Godawari Power is a Trading Buy with Expected Return of 61%: Edelweiss

Business Overview

Godawari Power & Ispat (GPIL) is a fully backward-integrated steel company with strong presence across the value chain—from operating captive iron-ore mines to manufacturing and selling value-added steel products. The company is one of the largest pellet manufacturers in India and India’s only manufacturer of high-grade pellets. GPIL has facilities in Chhattisgarh with two iron-ore mines. In addition to pellets, GPIL manufactures sponge iron, long steel products, ferro alloys and green energy.

Investment Rationale

• Weak dollar index – A historically weak DXY led to a rally in commodities, including iron ore, barring a few instances wherein iron ore fundamentals were weak. We expect the prices of iron ore pellets to bottom out in Q3FY23 and realisation of INR 10,000 in FY24E (spot INR 8,500).

• China iron ore port inventory – China’s iron ore inventory is below the 12- month average due to the restrictions induced by COVID-19 and subdued pricing environment for steel. We expect the iron ore inventory in Chinese ports to build up following the lockdown, thus boosting iron ore and pellet prices.

• Fungible, highly profitable production mix – Following the export duty imposed on iron ore pellets (0%-45%), GPIL ramped up the domestic sales of sponge iron ore and billets (up 112% and 23% in H1FY23 vs. H1FY22), which compensated for the weak pellet exports. In addition, captive iron ore and coal mines led to top quartile profitability in every product.

• Growth at reasonable valuation – We expect the FY24 EBITDA and cash flow to be INR 1,700cr and INR 1,100cr, respectively, and cash balance to be INR 930cr, suggesting 2.2x/4x EV/EBITDA and EV/OCF, which is undemanding valuation. Furthermore, the FY24E cash balance will be 20% of the Mcap.

Risks

• Extension of the COVID-19-led lockdown in China, which may not improve global iron ore prices.

• Weak global sentiment beyond C2Y23, which can suppress the overall commodity demand and prices.

• Our FY24E numbers are based on pellet price of INR 10,000/T, and any change in the pricing can alter EBITDA/OCF/cash on hand numbers.