Corporate Report

Published: Dec 29, 2021
Updated: Dec 29, 2021

GODAWARI POWER AND ISPAT: A Remarkable BiMiracle

Powered by the inspiring stewardship of Managing Director B L Agarwal, Godawari Power and Ispat (GPIL), the integrated steel company having captive iron ore mines to manufacture iron ore pellets, sponge iron, steel billets, wire rods & wires has cocked a snook at Covid-19’s supply chain nightmare by producing its main raw material, iron ore from its own mines. Not enough, it has a captive power plant to ensure regular power supply at a sustainable rate, while the icing on its self-sufficiency cake is the modern technology used to manufacture of high grade pellets and steel wires rods . What is more, GPIL has initiated an imaginative exercise to add value to iron ore pellets – which fetch higher prices and have emerged as a major driving force behind the surge in its earnings. The numbers for fiscal 2021 speak for themselves – the highest-ever sales revenues crossing Rs 4,000 crore as well as the highest-ever net profit of Rs 625 crore. Little wonder that the Mr. Dinesh Gandhi, a financial wizard and the company’s Director, has termed fiscal 2021 ‘the best year’ in GPIL’s history spanning over two decades.

The company with average performance all these years has pulled off an extraordinary show in the pandemic fiscal year ended March 2021 which was driven by the captive iron ore and pellet manufacturing facilities of 2.4 million tons led by supply constraints in global and domestic market. The robust performance led to a spurt in stock price and the scrip which was on offer around Rs. 153 a few months ago shot up to as high as Rs. 1500, before settling around Rs. 1375.

The dramatic transformation for this not so well-known mid cap steel company over the last 5 years was led by increase in its captive iron ore mining capacity from 2017 onwards, cost reduction & operating efficiency improvement over this period. With average performance of the Company prior to 2017-18 high debt and institutional as well as retail investors not even looking at the scrip, though available at a very cheap price – was brought about in the pandemic year of fiscal 2021, when the company notched up its highest-ever consolidated sales turnover of Rs 4,000 crore and earned the highestever net profit of Rs 625 crore in its two decades of existence.

What is more, there was so much free cash flow that the management could wipe out its huge debt making the company almost totally debt-free at standalone level. Not only this despite such a dramatic increase in its share price, the Company continues to trade very cheap as compared to its mid-cap pear group and even large cap steel companies. For the comparative valuations is as under: (See the table on page xxxxx) Enthused by this dream-like performance, the board of this Raipur-headquartered Hira group company, headed by its visionary managing director Bajrang Lal Agarwal proposed an unbelievably high equity dividend of Rs 18.5 per share (including interim dividend of Rs. 5 per share paid earlier).

Needless to say, there was a rush of investors to buy GPIL shares and their price skyrocketed from a low of Rs 150-155 to cross the Rs 1,000 mark and reached nearly Rs 1,500. According to director Dinesh Gandhi, the extraordinary performance of GPIL is thanks to Managing Director BL Agarwal’s innovative framing of a three-pronged strategy for rapid and sustainable growth. Accordingly, the company resorted to an integrative approach of having its own mines to produce iron ore, the main raw material. This step assured a regular supply of iron ore at reasonable prices – cutting out the profits of mine owners and middlemen. Besides, it has sharpened the competitive edge of the company.

Instead of selling iron ore in the market, the company started using it in its own production of steel and achieved a major value addition — as steel prices shot up, the company’s earnings too skyrocketed. Likewise, in the case of iron ore pellets, the company upgraded them so as to fetch higher prices. Thanks to this value addition, pellets have emerged a key driver in GPIL’s earnings. The company also set up a captive power plant which has led to substantial savings in power costs.

ROAD TO ZERO DEBT

Secondly, the company concentrated on reducing its debt which was as high as Rs 2163.4 crore in 2017. GPIL sold its non-essential assets, skipped dividends, expanded production capacity, enhanced value additions and took cost rationalisation steps to bring down the debt burden steadily to Rs 193 crore as on May 25, 2021. As a result, the net debt-to-equity ratio came down from 1.1 in fiscal 2020 to 0.42 in fiscal 2021 and the standalone long term the debt was totally wiped out, making GPIL debt-free company at standalone level. Thirdly, the company endeavoured to push up its free cash flow (FCF), which was enhanced from a negative level of Rs 316 crore in fiscal 2017 to a positive Rs 777 crore in fiscal 2021. These three strategic initiatives changed the very shape and size of the company, taking it to its enviable position today. „ before settling at Rs 1,375.

This miraculous transformation is being attributed to an imaginative and effective growth strategy devised by the company to (a) convert GPIL into an integrated entity, (b) take steps to boost free cash flow (c) make it a totally debt-free enterprise on standalone basis and (d) concentrate on boosting value addition.

WINNING MOVES

Towards this end, the company has ensured the availability of iron ore, its main raw material, by owning mines at two places in Chhattisgarh. It has also set up a captive power plant in order to ensure regular availability of power at a cheaper than-commercial rate. Again GPIL has gone for value addition by upgrading iron pellets as these fetch very high prices in the market. As a result, pellets have emerged as a major driver in pushing up operating profits.

“Growth is a way of life at the Hira group. We are aiming at carbon-neutral growth and in order to achieve this, we have decided to set up a Solar PV plant to meet increased requirement and to replace part of its thermal power capacity.

— B L Agarwal, Managing Director

The flagship of the Hira group GPIL was floated in 1999 with a view to setting up an integrated steel plant with captive power generation under the stewardship of Mr. Bajrang Lal Agarwal, who is a techno-commercial visionary with wide experience in commissioning and running Steel & Ferro Alloys plants. The company has integrated steel plant with a dominant presence in maufacruring of high grade iron ore pellets majority of the production is exported to China and other countries. It also produces sponge iron, billets, ferro alloys, captive power, wire rods, steel wires, oxygen gas etc. GPIL has also been awarded the rights for iron ore mining for captive consumption, as a result of which it now traverses the entire value chain in steel manufacturing and an integrated steel maker — from raw material to final product. GPIL is jaisalmer district of Rajasthan. The Company has long term PPA with NTPC Vidyut Vypar Ltd (subsidiary of NTPC) for selling power generated by solar thermal power plant at a tariff of Rs 12.20 per unit.

"About 3 years ago, we were hardly doing value addition of 2 lakh tonnes of sponte iron, but now we have already reached 4 lakh tonnes of pellets and going forward we are aiming as 7 lakh tonnes.”

— Abhishek Agarwal, Executive Director

DOUBLING GROWTH

Thanks to the remarkable business acumen of the farsighted founder and Managing Director, and help from a competent team, GPIL has recorded steady growth since its inception. During the last five years, its sales turnover (on a standalone basis) has more than doubled from Rs 1,546 crore in fiscal 2017 to Rs 3,641 crore in fiscal 2021, with the profit at net level amounting to Rs 625.76 crore in fiscal 2021, in striking contrast to a loss of Rs 77.43 crore in fiscal 2017. The company’s financial position is very strong, now with reserves at the end of March 2021 standing at Rs 1,163 crore – over 34 times its equity capital of Rs 34.11 crore. In the space of financial management, GPIL has slashed its debt burden drastically during the last five years from around Rs 2,169 crore to Rs 193 crore. To achieve this goal, it resorted to daring methods like pushing up cash flows and controlling outgo, for which the company even skipped paying dividends for years even though it was in a position to pay handsome dividends. Recently, to ensure that shareholders are not deprived of their due returns on their investment and in order to compensate them, the board of directors has proposed a fantastic dividend of 185 per cent (Rs 18.5 per share of the face value of Rs 10 per piece).

The pandemic hardly dented GPIL’s performance in fiscal 2021, when it generated an unbelievable free cash flow of Rs 900 crore. This bounty was mainly used in deleveraging the balance sheet and reducing the debt by over Rs 600 crore to bring down the burden to Rs 457 crore as on March 31, 2021. Notes Director, Dinesh Gandhi, “During the first two months of the current fiscal year, we have further reduced the debt to Rs 193 crore. Besides this remarkable achievement of GPIL, the management has repaid around Rs 50 crore of term loan in Godawari Green Energy (its material subsidiary) and also made Ardant Steel (a material subsidiary till Dec, 2020) debt-free. The consolidated repayment for FY 21 is Rs 723 crore, besides also repaying debt of Rs 464 crore in GPIL and Rs 15 crore in the current year. This is perhaps an unparalleled debt reduction exercise in the history of the Indian corporate sector by a mid cap company.”

CARBON-NEUTRAL PLAN

The mantra of growth is a way of life at the Hira group. The visionary in Mr Agarwal has devised inno-vative strategies to sustain the pace of growth of the company, going forward. One such plan is to aim at carbon neutral growth and in order to achieve this, the management has decided to meet its increased power requirement and by selling off its coal-based thermal power plant and set up a 250 MW solar PV project.

Elaborates Mr. Gandhi, “We will be utilising the existing land parcel which we had acquired earlier for setting up the coal-based thermal power plant. This parcel of land admeasuring over 900 acres will be sufficient to set up the 250 MW solar project at an estimated cost of Rs 750 crore. The project will be funded mainly out of the internal accruals and some bank credit. The solar PV plant, which will run at about 17 per cent to 18 per cent PLF, is expected to generate 370 million units of electricity per annum. The project is expected to be commissioned by Q3FY23.”

Adds Abhishek Agarwal, dynamic executive director, “We are in advanced negotiations with the prospective buyer of the solar thermal plant and we hope to close this transaction during the current year. Proceeds from this transaction will be utilised to finance the solar PV project, besides settling the balance long-term debt and rendering the company a totally debt-free enterprise.”

“The longterm prospects for the company are all the more promising as various expansions will be adding to the topline as well as the bottomline.”

— Siddharth Agarwal, Director

Fromprofit of the fiscal 2021, the company has repaid Rs. 600 crore debt to bring it down to Rs. 457 crore at the yearend. It was further reduced to Rs. 183 by June 2021, Now even the balance small debt has been wiped out making GPIL a totally debt-free at standalone level.”

— Dinesh Gandhi, Director Finance

This replacement strategy will be highly profitable as the internal rate of return on the solar PV plant will be around 24 per cent against just 12 per cent in the case of the existing thermal plant.

NEW STEEL PLANT

Another strategic initiative for sustainable growth going ahead will be expansion of the company’s steel capacity. Reveals Mr. B L Agrawal, “This will be achieved through the existing mine and by setting up a greenfield steel plant. The Company has recently received environment approval for upon receipt of consent to operate iron ore production from the existing mine will shoot up. This will make the company self-sufficient in its iron ore requirement by the end of fiscal 2022. Adds Mr Abhisek Agarwal, “We will continue to leverage our portfolio flexibility to maximise profitability.”

For the next phase of growth, the company has signed an MoU with the Chhattisgarh government for setting up a greenfield steel project. Says Mr Gandhi, “The management is in search of land and once this land is finalised , it will take 18 to 24 months for setting up the project. Then, details like capacity, product range and cost as well as the mode of finance will be worked out. Meanwhile, the company is undertaking a programme of de-bottlenecking and expanding the capacities of the existing plants. The company will invest in capex to further increase captive mining iron ore beneficiation and increase in steel billet capacity. The capacity of the Aridongri mine will be raised from 1.4 million tonnes to 2.3 million tonnes, the steel capacity will be raised from 4 lakh tonnes to 7 lakh tonnes, the sponge iron capacity from 5 lakh tonnes to 6 lakh tonnes, the pellets capacity already increased from 2.1 million tonnes to 2.4 million tonnes, and the mining capacity from 1.4 million tonnes to 2.3 million tonnes. This expansion will be completed by the end of the current fiscal year.”

Maintaining that the company has been continuously increasing its value addition in pellets, Mr Agarwal adds that high-priced pellets contribute significantly in pushing up the operating and net profit. “About 3 years ago, we were hardly doing value addition of 2 lakh tonnes of sponge iron, but now we have already reached 4 lakh tonnes of pellets and going forward we are aiming as 7 lakh tonnes of pellets at the existing location. Our pellets are fetching very high prices of around Rs 15,000 a tonne.”

STOCK CHERRY!

Maintains Siddharth Agarwal, a director who is an efficient and far-sighted operations expert, “The long-term prospects for the company are all the more promising as various expansions will be adding to the topline as well as the bottomline.”

According to experts, the sales turnover of the company will cross the Rs 5,000-crore mark within a couple of years, with a corresponding improvement in the bottomline. Shareholders of the company should reap a rich harvest going ahead as the management has adopted a pro-investor dividend policy. The cherry on the cake is that the stock price has spurted to cross the Rs 1,300 mark, while observers feel that even at the current rate, the stock is under-priced, viewed in the context of the future growth prospects of the company.

GPIL ENTERING HIGHER ORBIT OF GROWTH

Ticking all the right boxes

Fiscal 2022 will prove to be a historic year for Godawari Power and Ispat as the company has entered a new phase of growth which will take it to newer heights unimagined during the last two decades. What is more, in the coming years the valuation of the company’s shares will witness high levels unheard of by the investors all these years. A fully integrated structure – manufacturing from the main raw material of iron ore to the final steel wire product — captive power generation, and strong financials with a totally debt-free balance sheet have come together to transform the size and shape of the company.

Consider:

• The company has two captive iron ore mines with a capacity of 2.1 million tonnes, the delivered cost of which works out to Rs 2,300-2,400 per tonne, while the market rate for iron ore is more than double at around Rs 5,500-6,000 a tonne (recently it had gone up to Rs 10,000 per tonne). This regular, sufficient and very cheap availability of raw material has honed the competitive edge of GPIL. What is more, the company is in the process of expanding the iron ore mining capacity to 3 million tonnes and its reserves as of now are enough to last for 20-plus years.
• The company is setting up a solar power plant. Low-cost capacity expansion and captive solar power will drive margins and earnings involving an amount of Rs 750 million to increase: (a) its iron ore mining capacity from 2.1 million tonnes to 3 million tonnes; (b) iron ore beneficiation capacity from 1 million tonnes to 3 million tonnes; (c) Steel Billets capacity from 0.4 million tonnes to 0.7 million tonnes. This expansion will lead to an increase in sustainable advantage by another Rs 270-300 crore. In addition, the company is looking to add a 250 MW solar plant for captive use at a cost of Rs 750 crore. This will reduce the power cost from the current rate of Rs 5 per unit to less than Rs 2 per unit, leading to a lot of savings.
• The company has made its balance sheet a strong one by very nearly wiping out standalone debt — from around Rs 2,000 crore to Rs 193 crore. Now, it is in the process of selling its stake in Godawari Green Energy, which will make the company a totally debt-free corporate entity.
• There has been a paradigm shift in the policy for iron ore allocation of mines. After the change in regime of free allocation of iron ore resources to auction of iron ore mines, it saw heightened bidding. This has had two major impacts: first, most of the erstwhile merchant mines were taken away by large steel companies, in the process reducing retail supply of ore. Secondly, the royalty bid was on an average around 90-100 per cent of iron ore’s selling price and this has increased the cost curve permanently by Rs 1,500 a tonne.
• GPIL is trading at a mere 2.4 times the FY22 EV/EBITDA. Even on a sustainable EBITDA assumption of Rs 1,000 crore, it is trading at just 4.8 times the EV/EBITDA. the company’s valuation will surge despite a 10-fold spurt in recent months. This means that the market price can easily cross the Rs 2,000 mark. Needless to say, all these calculations will go wrong if there is a crash in global iron ore prices or an imposition of export tax on iron ore pellets!