Analysis

Analysis

Godawari Power and Ispat Limited 

POWERED FOR A ‘STEELY’ PERFORMANCE 

Godawari Power and Ispat Limited has improved its financial and operational performance over a period of time due to higher realisations and improved capacity utilisation of its plants, thus making it a sound choice for investors


Godawari Power and Ispat Limited is engaged in the business of manufacturing and trading of iron ore pellets, sponge iron, steel billets, hard bright (HB) wires and generation of power. The company’s main business segments include steel and electricity. It is also an end-to-end manufacturer of mild steel wires, ferroalloys, captive power, wires rods, steel wires, oxygen gas, and fly ash brick. The geographic business operations segments of the company include both domestic and international markets. It offers ferroalloys which include silico manganese. Through its subsidiaries, the company has been operating a ferroalloys manufacturing plant with capacity of nearly 52,200 metric tons (MT) and also captive thermal power generation of 20 MW. In addition, it has an 8 MW biomass power plant with over 50 MW solar thermal power plant in Rajasthan. The company also has a 0.6 million ton pellet capacity plant in Orissa.

Industry Overview 

By end of 2020, India’s labour force is expected to reach 160-170 million based on the current rate of population growth and increased labour force participation. Looking at the global steel sector scenario, from January-October 2019, world crude steel production reached around 1,541.77 million tons and has shown a growth of 3.2 per cent over the same period of the previous calendar year. China continued to remain the world’s largest crude steel producer during the same period (829.21 million tons) followed by India (93.31 million tons), Japan (83.79 million tons) and the US (74.07 million tons). As for the sector’s performance domestically, the Indian steel industry entered into a new development stage post de-regulation on the basis of resurgent economy and rising demand for steel.

Robust increase in production resulted in India becoming the second largest producer of crude steel during 2018. It is also the largest producer of sponge iron or DRI in the world. In 2018-19, the production of total finished steel (alloy or stainless + non-alloy) was 101.287 million tons. The coal-based route accounted for around 79 per cent of total sponge iron production (34.71 million tons) in the country during 2018-19. Capacity in sponge iron-making has increased over the years and stood at 46.56 million tons (2018-19) as per the report by Ministry of Steel, Government of India. Domestic steel prices are influenced by trends in raw material prices and market forces of demand and supply conditions as well as the international price trends among others.

Business Performance 

Irregular and extended monsoon during the year affected iron ore mining activity. Hence, production of iron mining fell by 2.04 per cent from 15,79,693 MT in FY18 to 15,47,384 MT in FY19. But, the production from captive iron ore mines positively impacted the company’s operating margins compared to the market price of iron. Godawari Power and Ispat has continuously strived to improve the production volume from the mines and expects to grow the volumes further during the year. For Q2FY20, the iron ore mining production was flat with a mere increase of 1 per cent to 3,07,286 MT from 3,05,207 MT in Q2FY19.

During FY18-19, the company achieved capacity utilisation of 92 per cent which is an increase of 5 per cent as compared to that in FY17-18. The production of iron ore pellets also increased during FY19 by around 5.01 per cent. Higher production of iron ore pellets coupled with better realisations has been able to contribute towards higher sales and profitability. During FY19, the company’s sponge iron plant operated at full capacity and achieved production volumes of 4,60,008 MT mainly on account of operational efficiency. The plant hence operated at a capacity utilisation of 89 per cent. Iron ore pellets production rose by 9 per cent to 6,94,934 MT in Q2FY20 compared to 6,40,379 MT in Q2FY19. Similarly, sponge iron production also witnessed an impressive growth of 19 per cent to 1,32,275 MT in Q2FY20 from 1,11,229 MT in Q2FY19.

For FY19, the company reported an increase of 51.02 per cent in the production of steel billets to 2,98,418 MT from 1,97,596 MT in FY18 on the basis of availability of additional power from Jagdamba Power and Alloys Limited (JPAL) during the year. Godawari Power and Ispat intends to increase the capacity utilisation of its steel melting shop during the next few quarters. As part of ferroalloys, the company makes silico manganese which is then used in making steel. Ferroalloys witnessed a decrease in production by 23.50 per cent from 13,772 MT in FY18 to 10,536 MT in FY19 because of the strategic shift of power to steel billet production. Steel billets recording the highest increase in production during Q2FY20 by 25 per cent to 79,290 MT compared to 63,618 MT in Q2FY19.

Looking at the global steel sector scenario, from January-October 2019, world crude steel production reached around 1,541.77 million tons and has shown a growth of 3.2 per cent over the same period of the previous calendar year. China continued to remain the world’s largest crude steel producer during the same period (829.21 million tons) followed by India (93.31 million tons), Japan (83.79 million tons) and the US (74.07 million tons).

In the segment of captive power, the company has been operating 73 MW of captive power generation capacity out of which 42 MW is waste heat recovery whereas 11 MW is thermal coal-based and 20 MW is biomass power. On an overall basis, production volume decreased by 8.95 per cent to `44.02 crore in FY19 as compared to `48.35 crore in FY18 because of higher cost of fuel. Meanwhile, captive power production reduced by 6 per cent to `10.7 crore in Q2FY20 from `11.3 crore in Q2FY19.

Financials 

Looking at the company’s consolidated quarterly financial trends, it reported net sales of `827.88 crore in Q2FY20, registering an increase of 2.92 per cent as compared to `804.39 crore in Q2FY19. The increase in net sales is on account of higher utilisation and realisation in pellets. The PBDT dropped by 20.10 per cent to `112.35 crore in Q2FY20 from `140.61 crore in Q2FY19 as a result of fall in realisation in finished steel. Subsequently, the company’s net profit fell by 22.11 per cent to `52.95 crore in Q2FY20 from `67.98 crore gained in Q2FY19. On the annual front, net sales for FY19 increased by 28.31 per cent to `3,321.63 crore from `2,588.84 crore gained in FY18. Its PBDT grew significantly by 61.14 per cent to `542.60 crore in FY19 as compared to `336.73 crore in FY18. For FY19, the company gained a net profit of `256.83, clocking a growth of 21.55 per cent compared to net profit of `211.29 crore gained in FY18.

Conclusion 

To boost the steel sector, the Indian government has taken various steps such as the National Steel Policy which allows 100 per cent foreign direct investment (FDI) under the automatic route. Godawari Power and Ispat is promoted by Hira Group which has a positive track record and experience in the steel and ferroalloys industries. It also has backward linkages in the form of captive iron ore mines, long-term linkages for coal supply and power supply through captive source and PPA. As of July 2019, CARE Ratings upgraded the company’s status to BBB+. Since the company has improved its financial and operational performance over a period of time due to higher realisations and improved capacity utilisation of its plants as well as utilisation of surplus cash flows towards its debt repayments, we recommend a BUY.

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