[T.S.R:11748] stock idea- GODAWARI POWER

If commodity prices shoot up again, the backward integration of Godawari Power will turn out to be very profitable

Indian steel companies are doing well again after a severe downturn in late 2008 and early 2009. Godawari Power & Ispat Limited is one of the smaller steel companies that is steadily expanding through backward and forward integration. We had first analysed and recommended this stock in Moneylife (24 May 2007) when its price was Rs137. The stock then went on to hit Rs355 in January 2008. It came down sharply in March 2008 to Rs149. Godawari is worth another look now. The company started as a coal-based sponge-iron manufacturer and diversified into steel, ferro alloys, mining and power. Its steel division has the capacity of producing of 23,000 metric tonnes of steel billets per month which is used to produce wire rods and bars. But it is the power business that makes more money for it now. The company started generating power as a by-product of sponge iron production (waste-heat recovery) to reduce costs. Generation capacity was increased from 28MW to 53MW in FY07 by adding two boilers. The capacity will go up further to 73MW by December. This additional power will be based on bio-mass and coal. In FY09 and in the June 2009 quarter, it sold surplus power in the merchant market. In fact, production of billets and ferro alloys was temporarily discontinued because of low demand and better margin on power sales. Some 80% of the power is sold in the open market at an average realisation of about Rs6-Rs7 per unit.

In its quest for backward integration and to reduce its cost of steel-making, Godawari went into iron-ore mining. In the June quarter, it started mining from Ari Dongri iron-ore mine with reserves of 7MT. Its output now is 1,000 tonnes per day and it plans to extract around 0.3MT of iron ore in FY10. It has also received approval for mining of Borai Tibu iron-ore mine having reserves of around 7-8MT. The output of the mine will go into a 600,000MT pelletisation plant which was expected to be commissioned in September 2009. The backward integration plan will be helpful as the pellet produced will be used as a raw material for the sponge-iron production.

If commodity prices shoot up again, as is likely, backward integration will turn out to be a goldmine. Godawari has the advantage of being close to the raw materials sources. The plant at Siltara (Chhattisgarh) is close to the railway track and Great Eastern Road (NH6) connecting Mumbai and Kolkata and NH43 connecting Visakhapatnam/Chennai and Jabalpur for transportation. The mining and power businesses would be the future drivers. Godawari works at a margin of 10%. When the steel business was booming, operating margin was as high as 21% (September 2007). Its market-cap, at the current price of Rs169, is 0.5 and 4.19 times its sales and operating profit. Buy the stock at around Rs130.

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