Godawari Power - Any Trackers?

Stock Opportunities Untested - but worth a good look
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The important thing to note in this industry that 35% of iron ore mining capacity is in Odisha- and significant part of that were auctioned in March 2020 at a 100%+ premium.
Due to such high auction prices, iron ore supply went from excess to shortage in the country.
The industry structure has changed permanently in India post the Mar 2020 auctions in Odisha.
Most of those mines are not even working and many cos like JSW steel are returning the mines to the govt.
As I mentioned in one of the posts above too, the value of GPIL is its license to the mine, which is an intangible asset and not its actual book value which would anyway cross 1000 by end of current FY in 7 months.

6000 pellet price was 10 yrs lows, pre-2020 prices.
Why would anyone take 6000 as base price? Those prices are not coming back because those days of low cost mines have gone permanently. New mines are auctioned at 100% premium because the govt has changed the mining laws with an amendment. Anyone can bid for a mine, and the highest price wins. This was not there earlier.

And, since they are expanding billet, wire rod, sponge capacity, 40-50% sales will come from billets, wire-rod etc, 3-4 months from now, once the expanded capacity is operational.

Billet prices are at 41800 and are very stable, and very much near the highs.

At these billet prices, with expanded capacity, quarterly EPS may touch 120, and annual EPS around 480.
Even 6 PE would give 2800 per share for a debt free company, which is putting up a big specialty steel plant in 3 years.

Even companies with high debt in commodity sector are not trading at 3 PE in Indian markets. Rain industries is a good example.
In addition, one can compare with other mining companies- MOIL, Nalco, HinCu, Vedanta, Coal India or same sector- Shyam metaliks to compare the valuations based on EV/EBITDA or PE basis, and nowhere, will you find such a cheap company.

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Latest update on Pellet prices.
Apparently, Chinese iron ore prices don’t have much impact on domestic prices, reason being Indian iron ore prices have a big export duty.
We don’t import iron ore as well.

Bellary iron ore pellet (Fe 63%) prices are at INR 11,400-11,500/t against INR 11,000/t on 10 Sept’21. Prices have increased amid a sharp hike in sponge iron offers in Bellary.

  • Confirmed deals of about 29,000 t were recorded at around INR 11,300-11,500/t exw.
  • Deals of about 3,000 t were reported at INR 11,600/t exw.
  • P-DRI prices rose to INR 30,000/t exw versus INR 28,700/t a week ago.
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These are the latest billet, sponge iron and wire rod prices.

They are still very much near highs. Just 5-6% off highs.
GPIL also sells billets, wire rods and is expanding its capacity here.
They also give higher margin than pellets.
The capacity expansion is only at an expense of 60-80 crores and should be online in a few months.
The dependency of pellet sales would reduce going forward after this capacity expansion in billets, wire rods.

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Earlier promotor/promotor group have pledged significant % of their holding. Now it is reduced to 14.8%. Any thoughts on this?

As per latest update to stock exchange:

…
the total no. of shares pledged by Promoter and Promoter Group with lenders
has been decreased from 77,31,846 Equity Shares (21.94%) to 52,30,000 Equity Shares
(14.84 %) of paid up capital of 3,52,36,247 Equity Shares of Rs.l 01- each) after the release of
pledged shares on 04.08.2021.
…

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Pledged stock should soon come to zero, as it is a debt free company now. Coming quarter results in a month will show that.

Infact, it should be having surplus cash on balance sheet from now onwards, as maintenance capex is very low unlike other steel companies.

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And, these are today’s Billet prices, rising to Rs. 42,000.

No impact of China iron ore price fall on billet, wire rod prices.
Pellets are converted into billets, and if billet prices are at highs, pellet prices have downside protection as well.
This is the reason why pellet prices have moved up a little bit in last 2-3 days from 11k to 11.3k as mentioned in a post above.

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We will have to remember that GPIL is in a cyclical business and especially in cyclical commodity business Valuation is a very subjective term. Valuation of GPIL may apparently look low now in comparison to Shyam. But to fill this parity Shyam Metallics may fall more from its current level to such a level where valuation of GPIL and Shayam metallics are comparable.
In a cyclical downtrend i feel valuation of Shyam will fall rather then GPIL rising up to have the parity in valuation.

Disclosure : Exited all my position…

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Yes, there are many other commodity stocks, around 100 commodity stocks listed on NSE and BSE, which are also cyclical stocks.
That’s why these cyclical stocks trade at low PE between 6-10 PE usually. For example Maithan alloys, IMFA, Sarda energy, Shyam, Rain industries, HEG, Graphite, Coal India, MOIL, and many others.

If you see MOIL, it makes a paltry annual EBITDA between 300 crore in the worst year, and 600 crore in the best year. Compared to this GPIL makes 600 crore in the worst year, and 2000 crore in the best year.
Infact with the capacity expansion, the worst possible EBITDA for GPIL would be near 1200 crore now (including the new billet capacity). Even here, just 6x EV/EBITDA multiples would give 7200 cr mkt cap.
MOIL is at 4000 crore market cap and is a PSU with poor capital allocation decisions and a bad promoter- the govt.

MOIL also doesn’t have any big capex plans (unlike GPIL which is putting up a specialty steel plant under PLI scheme)
The PEG multiple including growth for next 4 yrs, would be 1/10th of MOIL is my guess.

Similarly, you can compare with many other commodity cyclical stocks, and you will not be able to find such a cheap stock (and that too with big growth plans). Growth stocks usually get higher multiples, not lower compared to their peers in the same industry.

If one looks at EPS for FY 25 and assumes the current billet/pellet prices will be in FY 25 too (can be a lot higher), FY 25 EPS would be close to 700-800 per share (including the 1.5 mtpa steel plant).
If one assumes that pellet/billet prices will be 25% higher by FY 25, then FY 25 EPS would be close to 1200 per share.
So, in base scenario stock is available at 1.4 PE FY 25, and in optimistic scenario, it is at 1 PE FY 25 earnings for a debt free, low maintenance capex company!

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Today, GST raised on Iron ore from 5% to 18%.
This is negative for non-integrated producers like shyam metaliks and positive for integrated producers like GPIL.
Having own captive mine is a big advantage and an intangible asset.

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This just got published-

It says Pellet prices have stabilized, and offers in Raipur are at 11100-400 range. One deal also happened in that range, and prices expected to be stable next week as well.

It seems crash of Iron ore price in China has limited impact on Indian domestic market. Prices have come off, but there is no crash here, and neither it is expected.
The reason may be due to high export duties on Indian iron ore prices, which kept Indian iron ore at a huge discount to International prices for many years. However, the change in iron ore mines auction process has reduced that discount substantially now.

Very interesting article on Iron ore and the fact that supply demand dynamics have shifted to one level up permanently-

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https://thedocs.worldbank.org/en/doc/5d903e848db1d1b83e0ec8f744e55570-0350012021/related/CMO-Pink-Sheet-September-2021.pdf

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$100 per tonne is Rs. 7400 per tonne. Price of Indian iron ore is currently lower than this.
Add to this the logistic costs as iron ore is a bulk commodity.

Indian iron ore prices are also a function of sponge iron and billet prices.
Many small steel mills in India buy iron ore lumps or pellets from open market and convert it into sponge iron or billets and sell them again.
They get a conversion margin.

The price of sponge iron and Billets are near all time highs in India, just 5-7% off from all time highs.
This has given downward price protection to pellets and iron ore price in India.

We need to track billets, sponge iron, wire rod and pellet prices as GPIL makes and sells all of these.
The price of billets, wire rods etc are dependent on STEEL prices.
And, steel prices are near highs in China and Globally, because of reduced output in China.

It does not sell iron ore to China.

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Summary of what has happened in last 1 month

China has reduced steel output to crash iron ore and increase steel prices.
This makes their steel companies very profitable, but they also reduced their exports due to reduced output of steel.
This in-turn makes global and Indian steel prices very high and keeps our sponge iron, billet prices at highs too, and in-turn our pellet and iron ore prices at decent level.
The quarterly profit calculations assumptions that I posted earlier remains true even now (and the valuations remain crazy cheap as mentioned earlier)

If China increases steel output in future- iron ore price will rise.
If China reduces steel output further- steel prices will increase further due to less supply, and it will provide support to billet, sponge iron, and pellet prices as well.

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Shyam metaliks, sarda energy etc. seem to be unaffected. It seems only one stock is affected by the fall in price of iron ore in China.

JSPL gets mine at 118% premium. The race to secure iron ore is so bad in India that steel players are willing to make a loss by paying 118% of price of iron ore for their own mines.

Rebar prices, which is converted from Billets are going up.

This is todays post on Steelmint.

https://www.steelmint.com/intel/India-Raipur-based-re-rollers-raise-rebar-offers-by-up-to-INR-500-t-8604

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Would the Evergrande crisis have any impact on commodities worldwide?

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  • Book values as on 31.03.2021 is 578 per share. In the first quarter company has repaid close to 400 crore debt, so the book value currently will be higher than 700. So that should put the P/B currently at close to 1.8 levels.

  • The company did well to get EC for enhancement of iron ore production from 1.405 MTPA to 2.35 MTPA in June’21 as promised earlier. To get an EC for enhanced iron ore production is considered very tough. But the company did get the EC in a very short timeline.

*The company has done justice to shareholders when they announced that they may enter into a separate agreement to acquire/amalgamate the power assets( in place of the current one)

Some of the points company highlighted in the disclosure are

  • The scheme contemplated a share. swap between JPAL and our Company and the scheme filed with exchanges included detailed workings of valuations for both companies.
    However, to put things in perspective, despite pricing as per SEBI {CDR regulations indicating a pricing of INR 178.51 per share, the valuers indicated a fair valuation for GPIL ofINR 233.44 per share; The scheme was entered into and disclosed to stock exchanges on December 24, 2019. The closing price of the shares of the Company on that day on BSE Limited was INR 216.75 per share;

  • The Company through a letter dated February 12, 2020 submitted a Complaint Report, pursuant to SEBl Circular No. CFDIDIL3/CIR/2017/21 dated March 21,2017 indicating that there have been no complaints on the proposed scheme that have been received by the Company.

  • At one point in time, as on March 24, 2020, the share price of GPIL reduced to INR 84.45 per share and both parties i.e. GPIL and JPAL decided to continue with the. Proposed transaction despite the share price of GPlL having fallen by almost 64% from the price as determined by the valuers

However, investors should read this disclosure in conjunction with the disclosure they made on 22.01.2019 where the shareholders of JPAL voted against the merger of JPAL with GPIL as the market prices of GPIL has considerably fallen below the market valued price of Rs.509.00 considered for amalgamation.
withdrawal of merger Jagadamba.pdf (550.4 KB)

Considering this I would say the proposed share swap was definitely disadvantageous to minority shareholders of GPIL and I am happy that it’s called off. Secondly, the company has proposed to set up a captive Solar PV Power Plant of 250 MW capacity in Raigarh District of Chhattisgarh with a cost envisaged at Rs. 750 Crores was approved by the Board. The project shall be funded mainly out of internal accruals, The power generated in this project shall be captively consumed in the Company’s existing plant situated at Silatra Industrial Area, Raipur, Chhattisgarh and is expected to be commissioned by Q3 FY23. At that point of time wont the benefits of a merger with Jagadamba Power be redundant. When the company is trying to sell non core Godawari Green( its scrapped for the time being) does it make sense to acquire Jagadamba Power. Wouldn’t it be better to enter into a short term PPA as it is now??

  • Cyclical nature of industry

The company was major beneficiary of the high iron ore price in the past few quarters. The iron ore prices are seen to be cyclical. Over the past few months the iron ore prices have fallen by nearly half. The company exports high grade iron pellets mainly to China. Iron ore is beneficiated to produce pellets. Pellet prices usually proportionally to the ore prices. Pellet prices has started falling from its peak. Even when there is iron ore production bottle necks in India, prices may further go down tracking international prices.

NMDC has revised the iron ore prices as on 04.09.21 as under

  • Lump Ore ( 65.53, 6-40mm) @ Rs. 6, 150/- per ton from 7150 per ton in August
  • Fines ( 64.3, - 10 mm) @ Rs. 5,160/- per ton from 6160 per ton in August.

We may expect a further decrease in iron ore prices tracking reduction in international prices. This could have an effect on pellet price as well and we may see EBITDA margins coming down for GPIL. Cyclically, falling iron ore prices are a negative for the company’s earnings.

It was steel demand and steel prices that used to dictate the iron ore prices. However, we are seeing a different trend where the steel prices are going up and iron ore prices are going down significantly. This can be attributed to Chinese policies who are the largest consumers and producers of steel.

The world’s biggest steelmaker is intensifying production curbs to meet a target for lower volumes this year as it works towards a target of reaching carbon neutrality. China is targeting to keep the steel production in this year at last year’s level which will mean production has to be much less in second half of 2021. China cancelled export tax incentives on some steel long products. All these measures ensured lower iron ore demand and hence prices. However, these measures led to higher international steel prices. These measures seems to be slightly politically motivated as well. The big question is “ will Indian steel companies be able to fill the void created by lower Chinese steel exports and benefit from the situation”.

Atleast in the short term we will see margins contracting for players like GPIL and improving for conversion players. Another interesting factor is while the iron ore prices have gone down the Baltic capesize index which tracks iron ore and coal cargoes have rose to the highest level since December 2009. Ideally, the index should have gone down tracking the lower iron ore demand.

To sum it up we may see some very volatile days in terms of iron ore prices. And as a cycle I believe the days of peak margin are behind us. However, in the long term the company holds a lot of promise. The company has shown excellent execution skills in repaying a very high debt of close to 1600 crores in the past 5 years. The company’s license holds a lot of value, particularly when the iron ore mines are being auctioned at very high premium and the company’s mines have license beyond 2050( as I remember from a concall, pls crosscheck). Also it is to be noted that the company is in a transition from an iron ore miner/ pellet producer to an integrated steel manufacturer. Having said that, I believe that the current scenario favors the conversion players than miners.

Discl: no positions currently in GPIL, prices are much above my exit price, trying to understand whats happening currently in steel and iron ore cycle. I may have interpreted the cycle wrongly, so please take decision only after your own due diligence.

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Q2 will be over in 9 days, and book value as on 30 Sep 2021 should be close to 820-830 per share. Book value at end of this year (30 Mar 2022), in 6 months should be 1000-1050/share range (based on earning estimates as they already shared on TV interview that avg pellet price for Q2 will be 13-13500/ton.
This book value doesn’t include intangible assets like iron ore mine license.

Iron ore price in CHINA has fallen by half. In INDIA, iron ore is down only 20% and is still cheaper than iron ore price in China.
Steel prices globally and in India are at record highs, this gives a floor to Indian semi-steel prices.
China pellet prices are down from 16500/ton to 9000/ton or so. So, they have stopped selling to China.
They are now primarily selling in domestic market as they mentioned in the TV interview.
They switch from domestic to exports or vice versa seamlessly depending on where they are getting the best price. This has happened in the past too.

GPIL also sells Billets, Wire-rods and Sponge iron- they touched 1 month HIGH Yesterday as reported by STEELMINT. GPIL is nearly doubling its capacity in BILLETS (0.4 to 0.7 mnton/yr) in a few months.

The valuation comparison I did with Shyam metaliks was AFTER THE FALL of prices in Pellets from 16500 to 11300 range. Valuations of shyam are now 2.3x AFTER considering the fall in prices of pellets to 11300 range.

The dependency on pellets sale will reduce in just a few months, when the expanded billets, sponge iron and wire rod capacity comes online. GPIL has anyway locked high pellet rates for a few months.

Why is no one looking at billet, sponge iron and wire-rod prices as well and why only pellet prices is what I fail to understand, especially when GPIL is expanding capacity in these products.
Pellets internal consumption will increase once this expanded capacity comes online.
Pellets are converted into sponge iron and sponge iron into billets.

At current pellet, billet, wire rod prices quarterly EBITDA should be close to 500 crores, translating into annualised EPS of 450 per share.
Let us say, these prices fall another 20%, even then annualised EPS should be in 350-360 range (per year basis). However, the current prices look more as long term average price.
Neither 200 USD per tonne Iron ore is sustainable price, nor is 60 USD per tonne iron ore long term average price.
We should look at annual avg EBITDA or avg annual Iron ore price, not at daily variations as this is a very volatile commodity.

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A few more points-

  1. New Solar plant will be operational in an year from now. If I am not wrong, that will straightaway add 170 crore of annualised EBITDA - Which is non-cyclical in nature.
    A company earning 170 cr non-cyclical EBITDA would get atleast a 1200-1400 cr mkt cap in itself (if debt is zero).

  2. Steel players like Shyam have high maintenance capex (high depreciation). while maintenance capex/depreciation of GPIL is very low to non-existent. Free cash flow is very high for GPIL (now that debt is re-paid).

  3. No other steel or semi-steel player is putting such a big steel plant vs the current capacity. Details are awaited, but my guess is revenue and EBITDA will nearly double once this steel plant is operational in 3-3.5 yrs, thats a 20-30% CAGR for next few yrs (assuming no increase in iron ore price from here for next 4 yrs). If average iron ore rises with inflation for coming years, CAGR may reach 20-30%+inflation =30-40% CAGR for next 4 yrs.

  4. Today’s update from Steelmint. Prices in semi-steel segment remain near month’s highs. Chinese ore price affect Australian miners directly.
    For Indian companies, we need to look at their local market prices of products they sell.

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Latest update posted today evening by Steelmint

Semi-steel prices are very stable and are going up, rather than down.
It mentions Pellet prices in Bellary at 11,200 and Billet prices in Raipur at 42,750.

Why are these prices not crashing despite iron ore price going down in China?

Is it because Indian iron ore price is already lower than Chinese ore price and unlikely to go down from here?

Another one-

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Two points:

Pellets contribute about 70% of co’s revenues currently. Even after the billet expansion, the % is expected to reduce to around 50% only (1 ton billet needs 1.6 ton pellet; so one can do the math). Iron ore prices in china have fallen more than half. High grade pellet prices have fallen 30-35% or more. So its not as if pellets dont get influenced by iron ore prices.

If you chart landed iron ore prices and NMDC set prices of iron ore, both move in tandem but with a lag. So even if Indian prices have fallen less than Chinese prices today, it may very well fall more tomorrow to bring the discount in line with earlier trend. Discount is because of taxes and will always remain. India does not import iron ore, but prices get set in line with global prices.

Lastly, steel and billet prices are near about highs. But who is to say this will sustain? High product prices and low RM prices imply steel spreads are high. This incentivizes marginal players to start steel production thereby bringing down spreads. How strong would the action of these marginal players be, by when, if at all, will spreads contract, to what extent they may contract before stabilising etc, all remains to be seen.

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