Godawari Power - Any Trackers?

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That’s good enough. 50% will be contributed by non-pellet sales- wire-rod etc, which has higher margins, and stable prices. This will reduce the huge cyclical nature of earnings, increase ROCE, ROE, margins further. The calculations then should give equal importance to pellet prices and prices of billet and wire-rods.
Since, prices of wire-rods and billets are stable and near highs, there should not be a big issue if pellet prices have fallen by 30%.

Earlier, even Finished steel prices and international iron ore prices moved in tandem. BUT, This TREND has been broken now. What most people have missed is that many small mills buy pellets in domestic market and convert it into sponge iron and billets.
Now, prices of Billets and Sponge iron are near HIGHS. If the trend is true, they should be at LOWS, NOT HIGHS. Why are they moving UP for last 1 month? If they are moving up, then pellet prices also have downside protection.

Why has this trend broken- Because earlier steel/iron ore went prices down because of excess supply (steel dumping) from China on other countries. This time, something very different has happened for the first time. China has reduced steel production deliberately, and is reducing exports for the first time. This is leading to kind of steel shortage in US and Australia. Australia steel imports are down big time because China has reduced exports to Australia. It doesn’t have steel making capacity.
So, and this trend is likely to continue as China has said they want to reduce output and exports.

Rather thank just looking at previous trends we need to find the reasons of the current trend, which very few people do, and this is why this forum is here.

No, steel spreads haven’t moved further high in India in last 1 month because sponge iron prices are at one month highs in India. Their prices in domestic market are moving up in India for last 1 month. (Please check 1 month and weekly movement from steelmint, they are moving UP)
40% of steel is made in India by small mills in India who buy sponge iron etc in open market and convert it into steel products. They only get a small margin and still making that margin only.
Anybody can make such a mill. It is a low value add activity.

What’s the biggest value addition in steel industry today?
1. It is owning the raw materials
2. Having a specialty steel plant with higher margins than regular steel.
If someone owns a captive mine at low cost, it is a big advantage- and that company enjoys much higher margin than the rest of the players, till it has the mines.
Incidentally, GPIL already has 1, and will have 2 in another 3-3.5 years. And, it is the cheapest company vs other players.

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My simple point is that one month moves dont determine a trend. 2-3 months back when international iron prices were falling but Indian ore werent, there was chatter that see, since we are already at discount, only the discount narrows, prices need not fall.

This was till NMDC reduced its prices. Even today reduction in indian ore prices is much lesser than reduction in international ore prices. But one cant claim that this will remain as is. Indian ore prices may also fall tomorrow.

Similarly billet prices being high for last one month does not necessarily imply they will remain high. It is possible it remains high, or goes higher. Possible it even falls. Predicting this is not possible. However logical the reasoning may sound.

Earlier, steel dumping by china leading to lower steel prices leading to lower iron ore prices. Today steel production cut by china, leading to higher steel prices (due to lesser exports) YET lower ore prices due to less demand from china. Both sound logical and completely opposite. This is the crux.

The issue is that the industry cannot be modelled in excel easily and hence will always be volatile. And there will be logical sounding reasons to justify both sides.

Discl I am in the camp who thinks steel is set to do well over the next 12-18 months (which is about as far as I may hazard a guess). I own Godawari, Sarda Sandur and Sail.

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Billet prices are not just high, but they have gone up in last 1 month. If we can’t predict the direction, then one can take last 3 months average or current price as the base price.
The fact remains that steel prices crashed when China was producing excess compared to demand, and steel prices have gone up now due to China reducing export and outputs.

China is curbing steel exports and this is leading to shortage of steel in some countries. How can one be bearish on steel and semi-steel prices in this scenario?

Yes, that’s my whole point. You can’t take chinese ore prices on their face value and predict that Indian wire rod and billet prices will fall.
The exact opposite has happened in last 1 month. Chinese iron ore has crashed 50% over a month, but Indian billet and sponge iron prices are going up in last 1 month.
We need to take into account, what’s happening in the real market. What are the actual prices that GPIL is getting.
GPIL is getting 12,000/tonne pellet prices for exports for their high-grade pellets and 11500 for domestic market even now. Billet is 8% higher than previous quarter at 42,750.

The reasons why GPIL scores over all other steel cos-

  1. Very long captive iron ore mine license
  2. Big expansion in next 3-3.5 yrs, which is not possible for any other co. Much higher future growth for next 4 yrs, compared to rest of industry.
  3. Debt free and low depreciation/maintenance capex, so almost entire EBITDA goes towards free cash flows after 25% taxes.
  4. Very low valuations obviously. Lower than I can find in any other stock listed on NSE/BSE with a decent mkt cap.
  1. New growth area- specialty steel under PLI scheme will again have high margins than industry standards.

P.S. Today Iron ore is up 12% to $105. Iron ore is volatile, we need to take 3 months avg, not spot prices.

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263

I was also trying to convey the same.

Currently, pellets contribute to the bulk of the revenues. So it makes sense to consider it rather that products that contributes less than 15%to revenue.

Valuation comparison you put up are interesting but I dont think the valuations of shyam metallics is a good benchmark to consider. Considering, the ipo frenzy we had, I would say they listed the company at a very good time. As @VALUE2017 has already said valuations can align either way( a derating for shyam metallics is also possible)

As for the Indian iron ore prices, NMDC will announce new rates in a couple of weeks . And to add to iron ore availability and export, NMDC used to export the ore at a concessional rate in lieu of reduced export duty at 10% to Japan and Korea against 30% for private iron ore exporters and some railway freight concessions. Govt is understood to have not renewed the LTA for supply of iron ore to Japanese and Korean steel companies after its March expiry. In 2019-20 NMDC exported 2.44 MT of iron ore and in 2020-21 it exported 2.43 MT. There has not been any exports in the current fiscal.

Discl: Iam not saying that GPIL is overvalued or not a good investment pick. Iam just trying to say that it operates in a cyclical industry. Also investment in GPIL worked really well for me. The deleveraging they did was phenomenal. Iam also biased towards conversion players as I have a position in Beekay steel

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For Q2, avg pellet price is 13-13.5k, as mentioned in TV interview. So current pellet price of 11.3k is also not relevant for GPIL.
By the time current pellet prices will become relevant, by that time Billet capacity will be online. So, if you are taking 11.3k pellet price, you should also take billet price in consideration.

Valuation comparison is with all listed commodity cyclical companies, not just shyam.
Infact due to low maintenance capex, low depreciation, mega capex (20-30%/yr growth for next 3-4 yrs), debt free status, GPIL should get higher valuations than other companies.

A debt free cyclical company that would make 1200-1400 cr EBITDA in a down cycle and 2500-3000 cr EBITDA in an upcycle is available at 4200 cr mkt cap. Is there any other similar listed commodity company in Indian market?

Let us say, suppose company doesn’t invest in growth and pays out its almost entire profits as dividends similar to coal india- we are getting this at 30%+ Dividend Yield in that case.

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One of the reasons steel prices have remained high could be because coking coal prices are shooting off the roof. As per Sandur in today’s agm, in dec20-jan21 2020 coking coal prices were 120-125$ per ton. by mar-apr21 they were 160-180. today they are more than 400 usd . and china has been buying from usa at 500+ also (because of some issues in mongolia).

they expect prices to cool off by end of FY due to production resuming in some closed mines in Australia (they mentioned Gregory mine). JSW steel and JSPL managements have also expressed similar views in interviews.

So if coking coal prices cool off, and iron ore remains soft, is steel demand strong enough to ensure steel prices stay at these elevated levels? I dont know.

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Prices move as per supply and demand if I am not wrong. And China’s plan is to reduce supply for the long term- it has just begun- next few months would be more interesting.

Prices used to crash earlier because China used to dump steel in other countries. Now, reverse thing has started.

Today’s updates again show price increase everywhere-

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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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141% bid for iron ore mine placed today by Tata Steel.
That’s a very high premium and a perpetual loss assured for tata steel from this mine- against raw material security.
What times we are in!

Are these big steelmakers foreseeing shortage of iron ore in coming years that we are not able to see? Same like it happened in Coal industry? Even with very large coal deposits, we still import coal.

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For such high royalty what will be the base price of iron ore??
I am unable to understand this royalty system. If anyone can help me to understand this please.

What I can understand is if iron ore price is around 5000 per MT today the royalty paid will be 7000 (140% of 5000)?? Please correct me if I am wrong.

So, If iron ore is at 5000 then why they will not buy from market?? What is the logic of paying 7000 as royalty??

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Cannot there be a value accretive cyclical like Shree Cement, which adds value over multiple cycles of the industry? Are cyclicals only meant to be traded with view of cycles to maximize returns?

Disc: invested, traded, since 4 years

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One can go through this CRISIL report dated Jan 2020

Post the mining auction and change in mining rules, the value of license of a iron ore mine has changed drastically. Supply and price of iron ore in India also has changed permanently.
This is why Tata steel is bidding the iron ore mine at 141% premium and it will be a permanent loss to them.
Are small investors smarter than Tata Steel management? Tata steel doesn’t know that it should not bid for iron ore mine at 141% and have perpetual loss from such a mine?

Also, my calculations are based after the iron ore has crashed from 210 USD to 110 USD. At 210, the EBITDA will be closer to 4000 cr (= current mkt cap), not near 2000 cr.

As @vikas_sinha mentioned, Shree cement is a good example.
Shree cements owns a cheap limestone mine and has annual EBITDA of 4400 cr, with mkt cap of 1 lakh crore.
GPIL has low cost iron ore mine with annual EBITDA of 2000 cr and mkt cap of 4000 cr.
Both are commodity stocks. Both are debt free. Both have competitive advantage of license to a low cost mine.
One difference- GPIL future growth rate will be much higher because of big investment in specialty steel plant . The capex will be equal or more than their current market cap. So, the future growth rate will be lot higher.
Another obvious difference is the valuations.

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GPIL remains a cyclical, commodity stock.

Cyclical stocks trade at 6-10 PE. Debt free cyclical stocks trade at 7-12 PE in Indian markets.

No debt free cyclical commodity stock trades at 3-4 PE in Indian markets.

I have compared GPIL to other cyclical stocks like Rain, Shyam, MOIL, HinCu in above discussions.
Not comparing GPIL to non-cylical stocks.
For example. MOIL
If you see MOIL, it makes 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.

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Once the specialty steel plant is up and running in FY 25, I expect 2 things to happen-

  1. Earnings can potentially double (assuming 110 USD iron ore price).
    Suppose Iron ore price is also 50% up by 2025- then earnings would be triple.
  2. Re-rating- specialty steel plant will obviously get higher multiples, and that too will be debt free. So, I expect the PE to improve to 7-10 range. (which is also very much normal for a commodity stock).

Once both of these events happen, I may exit, or I may continue to hold because company will be again making big free cash flows in FY 25 from mine+steel plant, and will be again doing some big capex which should again double earnings in next 3-4 years. But re-rating play may no longer be there.

GPIL iron ore mining license is valid till 2050. And, there is no other listed stock in the market which has that license. So selling such a stock means, I am selling the license to that mine. Not an easy decision for me.

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In case of new plant, which is going to come in 2024-25 how can we say that GPIL will be debt free and it will not take any loan for capex?

They don’t have this much cash in hand for expansion. Next year earning will be decided only by Iron ore price. Cash required should be more than 5000 Cr. Company claiming that 3000 Cr well be required which feels very low compared to other players expansion cost

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They are generating 1500-2000 cr cash every year.
Capex will start 1 yr from now, and will happen over a period of 3 yrs.
4000-5000 CR cash is needed for capex.

Tell me how much debt is needed?

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I am not sure what cycle you are talking about.

Iron ore price in 2010 was 200 Dollars.
Iron ore price today is 110 USD.

Iron ore price is 50% down over 11 years.
GPIL is making profit because of license to iron ore mine.
Not because of some cycle.

This more looks like bottom of the cycle, if there is any cycle in reality.

I don’t believe in cycles. Though this cycle theory is popularised by general media and if it is true, then it is very good.
Because iron ore price is 50% down over a 11 yr period, so this looks more as a bottom of the cycle.

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The Supreme Court on Friday issued notice to the Central Government in a PIL filed by NGO Common Cause, seeking directions to the Union of India to completely ban export of iron ore, whether in the form of pellets or otherwise or in the alternative to levy an export duty of 30% on export of iron ore in all forms including pellets

Supreme Court Seeks Centre's Response In Plea Against Export Of Iron Ore In Pellet Form To Evade Export Duty

Any idea if GPIL is also affected with this???

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Let me explain the history behind this. There used to be no export duty on Pellets for a long time.
In 2014, Govt of India imposed 5% export duty on pellets.

Only 5% duty led to closure of lot of pellet units and loss of thousands of jobs.
Why did that happen?
Because almost all pellet makers buy iron ore at market rate, convert it into pellets and sell with a 5-10% margin only.
Even a 5% duty killed the pellet industry in India.

Govt realized its mistake and removed the pellet duty in 2016

The govt has freely allowed pellet exports and has reiterated this many times.

However, some parts of Congress keep on filing these cases that pellet export is illegal and govt should impose the duty.
GPIL has its own mine and big margins. 5% duty doesn’t matter for GPIL at all.
But hundreds of small pellet makers will close down with just a 5% duty and lead to loss of lot of machinery, factories and jobs.

This is more of political petitions filed by some Congress guys. Do search history and you will find Congress links in these petitions.
Imposing an export duty is a very anti-business move today.
And small pellet makers who work on 5% margin will go on a march and campaign against the government with even 5% duty.

Basically, the govt wanted pellet industry to develop in India, and that’s why it removed the export tax of 5%. Lot of small businessman and even big ones like JSPL, JSW, Tata have invested in pellet plants.
Putting export duty of even 5% will kill margins, create unemployment with no end benefit. The govt also understands this…and this petition or its various forms has been filed many times and replies also given. Questions also asked in parliament, and govt reply has been recorded already in this matter.

You will find all this on google search.

For example this reply by the govt- do read it.

https://www.business-standard.com/article/economy-policy/no-change-in-export-policy-of-iron-ore-pellets-opinion-under-review-govt-120100801504_1.html

This petition happens at least once every year.
Last year also, this happened-

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