2QFY2012 Result Update | Steel

November 11, 2011

Godawari Power & Ispat

Performance Highlights

BUY
CMP Target Price `119 `154
12 months
1QFY2012 494 76 15.4 31 % chg (qoq) (13.2) (30.7) (310)bp (64.7)

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

2QFY2012 429 53 12.3 11

2QFY2011 148 30 20.6 7

% chg (yoy) 190.0 73.2 (828)bp 50.0

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 377 0.9 224/108 22028 10 17,193 5,169 GDPI.BO GODPI@IN

Source: Company, Angel Research

For 2QFY2012, Godavari Power & Ispat (GPIL) reported robust top-line growth; however, its profitability was hit on account of higher iron ore and coal costs. We maintain our Buy rating on the stock. Higher volumes and realization drive strong top-line growth: During the quarter, GPILs net sales grew by 190.0% yoy to `429cr on account of higher realization and increased sales volume. Pellet, sponge iron, billets and HB wire realizations increased by 51.7%, 30.7%, 23.2% and 25.8% yoy, respectively. Billets, HB wire, ferro alloys, and power sales volumes grew by 108.3%, 30.1%, 24.5% and 21.9% yoy, respectively, during the quarter. Higher input costs mute profit growth: Raw-material cost as a percentage of net sales stood at 65.8% in 2QFY2012 compared to 49.1% in 2QFY2011, as the rise in iron ore and coal prices more than offset the rise in product prices. Thus, EBITDA margin slipped by 828bp yoy to 12.3% in 2QFY2012 and EBITDA grew by 73.2% yoy to `53cr. Interest and depreciation expenses grew by 145.0% and 51.7% yoy to `25cr and `17cr, respectively. Consequently, net profit increased by only 50.0% yoy to `11cr during the quarter. Outlook and valuation: Although GPILs 2QFY2012 profitability was affected by higher iron ore and coal costs, going forward we expect the company to improve its profitability on the back of increased high-margin pellet sales. At the CMP, the stock is trading at 3.7x FY2012E and 3.0x FY2013E EV/EBITDA. On a P/BV basis, it is trading at 0.5x FY2012E and 0.4x FY2013E estimates. We maintain our Buy recommendation on GPIL with a revised target price of `154, valuing it at 3.3x FY2013E EV/EBITDA.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.7 4.6 3.7 28.0

Abs. (%) Sensex GPIL

3m 0.8

1yr (16.5)

3yr 74.7 45.7

(24.3) (44.1)

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 5.8 0.6 11.9 10.5 1.0 6.2

FY2011 1,116 35.7 86 50.0 27.1 20.8 4.4 0.6 14.4 13.6 1.0 4.7

FY2012E 1,992 78.5 80 (7.4) 25.0 14.9 4.7 0.5 11.0 13.8 0.5 3.7

FY2013E 2,064 3.6 112 41.5 35.4 16.3 3.3 0.4 13.7 15.2 0.5 3.0

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

Please refer to important disclosures at the end of this report

Godawari Power | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 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
Source: Company, Angel Research

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

2QFY2011 148 73 49.1 8 5.1 37 25.2 117 79.4 30 20.6 30 20.6 10 11 9 6.1 2 20.3 7 4.9

yoy % 190.0 288.8 74.4 116.6 220.3 73.2 73.2 145.0 51.7 2,766.7 54.4 71.7 50.0

1QFY012 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

qoq % (13.2) (14.4) 31.1 3.1 (10.0) (30.7) (30.7) (7.6) 4.2 (21.1) (62.0) (48.2) (64.7)

Higher volumes and increased realization drive top-line growth

During the quarter, GPILs net sales grew by 190.0% yoy to `429cr on account of higher realization, increased sales volumes and merger with Hira Industries and R.R. Ispat. Pellet, sponge iron, billets and HB wire realizations increased by 51.7%, 30.7%, 23.2% and 25.8% yoy, respectively. Pellet sales volume stood at 52,937 tonnes (capacity utilization over 100%) in 2QFY2012 vs. 3,319 tonnes in 2QFY2011. Billets, HB wire, ferro alloys and power sales volumes grew by 108.3%, 30.1%, 24.5% and 21.9% yoy, respectively, during the quarter.

Higher coal and iron ore costs affect margins

Despite net sales growing by 190.0% yoy, EBITDA grew by only 73.2% yoy to `53cr on account of rising prices of key inputs. Raw-material cost as a percentage of net sales stood at 65.8% in 2QFY2012 compared to 49.1% in 2QFY2011, as the rise in iron ore and coal prices more than offset the rise in product prices. Thus, EBITDA margin slipped by 828bp yoy to 12.3% in 2QFY2012. Interest and depreciation expenses grew by 145.0% and 51.7% yoy to `25cr and `17cr, respectively, during the quarter. Consequently, net profit increased by only 50.0% yoy to `11cr during the quarter.

November 11, 2011

Godawari Power | 2QFY2012 Result Update

Exhibit 2: Quarterly production trend

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

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

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

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

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

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

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

2QFY12 80,759 30,714 18,620 1,471 87 1,52,700

yoy % 50.6 101.7 23.1 (22.1) 40.0 145.0

qoq % (11.0) 2.3 (27.4) (26.0) (13.6) (0.5)

Exhibit 3: Quarterly sales volume trend

(tonnes) Sponge iron Billets HB wire Ferro alloys Power (mn units) Pellet Source: Company, Angel Research 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 2QFY12 42,501 30,160 16,743 1,567 22 52,937 yoy % 10.5 108.3 30.1 24.5 21.9 1,495.1 qoq % (27.9) (1.0) (32.5) (3.9) (34.7) 21.3

Exhibit 4: Quarterly realization trend

(`/tonne) Sponge iron Billets HB wire Ferro alloys Power (`/unit) Pellet 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 2QFY12 18,873 30,389 36,415 50,498 2.9 8,146 yoy % 30.7 23.2 25.8 (5.4) 9.6 51.7 qoq % (2.7) 1.3 1.6 (1.6) (0.7) (1.7)

Source: Company, Angel Research

November 11, 2011

Godawari Power | 2QFY2012 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.

Outlook and valuation

Although GPILs 2QFY2012 profitability was affected by higher iron ore and coal costs, going forward we expect GPIL to 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 3.7x FY2012E and 3.0x FY2013E EV/EBITDA. On a P/BV basis, it is trading at 0.5x FY2012E and 0.4x FY2013E estimates. We maintain our Buy view on GPIL with a revised target price of `154, valuing it at 3.3x FY2013E EV/EBITDA.

Exhibit 5: EPS Angel forecast vs. consensus

Year (`) FY2012E FY2013E
Source: Bloomberg, Angel Research

Angel forecast
25.0 35.4

Bloomberg consensus
31.9 39.4

Variation (%)
(21.5) (10.1)

Exhibit 6: EV/EBITDA band

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

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

Source: Bloomberg, Angel Research

November 11, 2011

Godawari Power | 2QFY2012 Result Update

Exhibit 7: P/E band

450 400 350 300 250
(`)

200 150 100 50 0 Apr-06Oct-06Apr-07Oct-07Apr-08Oct-08Apr-09Oct-09Apr-10Oct-10Apr-11Oct-11 2x 4x 6x 8x 12x

Source: Bloomberg, Angel Research

Exhibit 8: P/BV band

600 500 400
(`)

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

Source: Bloomberg, Angel Research

Exhibit 9: Recommendation summary

Companies CMP Target Reco. Mcap Upside (` cr) Buy 377 P/E (x) P/BV (x) EV/EBITDA (x) RoE (%) RoCE (%) FY12E FY13E (`) Price (`) (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Bhushan
GPIL

323
119

- Neutral 6,859
154

30

4.1
4.7

4.1
3.3

0.5
0.5

0.5
0.4

8.5
3.7

7.5
3.0

13.8
11.0

12.2
13.7

7.9
13.8

7.4
15.2

Monnet Ispat
SEML

403
114

549
137

Buy
Buy

2,593
408

36
20

8.4
8.6

6.4
7.8

1.1
0.6

0.9
0.5

8.2
6.5

6.0
4.7

13.8
7.0

16.6
7.3

8.7
4.5

11.0
5.3

Source: Company, Angel Research

November 11, 2011

Godawari Power | 2QFY2012 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 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 1,221 105 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 2,130 138 1,992 1,992 78.5 1,696 1,169 478 49 296 27.4 14.9 76 220 24.5 11.1 125 16 14.4 111 (7.1) 111 19 17.0 92 (12) 80 80 (7.4) 4.0 25.0 25.0 (7.4) FY2013E 2,208 143 2,064 2,064 3.6 1,728 1,181 495 52 336 13.6 16.3 78 258 17.0 12.5 124 18 11.6 152 36.7 152 26 17.0 126 (13) 112 112 41.5 5.4 35.4 35.4 41.5

November 11, 2011

Godawari Power | 2QFY2012 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 1,172 202 971 94 22 601 136 110 355 127 474 5 1,566 1,292 277 1,015 64 55 686 90 110 486 203 484 5 1,618 1,392 356 1,037 61 55 833 229 110 494 204 629 5 1,783 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 FY2011 32 573 605 76 884 1,566 FY2012E FY2013E 32 642 673 89 856 1,618 32 743 775 102 906 1,783

November 11, 2011

Godawari Power | 2QFY2012 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 adv. 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 6 (240) 343 10 21 312 117 20 136 (90) (29) 11 (40) (46) 136 90 (98) 50 11 39 138 90 229 FY2008 FY2009 FY2010 FY2011 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 (174) 62 19 44 (246) (1) 111 76 (84) 19 84 (90) 152 78 (7) 26 197 (98) -

November 11, 2011

Godawari Power | 2QFY2012 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 0.5 12.5 4.5 0.7 24.5 2.7 1.0 37.3 2.9 1.1 31.3 2.4 0.9 24.0 1.8 0.7 18.5 2.1 2.1 115 20 20 61 2.3 60 10 16 53 1.3 109 16 12 71 1.2 164 22 26 78 1.6 114 22 26 64 1.5 114 22 26 72 23.9 28.6 33.1 12.6 16.0 14.7 10.5 14.0 11.9 13.6 16.5 14.4 13.8 15.7 11.0 15.2 17.4 13.7 17.6 87.7 1.5 22.4 9.5 0.5 29.3 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 15.9 83.4 0.9 12.1 8.7 1.1 15.7 11.1 83.0 1.3 12.4 12.0 0.9 12.7 12.5 83.0 1.3 13.9 11.7 0.7 15.5 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 25.0 25.0 48.9 3.0 240.0 35.4 35.4 60.1 3.0 276.2 3.3 2.6 0.8 3.4 0.7 3.1 0.8 5.3 3.6 0.7 2.1 0.6 5.0 0.8 5.8 3.6 0.6 2.1 1.0 6.2 0.8 4.4 2.7 0.6 2.1 1.0 4.7 0.7 4.7 2.4 0.5 2.5 0.5 3.7 0.7 3.3 2.0 0.4 2.5 0.5 3.0 0.6 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

November 11, 2011

Godawari Power | 2QFY2012 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%)

November 11, 2011

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