Godawari Power & Ispat margins likely to improve

June 30, 2008

June 30th (Economic Times) – Godawari Power & Ispat has received an ‘in principle’ approval from the forest department for mining iron ore from 107 hectares at Ari Dongri in Chhattisgarh, which was pending for 18 months. This is a major milestone achievement in obtaining the final mining approval.

Now, the company will be able to complete all legal formalities to get the final mining licence within three months. Ari Dongri has high grade lumpy ore that is suitable for sponge iron production. Iron ore production is expected to be ramped up to 400-600 kilo tones per annum (ktpa) in FY10. The company is currently buying iron ore from private miners at ~Rs 4,000/tonne.

Once the iron ore mine is operational, the cost of mined iron ore will be ~Rs 1,000/tonne, which will generate savings of more than Rs 100 crore in FY10 due to substitution of purchases. During FY09, sponge iron production is expected to increase 17% and margins are likely to improve due to substantial increase in sponge iron and steel prices, while the cost increases will be moderate.

Margins have already expanded, as is evident from the recently announced Q4 FY08 results. The current prices of sponge iron and steel are substantially higher than the average prices during Q4. Hence, margins are likely to be even better in subsequent quarters. The stock trades at a price-to-earnings (P/E) multiple of 4.1x FY09E and 2.5x FY10E. If the savings of Rs 100 crore on account of captive mining of iron ore are factored in, the stock trades at a P/E of 1.7x FY10.

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