 1HFY2010E, the company mined 86,545 tonnes and expects to mine 0.25 million tonnes and 0.6 million tonnes in FY2010E and FY2011E, respectively. Ore from these mines will replace the company’s purchases from NMDC and spot market, and the balance will be sold as pellets in the open market. This will lead to savings of Rs2,500/tonne in FY2011E.
GPIL is setting up a 0.6mtpa Pelletization plant and a 20MW Power plant in Raipur, which are expected to commence commercial production in 4QFY2010E. The Power plant is based on biomass and will consume rice husk sourced from the local areas. The Power plant is likely to contribute Rs22 crore to the company’s bottom-line in FY2011E, assuming average realizations of Rs4.5/unit. Further, the company has inventory of around 0.3million tonnes of fines, which will be converted into pellets in FY2011E, contributing Rs30 crore to the bottom-line in FY2011E.
Management expects to begin production of iron ore from its Boria Tibbu mines in1QFY2011E and from its coalmines in FY2012E. We have not factored the same into our valuation as final clearance from the concerned authorities is still awaited. With margins in the Power business being attractive, the company has not resumed the ferro alloy production. Also, production of billets has been reduced to sell power in the open market.
Valuation
We believe the stock is due for a re-rating, as the pelletization plant commences commercial production and as production from its captive mines ramps up. The stock is currently trading at 2.3x and 1.6x FY2011E and FY2012E EV/EBITDA, respectively. On a P/E basis it is trading at 2.9x and 2.5x FY2011E and FY2012E earnings, respectively. We upgrade the stock to a BUY, with a 15-month target price of Rs252.
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