A small steel company using captive power
Godawari Power and Ispat (GPIL) is part of the Hira group, which manufactures steel long products in central India. GPIL produces sponge iron, steel billets and captive power generation.
GPIL's current sponge iron, steel billets and captive power capacity is 2,35,000 tonnes, 2,50,000 tonnes, and 28 MW, respectively. The company intends to set up another unit near its existing facility to manufacture 2,60,000 tonnes of sponge iron, 1,50,000 tonnes of steel billets, and generate 25 MW of power through waste heat flu gases. After expansion the total capacity of sponge iron, steel billets and captive power plant will be 4,95,000 tonnes, 4,00,000 tonnes, and 53 MW, respectively. The expanded capacity is likely to be commissioned in the last quarter of FY 2007.
The project cost (excluding general corporate and issue expenses) is Rs 173.32 crore, which is estimated to be financed through a term loan of Rs 113.5 crore, issue proceeds from the Initial Public Offering and internal accruals.
Strengths
- Along with a consortium of four other corporate bodies (including group companies), GPIL was allotted rights for captive coal mining in January 2006. GPIL's share is 106.5 million tonnes. In September 2005, the ministry of mines granted an iron-ore mining lease for 106.6 hectares in Ari Dongir and 110 hectares in the Boria Tibbu. Normally, a timeframe of 27 months is required for commencement of commercial exploration of captive coal and iron ore mines. The company has not allocated any funds for developing these mines.
Weaknesses
- The promoters have few more group companies in the steel business, which can lead to conflict of interest and diversion of attention.
- Though highly dependent on its group companies for sale of its products, GPIL has not entered into any firm tie-up with group companies. The company supplies 40% of the billet requirement of some of its group companies, constituting about 75-80% of its current production.
- GPIL has not yet placed orders for equipment to produce sponge iron and steel billets and generate power, which may delay the implementation of the project. The company has still to apply for registrations for the expansion project including excise and commercial tax.
- Due to its cyclical nature, the dynamics of the steel industry keep changing, depending on factors such as demand-supply in China and cost of vital inputs including iron ore and coal. Currently, the steel industry is facing pressure on prices on a high base of last year, as China has become a net exporter. Also, on account of rising input costs, the margin of players has crumbled.
Valuation
At a price band of Rs 70 – 81, GPIL's PE works out to 7.2 – 8.3 times FY 2005 earning and 12.3 – 14.2 times six-month FY 2006 annualised earning on post-diluted equity. Notably, the sponge iron industry fared badly in the first half of the current fiscal, and GPIL's performance was also affected. Jindal Steel and Power, which is an established player, commands a TTM P/E of 9.1, while Monnet Ispat is trading at a TTM P/E of 7.4. The sector TTM P/E is around 6.3.