Godawari Power and Ispat

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Godawari Power & Ispat
A turn-around case...?
Niteen S Dharmawat
28 Oct 2017

2
IMPORTANT DISCLAIMER: This presentation is prepared solely to provide information about this
company and take feedback from the readers. This presentation is NOT meant for equity
investment. It should NOT be construed as an investment advice for buy/sell/hold or any other
form of recommendation. This presentation does not recommend any price or price target for
the company discussed. Investment in equity shares has its own risks. The information contained
herein is based on my study and upon sources that I consider reliable. I, however, do not vouch
for the accuracy or the completeness thereof. This material is for personal information and not
intended for any investment decisions. I am not responsible for any profit or loss incurred based
upon it & take no responsibility whatsoever for any financial profits or loss which may arise from
the discussion thread above/anywhere in communication. It is safe to assume that I, my family,
friends have vested interest in any of the companies/stocks discussed/presented here. Please do
your due diligence and take the help of a qualified advisor/registered research analyst before you
take any financial decision. I am neither of these.

Twitter - @niteen_indiaTwitter - @niteen_india
 Incorporated in 1999
 CMP: 139.7, 52H/L: 141 / 53.05. Book value per share 194.31
 Ever High: ~360 in Jan 2008 (IPO in 2006 at 70-81)
 Fully integrated steel plant: End-to-end manufacturer of mild steel wires, sponge iron, billets, Ferro alloys,
captive power, wires rods, steel wires, Oxygen gas, fly ash brick and iron ore pellets. Plant located at Raipur,
Chhattisgarh
 Dominant presence in the long product segment of the steel industry, mainly into mild steel wire
 Over the last few years, scaled up its capacity five fold and has become one of the largest players in the mild
steel wires segment
 Pioneers in the field of iron ore pelletization, operating it at 100% rated capacity.
About Godawari Power and Ispat
Background…
3Source: KMP interviews, Company Annual Reports, website

Iron ore to pellets, sponge iron, billets, rounds, wire to power…
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Integration is the key
Iron ore mines (2.1MT)
Sponge iron
(0.5MT)
Billets (0.4MT)
Round (0.1MT)
Wire (0.15MT)
Coal links Manganese Ore
Power (153MW)
WHR, Solar, Husk
Ferro Alloy
(0.0165MT)
Source: KMP interviews, Company Annual Reports, website, images from net
Pellet
(1.8MT)
Buyers

Base case scenario Best Case scenario Worst case
Products/ Division
Capacity
(In Mn Tn)
Prod
(In Mn Tn)
Utilization
Rates
(approx)
(per Tn)
Rates = CMP
Prod = @2016 utilization
Sales = 80% X Prod
Rates = CMP + 10%
Prod = @2016 + 20%
Sales = 80% X Prod
Rates = CMP - 20%
Prod = @2016 - 20%
Iron ore mining 2.10 1.18 56% 2,700 254 419 203
Iron ore pellets 1.80 1.50 83% 5,000 598 987 478
Sponge iron 0.50 0.43 87% 15,500 539 889 431
Steel billets 0.40 0.20 51% 22,500 345 606 294
MS rounds 0.10 0.10 96% 28,000 241 354 172
HB wire 0.15 0.07 48% 32,000 206 302 146
Ferro alloys 0.0165 0.0131 80% 65,000 77 113 55
Power (MW) ~153.00 110 110 110
2,369 3,779 1,889Source: market research, company website, assumptions
Capacities v/s Production v/s Scenarios
5
Avg FY2016 &
FY2017 Rev
numbers
• 2013 highest ever revenue (~2400Crs) and profit (150Crs)
• 2015 highest ever EBITDA ~350Crs
Source: KMP interviews, Company Annual Reports, website
This is not projection of numbers

Numbers
6
Background…
 Enterprise Value: 2694Crs (Market cap: 494Crs + Debt: 2200Crs)
 Revenue: 1804.41Crs (FY16-17) v/s 1979.73Crs (FY15-16)
 TTM EBITDA: 300crs v/s 217Crs of FY2016
 Jan-Jun 2017 EBITDA: 226Crs v/s Jan-Jun 2016 EBITDA: 80Crs
 Loss: (73.62)Crs (FY16-17) v/s (99.85)Crs (FY15-16)
 Never made a loss at EBITDA level in its history
 Peak #s
 Revenue: ~2400Crs (2013)
 EBITDA: ~350Crs (2015)
 PAT: ~150Crs (2013)
 Promoters increased stake from 56.15% (in FY08) to 67.36% (as of Sep2017 quarter)
 Promoters unpledged holding is: 37.52%
 Preferential allotment 24,80,000 shares to promoters @125 in Mar 2017 of INR 31Crs
Source: KMP interviews, Company Annual Reports, website

Godawari Power and Ispat
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Why…
 New ore auctions expected to happen at premium: advantage to companies with existing iron ore mines
 Strong iron ore prices benefit integrated players (Captive mines + coal linkages + power + steel outputs)
 Coal linkages were not sufficient. New linkages in Oct 2017 announced by Godawari
 Huge operating leverage with improvement in demand and prices
 Booming domestic and exports market
 Chhattisgarh (CG) government reduced subsidy on power to steel plants recently
 GPIL has in house husk based power plant in CG + solar plant in Raj
 Supreme Court imposed 100% penalty in Aug’17 on Odisha illegal miners
 CEC report says miners illegally extracted 215.5 million tonnes
 As per a govt official penalty amount to be 58,000Crs
 GPIL captive mines in CG and plants in CG and Odisha: no impact
 If illegal miners unable to pay penalty (likely to be paid by Dec’17) could help others
 Many small unwanted capacities won't come back from Jan 2018 onwards
Source: KMP interviews, Company Annual Reports, website, media reports, market sources, thewire.in

Godawari Power and Ispat
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Why…
 No new major capex
 Debt: 2200crs to come down gradually (this year by at least 100crs)
 Culture of kachha prevalent in steel industry. Implementation of GST impacting smaller unorganized players hard
 Government support for steel industry: minimum import price (MIP), Anti-dumping duty
 Steel demand grows 2-3% more than GDP growth. If GDP growing at 6% then steel demand to grow by 8-9% but
growing just at 2-3%.
 Rumours of solar plant sell. This plant is one of the best implemented solar projects in India. Generating an
EBITDA of 100crs on 110cra sell
 If solar power plant is sold then should fetch 800-900crs easily considering PLF and profits. This should
reduce debt significantly
 Debt restructuring, no haircut, promoters preferential allotment
Source: KMP interviews, Company Annual Reports, website, media reports, market sources

Why International prices to remain strong?
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Why…
 China intensifies its smog war over winter: closing down polluting capacities
 Steel plants meeting pollution norms require high quality iron ore: price gap between low and high-
grade iron ore highest currently
(India produces good quantity of high-grade iron ore)
 World-over steel capacities under stress after 2008-09 peak, companies under debt burden closing
down/consolidating, now new major capacities built
 Demand from developed countries improving
Source: KMP interviews, Company Annual Reports, website, media reports, market sources
World crude steel production: 1628MT in 2016
• China: 808MT
• Japan: 105MT
• India: 96MT
(Source: World Steel Association)

Sharing profits?
10
Dividend history…
 Dividend history: was paying until 2014-15. After the significant drop in operating
performance, the Company did not recommend any dividend.
FY Total Dividend per share
2016-2017 Nil
2015-2016 Nil
2014-2015 1.0
2013-2014 2.5
2012-2013 2.5
2011-2012 2.5
2010-2011 2.5
2009-2010 2.5
2008-2009 2.5
2007-2008 4.0
2006-2007 3.0

Risks
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& Mitigation
 Low unpledged holding
 Promoters consistently increased stake
 Recent Pref allotment @125 as a part of financial restructuring with the FIs
 Cyclical commodity business
 Need to keep a close watch on the commodity cycle
 Got crucial coal links help manage profit margins and consistency
 Credit rating downgraded to BBB+/A3+
 It was during the toughest period for the industry and company in particular
 Rating of subsidiary Godawari Green upgraded from BBB- to BBB+ (27 Oct 2017)
 Management may get overconfident to go for new capex

Twitter - @niteen_indiaTwitter - @niteen_india 12
About the presenter:
Niteen is an MBA and cleared CFA Level 2, CFA Institute USA. A firm believer in
long-term financial planning, and a 20 years veteran of the stock market. He also
conducts free investor awareness sessions.
He likes reading books/magazines/news papers on the topics as diverse as general
management, technology, investment, fiction, marketing and the Gita.
He is a person who believes in "Everything else can stop but learning".

Thank you
Twitter: @niteen_india
Blog: http://dharmawat.blogspot.com/
Mobile: 9850571857
Also on: Slideshare, Facebook

IMPORTANT DISCLAIMER: This presentation is prepared solely to provide information about this
company and take feedback from the readers. This presentation is NOT meant for equity
investment. It should NOT be construed as an investment advice for buy/sell/hold or any other
form of recommendation. This presentation does not recommend any price or price target for
the company discussed. Investment in equity shares has its own risks. The information contained
herein is based on my study and upon sources that I consider reliable. I, however, do not vouch
for the accuracy or the completeness thereof. This material is for personal information and not
intended for any investment decisions. I am not responsible for any profit or loss incurred based
upon it & take no responsibility whatsoever for any financial profits or loss which may arise from
the discussion thread above/anywhere in communication. It is safe to assume that I, my family,
friends have vested interest in any of the companies/stocks discussed/presented here. Please do
your due diligence and take the help of a qualified advisor/registered research analyst before you
take any financial decision. I am neither of these.

Steel Industry: India
15
India’s New Steel Policy, 2017
• 300MT of steel making capacity by 2030 from 122Mn
• Additional investment of 10 lakh Crore
• Increase per capita steel consumption to 160 Kgs by 2030 from existing ~60 Kg (rural is 11 Kg)
v/s World average steel consumption: 208 Kg
• Potential of MSME steel sector recognised
• Adoption of energy efficient technologies in the MSME steel sector to be encouraged to
improve the overall productivity & reduce energy intensity
• To domestically meet entire demand of high grade automotive steel, electrical steel, special
steels and alloys for strategic applications by 2030-31
• Increase domestic availability of washed coking coal so as to reduce import dependence on
coking coal to 50% by 2030-31
• To be net exporter of steel by 2025-26
Source: Draft National Steel Policy, GOI, Ministry of Steel

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• In India, steel has an output multiplier effect of nearly 1.4X on GDP and employment
multiplier factor of 6.8X.
• Focus on infrastructure and construction sector, affordable housing, expansion of railway
networks, development metro network, development of domestic shipbuilding industry,
opening up of defence sector for private participation, and the anticipated growth in the
automobile sector, are expected to create significant demand for steel in the country.
• Increase in urban population to 600 million by 2030 from the current level of 400 million (rural
market for steel currently consuming around 11 kg per annum)
• The coal based route accounted for 89% of total sponge iron production in the country in
2015-16.

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• The Indian steel industry categories: BF-BOF, EAF and IF (electric arc furnaces & induction
furnaces).
• BF-BOF route producers: large integrated steel making facilities which utilize iron ore and
coking coal for production of steel.
• BF-BOF route had a combined capacity of around 50 MT at utilization level of 82%.
• EAF/IF route are small steel producers who utilize sponge iron, melting scrap and non-
coking coal for steelmaking.
• 308 sponge iron producers
• 1175 electric arc furnaces & induction furnaces
• 1392 re-rollers that rolls out semi-finished steel into finished steel

Board of Directors
19

Board of Directors
20
Independence of Committees
Audit Committee
Nomination and Remuneration Committee

About Godawari Power and Ispat
21
Background…
 Hira Ferro Alloys Ltd. Did a revenue of 200 cr last year as per AR and EBITDA of 18.5Crs and
6Crs of EBT and did a NP of 3Crs
 Godawari Green Energy Ltd. Did a revenue of 113Cr and EBITDA was 100Cr and PAT 6.48Crs
 Ardent Steel Ltd
 Revenue of 147Cr and EBITDA was 28Cr and PAT of -3.24Crs

Remuneration
22

Godawari: Price history
23Source: Google Finance

Godawari Power and Ispat

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