Equirus Bullish on Godawari Power & Ispat: Predicts 62% Upside in the Stock

In the past year, Godawari Power & Ispat (GODPI) has been on a remarkable bull run, delivering a staggering 129% return to investors. The stock has also continued its upward trajectory in 2023, posting a 67% increase in value so far.

Despite these impressive gains, Equirus Securities, a prominent brokerage house, foresees substantial potential for further growth in GODPI. Equirus has initiated coverage on the stock, granting it a ‘long’ rating and setting a target price of ₹1,000, implying a substantial 62% upside potential.

Equirus justifies its optimism by valuing the stock at 6 times the forward EV/EBITDA for the next year, which is higher than the global peers’ CY24E average. Over the past 14 years, GODPI has typically traded at an average of 4.4 times EV/EBITDA. However, considering the company’s favorable net cash position compared to elevated debt levels between FY10 and FY20, Equirus believes that the premium valuation is well-founded. Factors like a robust seaborne market, increasing domestic demand for iron ore, and a focus on high-grade pellets are expected to further bolster the company’s fundamentals. In light of these factors, Equirus recommends a ‘LONG’ position on GODPI and sets a target price of ₹1,000 by March 2025.

In the first ten months of 2023, GODPI demonstrated positive returns in eight months, with only February and October in the red, declining by over 14% and 1.5%, respectively. Between March and September, the stock recorded a remarkable 85% rally. Notably, it reached its all-time high of ₹640.10 on September 4, 2023, riding the bullish wave in the Indian markets. However, after hitting this peak, the stock experienced a period of consolidation.

As of now, the stock is trading at ₹618.60, showing a slight drop of around 3% from its peak. Nevertheless, it has more than doubled investors’ wealth, surging by over 142% from its 52-week low of ₹255, which was reached on October 24, 2022.

Equirus Securities outlines several key points to support its investment rationale for GODPI:

1. Debt Restructuring: The company faced significant challenges due to high net debt from FY13 to FY21. However, in FY17, GODPI initiated a debt restructuring process to address the debt crisis.
2. Higher Iron Ore Prices: Between 2019 and 2022, surging iron ore prices significantly boosted the company’s financial performance, shifting it from a net debt to a net cash position.
3. Low-Cost Iron Ore Producer: GODPI maintains its status as a low-cost iron ore producer, thanks to its unique advantages under the Mines and Minerals Development and Regulation (MMDR) regime.
4. Growth Prospects: With new capacities coming online and rising crude steel utilization in India, the brokerage anticipates strong demand for iron ore, which is expected to outpace steel demand.

However, Equirus cautions that iron ore prices above $120 per ton are unlikely to remain stable due to pressures on Chinese steel margins, driven by a sluggish property market and reduced new property construction.

Despite an ambitious capital expenditure plan of ₹3500 crore between FY24 and FY27, Equirus expects GODPI to maintain a healthy net cash position of ₹1200 crore by the end of FY26.

In terms of valuation, Equirus justifies a premium compared to global pure-play iron ore mining firms, given GODPI’s robust growth prospects in the Indian market. The brokerage’s analysis estimates the company’s cash reserves to reach ₹700 crore by March 2025, contributing ₹50 per share to the target price.

Moreover, Equirus doesn’t factor in the integrated steel plant, scheduled for commissioning in FY27, which is expected to yield additional value due to captive iron ore resources. Equirus predicts an EBITDA of ₹10,000 per ton for integrated steel plant operations in FY27-28 with a 90% utilization rate, potentially contributing an extra ₹400 per share in FY28.

In summary, Equirus Securities is highly optimistic about the future of Godawari Power & Ispat, anticipating substantial growth potential despite its recent stellar performance.