GPIL - Quick update

Firm to set up coal-based plant in Jharkhand or Chhattisgarh.

Godawari Power and Ispat (GPIL), an integrated steel manufacturer based in Chhattisgarh, is mulling foray into commercial power generation with projects in Chhattisgarh or Jharkhand with capacities ranging between 300 to 1,000 mw with coal and coal rejects as fuel.

A consortium led by GPIL has been allocated four coal blocks at Nakia and Madanpur in Chhattisgarh with 243 million tonnes of total reserves, of which, GPIL’s share is 63 million tonnes. Of this, 40-50 per cent will be wastage such as coal ash and gases during coal processing.

GPIL was planning to optimise its coal mines with coal rejects-fired power plants as part of its backward integration expansions, said sources familiar with the development. GPIL would start mining by 2009 and set up power generation facilities by then, added sources.

“Our board of directors is yet to consider or finalise any plan and, now, we are concentrating only on the existing expansion plans to increase our operating margins. We may enter into commercial power business in future since our businesses are closely associated with power generation,” said Dinesh Gandhi, director, finance.

GPIL is a mid-sized integrated steel player producing sponge iron, steel billets, steel wires, wire rods and ferro alloys and generates captive power from waste gases produced at its steel manufacturing facilities.

GPIL currently has 53 mw of captive power consumption, which includes a 25 mw captive power plant commissioned in the first half of 2007-08. Of this, 11 mw is produced using byproducts of sponge iron.

According to sources, B L Agarwal, managing director of GPIL, in his personal capacity has picked up 25 per cent stake in Maruti Clean Coal and Power, a company floated in Chhattisgarh to set up a 270 mw coal-fired power plant with an investment of Rs 1,000 crore. However, GPIL has not firmed up any fuel linkages for this project, sources said.

GPIL is setting up a coal washery unit and a 0.6 mega tonnes per annum (mtpa) pelletisation plant with an overall capital expenditure of Rs 230 crore. This expansion would reduce the raw material cost helping increase operating margins up to 40 per cent.

With captive iron ore and coal mines ready for raw material supply by 2009, the company could enter into areas such as power production in a big way, said sources.

GPIL - As Reliable as Steel

Strong growth in the domestic infrastructure sector has boosted many allied business segments, including companies which manufacture steel wires and rods. 

There are a number of small players in this segment, but only companies with large volumes and backward integration capabilities are expected to do well. Godawari Power and Ispat (GPIL) is one such player. GPIL has invested in a steel billet unit, sponge-iron production plant, iron ore and non-coking coal mines, with the aim of insulating itself from the vagaries of input prices and improving operating profit margins. At the current price level GPIL’s financials and future plans make it an ideal pick for investors with a 2-3 year horizon. 

BUSINESS: GPIL manufactures mild steel wires, which are used as binding wire and barbed wire. To manufacture this end product, it produces all the required raw materials. 

This gives it two advantages — firstly, it is independent of the variability in the supply in raw materials, and secondly, it generates a higher operating margin. It also utilises waste heat generated during sponge iron-making process to produce power. This makes it self-sufficient in power. GPIL also manufactures ferro-alloy, which provides better operating margins. 

GROWTH DRIVERS: GPIL has been allotted an iron ore mine with estimated reserves of 15 million tonnes (mt), the final approval for which is pending. Once the company obtains this approval, it will take around four months to start mining the ore. This means the company will have sufficient captive iron ore supply for the next 30 years. 

This will also increase its operating margin to 35-40% of its net sales from the current 18%. GPIL is setting up a pellet plant at a cost of Rs 235 crore, which will utilise the iron ore fines to make quality coke. 

This will improve its capacity utilisation. The company was granted a sales tax waiver of Rs 300 crore in early ’00, which can be utilised till ’11. This will directly add to its bottomline. 

FINANCIALS: The company’s net sales and net profit have witnessed a compound annual growth rate (CAGR) of 59.8% and 89.8%, respectively in the past three years. Its current market capitalisation, at Rs 685 crore, is 1.55 times its FY07 net sales, which is the same as the industry average. GPIL’s operating margin, at around 18%, is nearly double that of peers like Ramsarup Industries and Bansal Wire Industries. Similarly, GPIL’s return on capital employed (RoCE) and return on equity (RoE) are 20% and 30%, respectively — slightly higher than that of other players in this segment.

VALUATIONS: The effect of the new pellet plant, captive iron ore and coal mines will be reflected in the company’s financials in FY10 and will also help to improve its operating margin to around 35%. The estimated EPS for FY09 and FY10 are Rs 47 and Rs 107, respectively. This translates into forward P/E multiples of 5.6x and 2.5x, respectively, at the current price level, providing sufficient upside growth potential. The EV/EBITDA multiples for FY09 and FY10 are 4.0 and 2.0, respectively. 

Moreover, if GPIL increases its dividend payout ratio consistent with the past two years, it will result in a 10% dividend yield after three years at historical investment cost. Hence, investors are advised to buy this stock at current levels of Rs 265 with a horizon of 2-3 years.

Rana sugars - Ethanol Plant

Rana Sugars Ltd, part of the Chandigarh-headquartered Rana Group, has plans to set up an ethanol unit in Moradabad (Uttar Pradesh) at a cost of Rs 80 crore. The proposed unit will have a production capacity of 180 kilo litres per day of ethanol.

 

The plant will also have the facility for co-generation of 6 Mw of power, which will be sold to the state electricity board. The project will be funded through debt, internal accruals and the Centre’s sugar development fund.

 

“We are going to infuse fresh capital of Rs 80 crore into the proposed project in Moradabad district, on the premises of the sugar mill there. Work on this project is likely to start by October and will take 13-14 months to complete,” said Rana Inder Pratap Singh, the company director.

 

The setting up of the ethanol plant will make the plant a complete integrated unit. The company will sell the ethanol to oil companies. “According to the government regulations, once the company starts commercial production of ethanol, it is bound to sell to oil companies at the rate set by the central government,” he added.

 

Recently, the company’s new sugar unit at Moradabad, which has a crushing capacity of 5,000 tonnes of sugarcane per day and facilities for co-generation of 20 Mw, of power has started commercial production. In addition to this, the company’s second new unit, which has a crushing capacity 5,000 tonnes of sugarcane per day at Rampur district (Uttar Pradesh), will be operational by October 2007.

 

“The company hopes to achieve a turnover of Rs 500 crore by the end of this financial year, as the two new sugar mill at Moradabad and Rampur district will be operational,” he said. Last financial year, the company’s turnover was Rs 200 crore.

 

The group has also diversified into textiles, informatics and infrastructure. In last financial year, the turnover of the group was Rs 330 crore and this year it hopes to have a turnover of Rs 650 crore.

 

The group also plans to enter real estate and is looking at developing a housing project in Mohali with an investment of Rs 150 crore.

 

“Once we get all the necessary clearances from the state government, we will start construction,” Singh said.