Godawari has also entered the list of suppliers for high grade pellet where it will command higher premium.High grade pellets are largely expected to be sold into term contracts as opposed to individual spot cargoes, as the usage of new products in the blast furnace might cause some disruption to steel production at a time of attractive steel margins.
The Company in their recent concals had advised that gradually they are shifting to high grade pellets and the CAPEX requirement for the same is almost Nil and which has also been done by the Company.
The Company had also recently received approvals for expansion of its Iron Ore benefaction plant from 1MTPA to 3.28 MTPA which will be utilised by it for producing high grade pellets.
Why China is preferring high grade pellet??
There are two main reason for this:
High grade pellet in Blast furnace requires lesser amount of Coal for steel production. Lesser amount of burning Coal in Blast Furnace results in less coal energy consumption(and obviously lesser coal consumption) which leads to lesser pollution. reducing pollution has become a thing of paramount importance in China. You can produce steel in China if the process is less polluting so their survival is now dependent on low polluting feed to Blast furnace.
This also results in reducing their Energy/Coal expense.
When you are operating at full capacity utilization , high grade pellet increases your output because blast furnace has a fixed capacity and if amount of Coal to be fed is decreased then you can charge/input extra pellet in Blast furnace which will led to higher output for a given capacity i.e with a given capacity your steel out put will be higher if you charge pellet instead of Coal. When you are making high margins in your product you would always prefer to operate at full capacity that to with maximum output.
The above are two main reasons which are driving demand for high grade pellet.
Further due to lower coal handling and high grade pellet, the duration of cycle of steel production is also reduced in Blast furnace for example if your steel cycle in Blast furnace with low grade Iron ore is X hrs then because of high grade pellet it will come down by 3 to 4 % because of which the efficiency of Blast furnace will increase by 3 to 4 %.
Figures upto Sept 20 taken from Screener.
Assumption :For Sept 20 EBIDTA taken on anualised basis as for FY 20-21.
Group will be debt free by Q1 assuming sale of Solar assets and cash inflow of Rs 214 Cr by its sale.
For Mar 22 EBIDTA has been calculated at Rs 700 Cr and 1000 Cr.
As on 31.03.21 and at Rs 700 Cr EBIDTA, EV/EBIDTA is 4.96 assuming Share price of Rs 1200.
The management has not yet announced the date of Q4 and annual results. A SGM is scheduled on 12 Jun - which is more than a month away. Any idea anyone ? In the day there has been a drastic fall of close to 15 percent . Any clues ???
Fall is in overall in Metal Stock as there had been a considerate one way rally in all Ferrous metal stock. Further there is inflation risk in US and other markets because of which there is risk aversion and profit booking. In a commodity cycle the risk we carry is that we never know where the peak is??
It will be a real test for Iron ore prices which will be separating men from the boys i.e Actual demand vs speculation.
In cyclical stock when the cycle is in uptrend it rewards you with 3x to 6x return within a short period of time, however we always live with a constant fear as to when the cycle is going to reverse. Problem with cyclical stocks is that when market downgrades them it downgrades them below their fair value.
Market is testing our convictionâŚ
Dividend of Rs 13.5 (In addition to interim dividend of Rs 5)
Proposal to set up new Captive Solar Power plant of 250 MW at a cost of Rs 750 crores with through internal accruals
Standalone
Revenue from Operations: QOQ - Rs 1236.64 Vs 953.8 Crores
YOY - Rs 1236.64 Vs 646.69 Crores
PAT: QOQ - Rs 303.94 Vs 203.03 Crores
YOY - Rs 303.94 Vs 26.95 Crores
EPS: QOQ - 86.26 Vs 57.62
YOY - 86.26 Vs 7.65
Results are too good and avg realization for current quarter q1, will be higher than last quarter q4. So This year will be very exciting in term of operational performance and ofcourse will achieve zero debt targetâŚ
New capex of 250 MW solar power for captive consumption announced - Rs750cr (capex per MW low at Rs3 cr)
Strong dividend at Rs13.5. Total for FY21 is Rs18 but waiting for their dividend policy (likely in Annnual report). This will result in energy cost savings of Rs170 cr . Not bad. Pay back period under 5 yearsâkind of okaish
Internal and Cost auditors appointed (indicates improved corporate governance)
GPIL in talks to sell Godawari Green - if it goes through it will be positive.
Iron ore mining capacity to be up from 2.1 mtpa to 3 mtpa in FY22. This is not new. Hopefully it happens sooner than later.
Overall, Godawari will become a debt free, backward integrated company (captive iron ore) with lowest energy costs. A strong moat in the making in my view. Should deserve a decent multiple.
Few points covered in GPIL presentation give good insights into current situation of iron ore and pellets market.
International Market
Iron ore prices have climbed to US$ 233/t, touching multi-year high, and is now trading at US$ 200/t. Among the 3 major iron ore producers globally only Vale has been projecting higher production in FY22. The demand supply is expected to remain tight for next 1-2years.
Pellet prices have been tracking higher iron ore prices and have remained strong at US$241/t CIF China, down from recent peak of US$268/t. China is focused on decarbonisation of the economy and this has increased demand for higher grade pellets and iron ore.
Domestic market
Indian iron ore prices have almost doubled in last 3 months to 9300/t for 62% Fe (Orissa iron ore fines).
Indian iron ore production declined by 44mnt in FY21 and at the same time cost curve got bumped up as the winning bid premium on recently held auction in Odisha has been between 90%-150% of IBM iron ore prices.
Pellet prices in India have hit 10 year high. Domestic Pellet demand & prices are on rise due to shortage of iron ore. Current pellet prices are trading close to 15,000+ per tonne for 64%/63% Fe. Q4FY21 pellet realisations were at 11718 per tonne.
Great Presentation and staggering results by godawari again
Key takeways for me
Debt reduction
Long term gross debt (standalone) reduced from INR1,055 crore to INR 457 crore;
further reduced to INR 193crores as on 25 May 2021 !
This is clearly a management that walks the talk. Staggering turnaround in business and have made full use of the cycle. With the current repayment rate debt should be paid off in a couple of months and promoter the shares can be be depledged. Major players would enter post depledging which should result in significant rerating.
Godawari 2.0
250 MW solar plant to be setup by the company using internal accruals ( The funding for this could be avaiable from operations in Q2 and Q3 FY21 itself)
Annual EBITDA (savings) from the power plant would approximately be 170 crores which is not dependent on iron ore prices which is a major plus .
Low cost expansions
i) Iron ore expansion from 2.1 MT to 3.0 MT
ii) Iron ore benification from 1.1 MT to 3.3 MT
iii) Pellet expansion from 2.1MT to 2.4 MT
iv) Sponge iron from 0.49 MT to 0.59 MT
v) Steel billets from 0.4 Mt to 0.7MT
Total cost of these expansions is only 125 crores . All of which could conservatively add 15 -20% to annual EBIDTA going forward. They aim to have this entire capacity onstream in FY22 itself.
Management is not only ensuring complete utilisation of the exisitng cycle but also offering significant protection against any risk related to the reduction in ore prices.
Even assuming a worst case scenario where 2 years down the line the pellet prices reduce by 50% ,the company with the current measures should be able to post an annual EBIDTA of 1000 odd crores .
What we are essentialy getiing is a debt free company quoting at EV/EBIDTA ratio of about 1.2 at current prices and and a ratio of 3 considering a worst case scenario.
I have question regarding valuation - if the company reduces debt significantly, the book value expands and it will expand such that it P/B reduces further, like it happened just now, P/B was more than 2 before the results and itâs less than 2 after the results. Going forward if thereâs no debt, then wonât this make the valuations look cheap (P/B=1) ?
