Emkay Global Financial Services has maintained `Buy` on Godawari Power & Ispat with a price target of Rs 133 as against the current market price (CMP) of Rs 105 in its report dated Jan. 24, 2012. The broking house gave the following rationale:
Better realizations lifted the topline; iron ore mining declined:
While realizations maintained strength on a QoQ basis for all, production volumes improved significantly for fewer product categories. Pellets and sponge iron realizations improved 11% and 8% respectively. Production of steel billets, Ferro alloys and power grew by 61%, 62% and 12% respectively on a QoQ basis, however, iron ore mining declined by 58% due to extended monsoon and logistic issues. While, sales volume of billets, pellets and H. B. Wires increased by 65%, 45% and 18% respectively on a QoQ basis, other products saw a decline in the range of 9% -51% with the highest decline witnessed in Ferro Alloys (-51%) and sponge iron (-34%) primarily due to softening prices and higher captive consumption respectively. We expect better capacity utilization going forward, as issues related to mining has been resolved now and prices are likely to remain stable.
Expenses continue to be a concern:
As we anticipated, raw material expenses surprised negatively with a 260 bps increase on a QoQ basis and weighed heavy on margins. This was primarily due to higher purchasing of trading goods, mainly iron ore. Also employee expenses and other expenses continued to remain elevated putting further pressure on the margins. The consolidated EBITDA margin as a result declined 63 bps to 11.6% during the quarter. Performance of Hira Ferro Alloys and Ardent Steel remained subdued Pellet production in Ardent Steel fell 3% on QoQ basis with sales down by 9% for the same period. This was partially offset by ~6% QoQ improvement in realizations. Poor demand for ferro alloys in the region pulled down sales volume at Hira Ferro alloys by 35% QoQ. Higher power sales (up 42% QoQ) however gave some respite. Despite this topline grew by 27% QoQ mainly due to 5 fold increase trading purchases. HFL thus reported a net loss of Rs 4 million during Q3FY12.
Valuation attractive; maintain Buy:
At the CMP of RS 105, the stock is discounting its FY13E EPS by 3.3x and is trading at 4.3x FY13E EV/ EBITDA. At P/ BV the stock is available at 0.4x. We believe the valuations are attractive factoring in the concerns and opportunities. Due to uncertainties in the sector related to regulatory issues, we value the stock at 4.5xFY13 EV/ EBITDA. We revise our target price to Rs 133/ share. Maintain Buy.
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