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Ticking all the right boxes!

We initiate coverage on Godawari Power and Ispat Ltd (“GPIL” or “the company”) with a bullish BUY rating. Our rating on GPIL is built on the following conviction:

Backward integration ensures cost optimization to be at the heart of operations GPIL’s financial performance has been highly dependent on its backward integration operations.

The ongoing expansion of the mining operations is central to the company's plans for future investments in capital assets. GPIL manages its iron ore mines in Chhattisgarh, located just 200 kilometers from its steel manufacturing facilities and customers. This proximity not only offers a strategic geographical benefit but also enables the company in reducing its logistics burden. GPIL is increasing its mining output at its Ari Dongri mines, which will serve as the primary source of raw materials for its pelletization and HRC plants in the future. We believe that the mining activities will support GPIL in its goal of becoming one of the most cost-efficient steel producers in the country.

High-grade pelletization propels future growth

GPIL is currently undergoing an expansion on its pellet plants from 2.70 mtpa to 4.70 mtpa of capacity. GPIL adopted high-grade pellets instead of iron ore lumps and blended coal in its sponge iron manufacturing process. These high-quality pellets command a premium over the market prices of standard-grade pellets, in the range of approximately Rs 1,000 to Rs 1,500 per tonne. In FY26, we see about 1.0 mn tonnes of incremental volumes from the FY24 to kick in due to the new pellet plant capacity getting commissioned during the early months of the financial year. Given that this pellet plant is the sole major expansion project planned in the near future, the increase in pellet volumes is expected to significantly affect the company's financial projections.

Healthy balance sheet is a compelling value prop

Being a net-debt free company allows GPIL to allocate new funds for growth projects from internal profits. The reduced interest costs will lead to increased liquidity for the business, enabling it to undertake major capital investments. More importantly, the company’s stock has been trading below its peers over the years due to the debt burden attached to the company’s operations. GPIL is now undertaking a Rs 60,000 mn greenfield integrated HRC plant of 2.0 mtpa capacity. This capex is expected to be met through internal cash accruals and the company’s net-worth capital owing to the strong balance sheet position.

HRC plant paves the way for strong industry and market foothold

Following its expansions in the mining and pelletization activities, GPIL will be strategically positioning itself to advance forward by aiming to become an integrated steel producer. The first step in this direction is the development of the 2.0 mtpa integrated HRC plant. The project is anticipated to be finished between September 2027 and March 2028. We believe that by establishing this HRC plant, GPIL will be able to fully utilize its backward integrated capabilities to enhance its market position as one of the most cost-effective steel producers in the country.

We value GPIL at 6.5x FY26E EV/EBITDA to arrive at our target price of Rs 1,390/sh.

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