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Increase in Coking coal prices is again increasing demand of pellets

Latest update from Steelmint. This is Big news for GPIL.

"It has been heard that demand for pellets at China’s ports is still decent as high coke prices are supporting the preference for pellets over lump ore. High coke prices in China may create an upside for low-alumina pellets in the market, as pellets are an alternative to iron ore lumps.

In China, the surge in coking coal costs has appeared to have worsened, with the raw material making up between 50%-70% of the input cost to produce hot metal. It was heard that steel mills’ estimated cost of coking coal has increased to about 70% of the total raw material input costs since May even as iron ore prices have slumped.

"We have firm bids for low Al pellets at above $150/t CFR China after the Fe 62% fines index recovered by $14/t today to $108/t CFR China," an Indian pellet producer informed.

Basically, the low alumina pellets (and GPIL ones are exactly that) need less coking coal to make steel compared to iron ore. So, this is again pushing up demand and prices of pellets in China.
$150/ton quoted above is now near domestic prices. And, this is correlated to current iron ore price. If iron ore price moves up, this can go to $160-170 very fast, taking pellet prices to Rs. 12k again very soon.

At 12k pellet, with 100% captive iron ore, and expanded billet, sponge iron capacity etc, GPIL annual EPS would be close to 500 per share, which is a measly 2.2 PE. Even at 11.3k Pellet, it is at less than 3 PE or so only.

There is no listed or unlisted company in Indian markets that is making annual EBITDA in range of 1400-2500 crores, is debt free and is in 4000-5000 cr mkt cap range or having debt and is in 4000-5000 cr Enterprise value range.

I haven’t see such low valuations except in 2008 crisis, March 2020 crisis and 2013 bottom and that too for a debt free co.

Comments are welcome!

Disclosure- GPIL is my biggest allocation and I have bought stocks in last 1 week as well given how mouthwatering the valuations are. The stock was available at nearly 45% earnings yield just 10 days ago. Even now, it is at 30-35% earnings yield compared to 5% earnings yield of a fixed deposit or 10-12% earnings yield of other commodity stocks. Also, the new specialty steel plant will not just nearly double the earnings but re-rate the company as well to higher multiples than other steel companies as specialty steel plants have higher margins than regular steel. Please do your own diligence.

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