2QFY2013 Result Update | Steel

November 2, 2012

Godawari Power & Ispat

Performance Highlights
Quarterly Highlights (Consolidated)
Standalone (` cr) Net sales EBITDA % margin Net income
Source: Company, Angel Research

BUY
CMP Target Price
Investment Period

`123 `144
12 months

2QFY2013 597 75 12.5 22

2QFY2012 429 53 12.3 11

% chg (yoy) 39.3 41.9 23bp 102.1

1QFY2013 602 110 18.2 51

% chg (qoq) (0.9) (31.9) (569)bp (56.6)

Stock Info Sector Market Cap (` cr) Net Debt (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Steel 389 769 1.0 136/70 9,055 10 18,755 5,698 GDPI.BO GODPI@IN

Godawari Power and Ispat (GPIL) reported a strong growth in bottom-line in its 2QFY2013 results. The consolidated net sales grew by 39.3% yoy to `597cr, while net profit increased by 102.1% yoy to `22cr. We recommend a Buy rating on the stock. Top-line growth led by increases in prices and realizations: During the quarter, GPILs net sales grew by 39.3% yoy to `597cr on account of increases in both, realizations as well as sales volumes across product categories. Average realization for sponge iron, HB wire, billets, ferro alloys and pellets grew by 13.0%, 7.0%, 5.9%, 6.5% and 6.8% yoy, respectively; however, on a sequential basis the realizations declined by 6.0%, 4.7%, 6.5%, 5.9% and 9.6%, respectively. Billets, HB wires and pellet sales volume increased by 54.5%, 41.9% yoy and 61.0% yoy, respectively. EBITDA growth in line with increase in top-line: Employee cost as a percentage of net revenue fell to 2.8% in 2QFY2013 vs 3.1% in 2QFY2012 and other expenditure as a percentage of net revenue fell to 17.3% in 2QFY2013 vs 18.8% in 2QFY2012. Thus, the EBITDA margin expanded by 23bp yoy to 12.5% and EBITDA grew by 41.9% yoy to `75cr. Interest expenses increased by 14.3% yoy to `29cr and net profit increased by 102.1% yoy to `22cr. Outlook and valuation: GPIL reported a strong profitability growth in 2QFY2013. Going forward, we expect GPIL to further improve its profitability on the back of increase in high-margin pellet sales. A key catalyst for the stock would be commencement of iron ore mining from Boria Tibu. At the current market price, the stock is trading at 4.7x FY2013E and 3.6x FY2014E EV/EBITDA. On a P/BV basis, it is trading at 0.4x FY2013E and 0.4x FY2014E estimates. We maintain Buy on GPIL with a revised target price of `144, valuing it at 3.8x FY2014E EV/EBITDA.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.8 6.8 0.9 28.6

Abs. (%) Sensex GPIL

3m 8.9 (0.3)

1yr 7.4 3.9

3yr 18.0 7.4

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

FY2011 1,119 36.0 86 50.0 27.0 21.0 4.5 0.6 14.4 14.5 0.9 4.3

FY2012 2,060 84.2 84 (1.9) 26.5 13.7 4.6 0.5 11.6 13.7 0.6 4.1

FY2013E 2,343 13.7 90 6.3 27.8 13.7 4.4 0.4 10.9 13.4 0.6 4.7

FY2014E 2,471 5.5 109 21.9 33.9 15.3 3.6 0.4 11.4 13.7 0.6 3.6

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

Vinay Rachh
Tel: 022- 39357800 Ext: 6841 vinay.rachh@angelbroking.com

Please refer to important disclosures at the end of this report

Godawari Power| 2QFY2013 Result Update

Exhibit 1: 2QFY2013 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 EBIDTA EBITDA margins (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Net income % of net sales
Source: Company, Angel Research

2QFY2013 597 403 67.4 17 2.8 103 17.3 523 87.5 75 12.5 75 12.5 29 18 3 31 5.2 9 29.5 22 3.7

2QFY2012 429 282 65.8 13 3.1 81 18.8 376 87.7 53 12.3 53 12.3 25 17 3 14 3.3 3 22.5 11 2.5

yoy % 39.3 42.7 26.7 27.8 38.9 41.9

1QFY2013 602 368 61.0 14 2.3 111 18.5 493 81.8 110 18.2 -

qoq % (0.9) 9.5 21.1 (7.4) 6.0 (31.9)

1HFY2013 1,200 770 64.2 31 2.6 215 17.9 1,015 84.6 184 15.4

1HFY2012 923 612 66.3 23 2.5 159 17.2 794 86.1 129 13.9 129 13.9 52 33 8 51 5.5 9 18.2 42 4.5

yoy % 30.0 25.9 31.2 34.9 27.9 43.4

41.9 14.3 6.1 (8.7) 122.2 191.1 102.1

110 18.2 29 17 3 66 10.9 15 23.2 51 8.4

(31.9) (2.7) 4.0

184 15.4 58 35 6 -

43.4 11.3 6.2 (20.6) 90.8 164.6 74.3

(52.7) (39.9) (56.6)

97 8.1 25 25.2 73 6.0

Net revenue growth driven by increased pellet sales

During the quarter, GPILs net sales grew by 39.3% yoy to `597cr on account of higher realization and increased sales volumes. Average realization for sponge iron, billets and pellets grew by 13.0%, 5.9% and 6.8% yoy respectively; however on a sequential basis the realizations were down by 6.0%, 6.5% and 9.6% respectively. Pellet sales volume for 2QFY2013 was substantially higher at 85,223 tonne vs 52,937 tonne in 2QFY2012. Billets and HB wire sales volume increased by 54.5% and 41.9% yoy to 46,602 tonne and 23,760 tonne respectively. However, sponge iron sales volume declined 13.2% yoy to 36,899 tonne.

Exhibit 2: Quarterly production trend

(tonnes) Sponge iron Billets HB wire Ferro alloys Power (mn units) Iron ore Pellet 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 2QFY12 80,759 30,714 18,620 1,471 87 63,000 152,700 3QFY12 76,598 49,470 18,545 2,387 98 26,549 150,150 4QFY12 95,150 56,568 18,256 2,152 103 183,110 167,500 1QFY13 68,486 40,151 24,738 1,823 88 261,314 168,700 2QFY13 71,179 46,601 25,339 2,202 99 128,459 153,800 yoy % (11.9) 51.7 36.1 49.7 14.3 103.9 0.7 qoq % 3.9 16.1 2.4 20.8 13.6 (50.8) (8.8)

Source: Company, Angel Research

November 2, 2012

Godawari Power| 2QFY2013 Result Update

Exhibit 3: Quarterly sales volume trend (tonnes) Sponge iron Billets HB wire Ferro alloys Power (mn units) Pellet Source: Company, Angel Research 4QFY11 44,001 39,097 19,566 2,322 22 49,561 1QFY12 58,974 30,476 24,802 1,631 34 43,625 2QFY12 42,501 30,160 16,743 1,567 22 52,937 3QFY12 76,753 49,687 19,710 766 15 76,753 4QFY12 39,223 56,516 20,278 2,761 14 58,278 1QFY13 27,622 40,261 25,012 1,506 14 100,598 2QFY13 36,899 46,602 23,760 2,040 17 85,223 yoy % (13.2) 54.5 41.9 30.2 (25.2) 61.0 qoq % 33.6 15.8 (5.0) 35.4 21.2 (15.3)

Exhibit 4: Quarterly realization trend

(`/tonne) Sponge iron Billets HB wire Ferro alloys Power (mn units) Pellet Source: Company, Angel Research 4QFY11 19,445 28,741 34,811 51,981 2.5 7,924 1QFY12 19,404 30,002 35,855 51,301 2.9 8,291 2QFY12 18,873 30,389 36,415 50,498 2.9 8,146 3QFY12 21,464 32,046 37,818 50,369 3.0 9,002 4QFY12 23,441 33,731 39,525 50,334 2.6 9,955 1QFY13 22,681 34,396 40,859 57,135 2.6 9,623 2QFY13 21,318 32,170 38,956 53,762 2.8 8,701 yoy % 13.0 5.9 7.0 6.5 (3.1) 6.8 qoq % (6.0) (6.5) (4.7) (5.9) 7.3 (9.6)

Strong operating performance

Employee cost as a percentage of net revenue fell to 2.8% in 2QFY2013 vs 3.1% in 2QFY2012 and other expenditure as a percentage of net revenue fell to 17.3% in 2QFY2013 vs 18.8% in 2QFY2012. Thus, the EBITDA margin expanded by 23bp yoy to 12.5% and EBITDA grew by 41.9% yoy to `75cr. Interest expenses increased by 14.3% yoy to `29cr however, net profit increased by 102.1% yoy to `22cr.

Other updates
The company is currently meeting approximately 45% of its iron ore requirement from its Arti Dongri iron ore mine. There is no clarity on iron ore production from Boria Tibu iron ore mine currently. The company has spent `175cr on its upcoming 1.2mn tonne pellet plant at Raipur. It aims to complete it by September 2013 (earlier timeline March 2014). The company has spent `500cr on its 50MW solar power plant (out of the `800cr required) for the power plant.

November 2, 2012

Godawari Power| 2QFY2013 Result Update

Investment rationale
Increasing pellet sales to improve GPILs profits
GPILs 0.6mn tonne pellet plant in its 75% subsidiary Ardent Steel in Keonjhar, Odisha, had started commercial production in August 2010. However, it achieved stabilization at the end of FY2012. Going forward, additional volumes from highmargin pellet sales alongside GPILs 0.6mn tonne pellet plant should drive strong profitability growth in FY2013 and FY2014, as we expect pellet prices to remain firm during FY2013-14.

Steel production to rise during FY2013

Merchant power rates have recently declined to `2.63.0 per unit. We expect merchant power rates to remain stable in the medium term. Further, steel product prices have risen gradually over the past one year. Hence, we expect GPIL to increase steel products production during FY2013.

Outlook and valuation

GPIL reported strong profitability growth in 2QFY2013. Going forward, we expect GPIL to further improve its profitability on the back of increase in high-margin pellet sales. A key catalyst for the stock would be commencement of iron ore mining from Boria Tibu. At the current market price, the stock is trading at 4.7x FY2013E and 3.6x FY2014E EV/EBITDA. On a P/BV basis, it is trading at 0.4x FY2013E and 0.4x FY2014E estimates. We maintain Buy on GPIL with a revised target price of `144, valuing it at 3.8x FY2014E EV/EBITDA.

Exhibit 5: EPS Angel forecast vs consensus

Year (`) FY2013E FY2014E
Source: Bloomberg, Angel Research

Angel forecast Bloomberg consensus

27.8 33.9 39.1 43.8

Variation (%)
(29.0) (22.7)

Exhibit 6: EV/EBITDA band

3,000 2,500 2,000

(` cr)

1,500 1,000 500 0 Nov-09 Apr-10 2x Sep-10 Feb-11 4x Jul-11 Dec-11 6x May-12 8x Oct-12

Source: Bloomberg, Angel Research

November 2, 2012

Godawari Power| 2QFY2013 Result Update

Exhibit 7: P/E band

450 400 350 300 250 200 150 100 50 0 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 2x
Source: Bloomberg, Angel Research

(`)

4x

6x

8x

12x

Exhibit 8: P/BV band

700 600 500

(`)

400 300 200 100 0 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 0.5x 1.0x 1.5x 2.0x

Source: Bloomberg, Angel Research

Exhibit 9: Recommendation summary

Companies Godawari Sarda Prakash CMP (`) Target Price (`) Reco. Mcap Upside (` cr) (%) P/E (x) FY13E FY14E P/BV (x) FY13E EV/EBITDA (x) RoE (%) RoCE (%) FY14E FY14E FY13E FY14E FY13E FY14E FY13E

123 131 50

144 153 73

Buy Buy Buy

389 492 706

17 17 46

4.4 4.8 3.1

3.6 4.6 2.5

0.4 0.5 0.3

0.4 0.5 0.3

4.7 3.8 3.4

3.6 3.7 2.2

10.9 11.5 11.4

11.4 11.0 12.8

13.4 11.9 9.5

13.7 10.9 10.7

Source: Company, Angel Research

Company Background: GPIL, incorporated in 1999, is a part of the HIRA group of Industries based in Raipur (C.G). GPIL is a steel maker and produces sponge iron, billets, ferro alloys and has its own captive power plant. The company has a captive iron ore mine (Arti Dongri) which fulfills its iron ore requirement partially. GPILs sponge iron, billets, wire rod and pellet capacities stand at 495,000 tonnes, 400,000 tonnes, 120,000 tonnes and 1,200,000 tonnes, respectively.

November 2, 2012

Godawari Power| 2QFY2013 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 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 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 57 57 (8.1) 7.0 21.2 20.5 (8.1) FY2011 1,235 116 1,119 1,119 36.0 884 637 211 35 235 80.0 21.0 55 180 86.3 16.0 73 13 10.8 119 79.0 119 20 16.6 99 0.4 (14) 86 86 50.0 7.7 27.0 27.0 32.0 FY2012 FY2013E FY2014E 2,291 230 2,060 2,060 84.2 1,779 1,353 374 52 282 19.9 13.7 68 214 19.3 10.4 116 11 10.3 110 (8.1) 110 22 20.1 88 (3) 84 84 (1.9) 4.1 26.5 26.5 (1.9) 2,506 163 2,343 2,343 13.7 2,021 1,248 703 70 322 14.2 13.7 70 251 17.4 10.7 129 12 9.2 135 23.2 135 34 25.0 101 (12) 90 90 6.3 3.8 28.2 27.8 4.6 2,643 172 2,471 2,471 5.5 2,093 1,278 741 74 378 17.5 15.3 79 299 18.9 12.1 148 14 8.3 164 21.7 164 41 25.0 123 (14) 109 109 21.9 4.4 34.4 33.9 21.9

November 2, 2012

Godawari Power| 2QFY2013 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 Other Long term liabilities Long term provisions Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long term loans and adv. Other non-current assets Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Deferred Tax Asset Mis. Exp. not written off Total Assets 0 812 0 1,027 267 44 47 176 77 189 288 20 59 210 101 188 495 89 407 202 5 10 752 122 630 194 5 12 1,172 202 971 94 0 22 6 6 588 130 102 357 243 345 5 0 1,449 1,318 268 1,050 285 0 18 7 9 633 99 91 443 336 297 5 0 1,672 1,568 338 1,230 283 0 18 7 9 812 35 91 685 276 536 5 0 2,089 1,818 417 1,401 280 0 18 7 9 831 210 91 529 278 553 5 0 2,275 812 1,027 27 419 446 3 7 355 2 27 471 498 0 10 518 1 32 573 605 0 76 765 2 2 1,449 32 646 678 0 92 868 32 2 1,672 37 736 773 0 104 1,178 32 2 2,089 37 878 915 0 118 1,208 32 2 2,275 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

November 2, 2012

Godawari Power| 2QFY2013 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. 7 (200) 0 62 8 29 25 (20) 64 44 1 (250) 0 163 8 30 125 (24) 44 20 5 (251) 0 342 10 21 312 106 29 126 10 (371) 0 103 11 103 (11) (76) 126 50 0 (248) 16 310 11 0 315 (64) 50 35 0 (248) 44 30 11 0 63 175 35 210 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 70 28 39 31 14 155 (217) 10 67 34 (23) 33 10 101 (250) (0) 119 55 (65) 63 19 45 (246) (11) 110 68 40 106 18 305 (336) (45) 135 70 (303) 0 34 (131) (248) 0 164 79 158 0 41 360 (248) 0

November 2, 2012

Godawari Power| 2QFY2013 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 0.7 24.5 2.7 1.0 37.3 2.9 0.9 26.1 2.5 1.0 26.7 1.8 1.3 35.0 2.0 0.9 25.9 2.0 2.3 60 10 15 53 1.3 109 16 10 71 1.2 165 22 29 74 1.7 243 17 27 49 1.6 168 17 27 69 1.5 118 17 27 76 12.6 16.0 14.7 10.5 14.0 11.9 14.5 17.6 14.4 13.7 17.0 11.6 13.4 16.4 10.9 13.7 16.8 11.4 8.6 88.1 1.6 11.9 9.7 0.7 13.4 11.7 84.2 0.9 9.1 6.5 1.0 11.7 16.0 83.4 1.0 12.9 9.5 0.9 15.9 10.4 79.9 1.4 11.8 11.3 1.0 12.3 10.7 75.0 1.3 10.4 9.4 1.3 11.6 12.1 75.0 1.2 10.9 9.3 0.9 12.4 23.1 22.3 32.5 2.5 169.1 21.2 20.5 32.7 2.5 188.7 27.0 27.0 44.5 2.5 214.6 26.5 26.5 47.9 3.0 242.7 28.2 27.8 49.6 3.0 276.2 34.4 33.9 58.4 3.0 325.3 5.5 3.8 0.7 2.0 0.6 5.1 0.8 6.0 3.8 0.7 2.0 1.0 6.3 0.8 4.5 2.8 0.6 2.0 0.9 4.3 0.7 4.6 2.6 0.5 2.4 0.6 4.1 0.7 4.4 2.5 0.4 2.4 0.6 4.7 0.7 3.6 2.1 0.4 2.4 0.6 3.6 0.6 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

November 2, 2012

Godawari Power| 2QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
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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%)

November 2, 2012

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