1QFY2012 Result Update | Steel

August 8, 2011

Godawari Power & Ispat

Performance Highlights

BUY
CMP Target Price `150 `221
12 months
4QFY2011 329 72 22.0 31 % chg (qoq) 50.2 4.9 (665)bp (0.7)

Standalone (` cr) Net sales EBITDA % margin Net income

1QFY2012 494 76 15.4 31

1QFY2011 196 36 18.4 13

% chg (yoy) 152.0 110.5 (303)bp 143.5

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Steel 476 1.0 240/141 28481 10 16,990 5,119 GDPI.BO GODPI@IN

Source: Company, Angel Research

For 1QFY2012, Godavari Power & Ispat (GPIL) reported robust top-line growth, however its profitability was hit on account of higher iron ore and coal costs. Further, higher interest expenses impacted its bottom-line growth for the quarter. Rising input costs hit margins: GPILs net sales grew by 152.0% yoy to `494cr on account of higher realisation, increased sales volumes and merger with Hira Industries and R.R. Ispat. Average realisation for sponge iron, HB wires, pellets and billets grew by 26.3%, 17.6%, 14.3% and 6.6% yoy, respectively. Billet sales volume for 1QFY2012 was substantially higher at 30,476 tonnes vs. 533 tonnes in 1QFY2011. Pellet sales volume stood at 43,625 tonnes vs. 8,591 tonnes in 1QFY2011. Raw-material cost as a percentage of net revenue rose to 66.7% in 1QFY2012 vs. 62.2% in 1QFY2011. Thus, although EBITDA grew by 110.5% yoy to `76cr, EBITDA margin contracted by 303bp yoy to 15.4%. Interest expenses increased by 169.9% yoy to `27cr. Consequently, net profit for the quarter increased by 143.5% yoy to `31cr. Outlook and valuation: Although GPILs 1QFY2012 profitability was affected by higher iron ore and coal costs, going forward we expect GPIL to further improve its profitability on the back of increased high-margin pellet sales. A key catalyst for the stock would be commencement of iron ore mining from Boria Tibu. At the CMP, the stock is trading at 3.6x FY2012E and 2.4x FY2013E EV/EBITDA. On a P/BV basis, it is trading at 0.6x FY2012E and 0.5x FY2013E estimates. We maintain our Buy view on GPIL with a revised target price of `221, valuing it at 3.0x FY2013E EV/EBITDA.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.7 4.7 4.3 27.3

Abs. (%) Sensex GPIL

3m (8.3)

1yr (6.4)

3yr 12.0

(16.3) (34.8) (31.0)

Key financials (Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg FDEPS (`) OPM (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 822 (24.7) 57 (8.1) 20.5 15.9 7.3 0.8 11.9 10.5 1.1 6.9

FY2011E 1,116 35.7 86 50.0 27.1 20.8 5.6 0.7 14.4 13.6 1.0 4.9

FY2012E 1,774 58.9 109 26.6 34.2 17.2 4.4 0.6 14.8 15.2 0.6 3.6

FY2013E 1,916 8.0 175 60.7 55.0 20.5 2.7 0.5 20.0 19.9 0.5 2.4

Bhavesh Chauhan
Tel: 022- 39357600 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Please refer to important disclosures at the end of this report

Godawari Power | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 performance (Consolidated)

Y/E March (` cr) Net sales Raw material % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit OPM (%) Other operating income EBITDA EBITDA margins (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Profit after tax % of net sales 1QFY2012 Post merger 494 330 66.7 10 2.0 78 15.9 418 84.6 76 15.4 76 15.4 27 16 4 37 7.5 6 16.5 31 6.2 1QFY2011 Pre merger 196 122 62.2 6 2.9 32 16.5 160 81.6 36 18.4 36 18.4 10 11 15 7.8 3 17.7 13 6.4 143.5 124.3 169.9 49.5 140.1 110.5 110.5 161.4 141.9 76.9 yoy % 152.0 170.5 FY2011 Post merger 1,116 638 57.2 35 3.2 210 18.8 884 79.2 232 20.8 232 20.8 73 55 15 119 10.7 20 16.6 86 7.7 FY2010 Pre merger 822 580 70.6 19 2.3 92 11.2 692 84.1 131 15.9 131 15.9 34 34 4 67 8.1 11 15.8 57 7.0

Source: Company, Angel Research; Note: 1QFY2012 and FY2011 numbers include the impact of the merger with Hira Industries and R.R Ispat Ltd., while 1QFY2011 and FY2010 do not include the impact of merger with Hira Industries and R.R. Ispat

Higher steel and pellet sales drive net revenue growth

During the quarter, GPILs net sales grew by 152.0% yoy to `494cr on account of higher realisation, increased sales volumes and merger with Hira Industries and R.R. Ispat. Average realisation for sponge iron, HB wires, pellets and billets grew by 26.3%, 17.6%, 14.3% and 6.6% yoy, respectively. Billet sales volume for 1QFY2012 was substantially higher at 30,476 tonnes vs. 533 tonnes in 1QFY2011. Pellet sales volume stood at 43,625 tonnes vs. 8,591 tonnes in 1QFY2011. However, power sales volume declined by 34.2% yoy to 34mn units on account of increased captive consumption in steel production. Moreover, ferro alloy and power realisation declined by 10.5% yoy and 43.2% yoy to `51,301/tonne and `2.9/unit, respectively.

Higher coal and iron ore costs affect margins

Raw-material cost as a percentage of net revenue rose to 66.7% in 1QFY2012 vs. 62.2% in 1QFY2011 as the rise in iron ore and coal prices more than offset the rise in product prices. Thus, although EBITDA grew by 110.5% yoy to `76cr, EBITDA margin contracted by 303bp yoy to 15.4%. Interest expenses increased by 169.9% yoy to `27cr. Consequently, net profit increased by 143.5% yoy to `31cr.

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Godawari Power | 1QFY2012 Result Update

Exhibit 2: Quarterly production trend

(tonnes) Sponge iron Billets HB wire Ferro alloys Power (mn units) Iron ore Pellet
Source: Company, Angel Research

3QFY10 60,860 16,802 19,506 71 32,418 -

4QFY10 80,359 23,370 17,088 1,500 88 128,044 48,305

1QFY11 61,535 14,193 76 141,984 55,396

2QFY11 53,637 15,228 15,130 1,888 62 56,017 62,315

3QFY11 75,314 30,990 13,457 1,971 80 111,398 103,100

4QFY11 88,955 39,033 18,901 1,312 92 212,308 133,750

1QFY12 90,720 30,031 25,664 1,988 101 76,186 153,400

yoy % 47.4 80.8 33.0 (46.3) 176.9

qoq % 2.0 (23.1) 35.8 51.5 9.7 (64.1) 14.7

Exhibit 3: Quarterly sales volume trend

(tonnes) Sponge iron Billets HB wire Ferro alloys Power (mn units) Pellet Source: Company, Angel Research 3QFY10 42,226 17,153 15,569 36 4QFY10 59,768 23,221 17,934 1,168 37 8,473 1QFY11 61,144 533 13,609 649 52 8,591 2QFY11 38,460 14,478 12,866 1,259 18 3,319 3QFY11 41,194 31,168 14,952 852 19 18,265 4QFY11 44,001 39,097 19,566 2,322 22 49,561 1QFY12 58,974 30,476 24,802 1,631 34 43,625 yoy % (3.5) 5,617.8 82.2 151.3 (34.2) 407.8 qoq % 34.0 (22.1) 26.8 (29.8) 51.8 (12.0)

Exhibit 4: Quarterly realisation trend

(`/tonne) Sponge iron Billets HB wire Ferro alloys Power (`/unit) Pellet
Source: Company, Angel Research

3QFY10 12,236 21,005 27,703 3.4 -

4QFY10 15,384 24,151 29,458 57,534 3.9 5,571

1QFY11 15,365 28,143 30,502 57,319 5.1 7,252

2QFY11 14,438 24,669 28,956 53,366 2.6 5,371

3QFY11 16,988 25,331 29,441 52,289 2.9 7,292

4QFY11 19,445 28,741 34,811 51,981 2.5 7,924

1QFY12 19,404 30,002 35,855 51,301 3.0 8,291

yoy % 26.3 6.6 17.6 (10.5) (43.2) 14.3

qoq % (0.2) 4.4 3.0 (1.3) 16.6 4.6

August 8, 2011

Godawari Power | 1QFY2012 Result Update

Investment rationale
Mining capacity at Ari Dongri mine to increase
Currently, GPIL has an approval to mine 0.6mn tonnes of iron ore from the Ari Dongri mine. Management aims to increase the mining capacity to 0.9mn tonnes during FY2012. Increased production from captive iron ore mine should further lower costs, given a steep rise in iron ore prices recently.

Increasing pellet sales to improve GPILs profits

GPILs 0.6mn tonne pellet plant in its 75% subsidiary Ardent Steel in Keonjhar, Orissa, started commercial production during August 2010. This coupled with GPILs 0.6mn tonne pellet plant should drive strong profitability growth in FY2012 and FY2013, as we expect pellet prices to remain firm during FY2012.

Billet production to increase during FY2012

Merchant power rates have recently declined to `2.53.0 per unit. We expect merchant power rates to remain stable in the medium term. Hence, we expect GPIL to increase billet production as the company operates a flexible business model that allows it to interchange between steel and power, depending on the business economics.

Outlook and valuation

Although GPILs 1QFY2012 profitability was affected by higher iron ore and coal costs, going forward we expect GPIL to further improve its profitability on the back of the increase in high-margin pellet sales. A key catalyst for the stock would be commencement of iron ore mining from Boria Tibu. At the CMP, the stock is trading at 3.6x FY2012E and 2.4x FY2013E EV/EBITDA. On a P/BV basis, it is trading at 0.6x FY2012E and 0.5x FY2013E estimates. We maintain our Buy view on GPIL with a revised target price of `221, valuing it at 3.0x FY2013E EV/EBITDA. While we have raised our sales estimates to account for increased sponge iron sales and higher realisation, we have cut our profitability estimates on account of a sharp rise in iron ore and coal costs for the company (as witnessed in 1QFY2012).

Exhibit 5: Earlier vs. revised estimates

(` cr) Net sales EBITDA EBITDA margin (%) PBT PAT PAT margin (%) Earlier estimates FY12E 1,425 286 20.0 176 131 9.2 FY13E 1,607 349 21.7 231 174 10.8 Revised estimates FY12E 1,774 304 17.2 141 109 6.1 FY13E 1,916 396 20.7 226 178 9.3 Upgrade/(downgrade) (%) FY12E 24.5 6.6 (288)bp (19.8) (17.0) (306)bp FY13E 19.2 13.5 (105)bp (2.4) 2.2 (155)bp

Source: Company, Angel Research

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Godawari Power | 1QFY2012 Result Update

Exhibit 6: EPS Angel forecast vs. consensus

Year (`) FY2012E FY2013E Angel forecast
34.2 55.0

Bloomberg consensus
38.3 46.9

Variation (%)
(10.6) 17.3

Source: Bloomberg, Angel Research

Exhibit 7: EV/EBITDA band

3,000 2,500 2,000
(` cr)

1,500 1,000 500 0 Apr-06 Dec-06 Aug-07 Apr-08 2x Dec-08 Aug-09 4x 6x Apr-10 8x Dec-10 Aug-11

Source: Bloomberg, Angel Research

Exhibit 8: P/E band

600 500 400
(`)

300 200 100 0 Apr-06 Dec-06 Aug-07 2x Apr-08 4x Dec-08 6x Aug-09 8x Apr-10 12x Dec-10 Aug-11

Source: Bloomberg, Angel Research

August 8, 2011

Godawari Power | 1QFY2012 Result Update

Exhibit 9: P/BV band

600 500 400
(`)

300 200 100 0 Apr-06 Dec-06 Aug-07 Apr-08 0.5x Dec-08 1.0x Aug-09 1.5x Apr-10 Dec-10 Aug-11 2.0x

Source: Bloomberg, Angel Research

Exhibit 10: Recommendation summary

Companies Bhushan GPIL Monnet Ispat SEML CMP (`) 344 150 468 177 Target Price (`) - Neutral 221 549 259 Buy Buy Buy Reco. Mcap Upside (` cr) 7,311 476 3,011 632 47 17 47 P/E (x) 9.3 4.4 10.2 7.6 9.2 2.7 7.7 6.4 P/BV (x) 1.4 0.6 1.2 0.8 1.2 0.5 1.1 0.7 EV/EBITDA (x) 8.1 3.6 10.1 5.9 7.2 2.4 7.4 4.2 RoE (%) 16.1 14.8 12.9 12.0 14.0 20.0 16.1 12.8 RoCE (%) 8.6 15.2 8.1 8.7 7.9 19.9 10.5 9.5 (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Source: Company, Angel Research

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Godawari Power | 1QFY2012 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of net sales) Depreciation EBIT % chg (% of net sales) Interest charges Other income (% of PBT) Share in profit of asso. Recurring PBT % chg Extra. Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Earnings of asso. Less: Minority interest Extra. Expense/(Inc.) PAT after MI (reported) Adj. PAT % chg (% of net sales) Basic EPS (`) Fully diluted EPS (`) % chg FY2008 936 126 810 810 69.6 642 553 78 11 168 98.0 20.7 26 142 95.7 17.6 31 2 1.6 113 81.4 113 14 12.3 99 1 0.1 100 100 86.6 12.3 40.8 35.6 58.4 FY2009 1,233 141 1,092 1,092 34.8 969 876 79 14 123 (26.8) 11.3 28 94 (33.6) 8.6 36 11 16.2 70 (37.6) 70 8 11.9 61 1 (0.0) 62 62 (37.4) 5.7 23.1 22.3 (37.4) FY2010 887 64 822 822 (24.7) 692 580 92 19 131 6.2 15.9 34 96 2.1 11.7 34 4 6.0 67 (5.1) 67 11 15.8 56 1.2 (0.0) 57 57 (8.1) 7.0 21.2 20.5 (8.1) FY2011 1,221 105 1,116 1,116 35.7 884 638 210 35 232 78.0 20.8 55 177 83.6 15.9 73 15 13.0 119 79.0 119 20 16.6 99 0.4 (14) 86 86 50.0 7.7 27.1 27.1 32.1 FY2012E 1,897 123 1,774 1,774 58.9 1,469 1,000 426 43 304 30.9 17.2 67 237 33.9 13.4 112 16 11.3 141 18.3 141 24 17.0 117 (8) 109 109 26.6 6.1 34.2 34.2 26.6 FY2013E 2,049 133 1,916 1,916 8.0 1,524 1,016 460 48 392 28.9 20.5 73 319 34.9 16.7 115 18 7.9 222 57.4 222 38 17.0 184 (10) 175 175 60.7 9.1 55.0 55.0 60.7

August 8, 2011

Godawari Power | 1QFY2012 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Share warrants Minority interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Goodwill Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Deferred Tax Asset Mis. exp. not written off Total assets 464 60 404 15 5 19 323 64 41 219 78 246 689 495 89 407 202 5 10 267 44 47 176 77 189 812 752 122 630 194 5 12 288 20 59 210 101 188 1,027 942 178 1,021 44 22 678 214 110 355 205 474 5 1,566 1,092 245 847 14 174 697 147 110 441 194 503 5 1,543 1,192 318 874 11 174 794 229 110 454 192 602 5 1,666 FY2008 FY2009 FY2010 27 364 391 3 293 2 689 27 419 446 3 7 355 2 812 27 471 498 10 518 1 1,027 FY2011E 32 573 605 76 884 1,566 FY2012E 32 671 702 85 756 1,543 FY2013E 32 834 866 94 706 1,666

August 8, 2011

Godawari Power | 1QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation Change in working capital Less: Other income Direct taxes paid Cash flow from operations (Inc.)/ Dec. in fixed assets (Inc.)/ Dec. in investments (Inc.)/ Dec. in loans and advances Other income Cash flow from investing Issue of equity Inc./(Dec.) in loans Dividend paid Others Cash flow from financing Inc./(Dec.) in cash Opening cash bal. Closing cash bal. 1 (74) 100 3 10 34 59 51 13 64 7 (200) 62 8 29 25 (20) 64 44 1 (250) 163 8 30 125 (24) 44 20 (40) 366 9 357 194 20 214 (120) (129) 11 (140) (68) 214 147 (98) (50) 11 (61) 83 147 229 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E 113 26 (90) 31 12 66 (61) (14) 70 28 39 31 14 155 (217) 10 67 34 (23) 33 10 101 (250) 119 55 (278) 20 (123) (40) 141 67 8 24 192 (120) 222 73 (16) 38 242 (98) -

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Godawari Power | 1QFY2012 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book value DuPont analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of debt (post tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (pre-tax) RoE Turnover ratios (x) Asset turnover (gross block) Inventory (days) Receivables (days) Payables (days) WC cycle (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest coverage 0.6 13.6 4.5 0.7 25.3 2.7 1.0 38.2 2.9 1.0 28.9 2.4 0.8 20.0 2.1 0.5 12.1 2.8 2.1 115 20 20 61 2.3 60 10 16 53 1.3 109 16 12 71 1.3 164 22 25 81 1.7 122 22 24 71 1.7 122 22 23 73 23.9 28.6 33.1 12.6 16.0 14.7 10.5 14.0 11.9 13.6 16.7 14.4 15.2 17.6 14.8 19.9 22.8 20.0 17.6 87.7 1.5 22.4 9.5 0.6 30.0 8.6 88.1 1.6 11.9 9.7 0.7 13.5 11.7 84.2 0.9 9.1 6.5 1.0 11.7 15.9 83.4 0.9 12.5 8.7 1.0 16.3 13.4 83.0 1.3 14.3 11.3 0.8 16.6 16.7 83.0 1.4 18.7 13.1 0.5 21.5 40.8 35.6 44.9 4.0 146.4 23.1 22.3 32.5 2.5 169.1 21.2 20.5 32.7 2.5 188.7 27.1 27.1 44.5 2.5 214.6 34.2 34.2 55.5 3.0 248.0 55.0 55.0 78.0 3.0 302.5 4.2 3.3 1.0 2.7 0.8 3.8 0.9 6.7 4.6 0.9 1.7 0.7 5.8 0.9 7.3 4.6 0.8 1.7 1.1 6.9 0.9 5.6 3.4 0.7 1.7 1.0 4.9 0.7 4.4 2.7 0.6 2.0 0.6 3.6 0.7 2.7 1.9 0.5 2.0 0.5 2.4 0.6 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

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Godawari Power | 1QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Godawari Power No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) :

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 8, 2011

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