Beyond capacity

IPO REVIEW

Godawari Power is approaching the market to fund its expansion at a time when its capacities are significantly underutilised.

With good growth happening in industry and infrastructure, the demand for steel will continue to grow. Players "� big and small "� are expanding capacities. Chhattisgarh-based Godawari Power and Ispat is entering the capital market with 82,95,000 equity shares of Rs 10 each in the price band of Rs 70-81 to part-finance its expansion project.

The main objective behind its expansion drive is to become an integrated player in the long product segment, especially in wires in the steel business, to scale up operations to achieve economies of scale and ensure consistent supply of material to the group companies. The positives for the company include tax benefits and captive power.

The total estimated fund requirement for the expansion is Rs 173.32 crore, and this is proposed to be funded through the issue proceeds and a sanctioned term loan of Rs 125 crore. Any shortfall will be met through the internal accruals. Post-issue, the promoters' holding will be 63.44 per cent.

Godawari has reported good numbers, and its valuation is in line with its peers'. Its net profit for the six months ended September 2005 was Rs 7.08 crore, on the back of net sales of Rs 89.09 crore. Its sales for FY05 were Rs 172.63 crore, a growth of 60.44 per cent over FY04. The stock at Rs 70 and Rs 81 trades at 7.98 and 9.23 times, respectively, the six-month (ended September 2005) annualised earnings. 
 

FINANCIAL
Rs/crore	FY04	FY05	% Change	Six months  ended '05
Net Sales	107.60	172.63	60.43	89.09
RM/Net Sales(%)	66.94	67.69	0.75	74.36
OPE	21.15	37.40	76.84	13.00
OPE Margin(%)	19.65	21.67	2.01	14.59
Net Profit	7.76	24.10	210.56	7.08
Net Profit Margin(%)	7.21	13.96	6.74	7.94

In comparison, Monnet Ispat's multiple is 8.31 on an annualised basis and the net sales for six months (Sepetember 2005) are Rs 272.9 crore. The multiples for Kanishk Steel Industries and Modern Steel Ltd are 3.59 and 2.63 respectively.

The expansion has already started and a part of plant and machinery order has been placed. "The commercial production is likely to start in the last quarter of FY07," said B L Agarwal, chairman and managing director.

Godawari has a manufacturing unit at Siltara industrial estate, near Raipur (one of the country's emerging steel hubs) in Chhattisgarh. The new project will be located adjacent to this facility.

Promoted by the Hira group, the company is currently engaged in integrated business of manufacturing sponge iron, steel billets and captive power generation. It makes mild steel wire that finds application in infrastructure "� mainly in construction, railways and power generation.

Its products are used by some fast-growing industries. The surplus production of steel billets is sold to the group companies and the sponge iron and steel manufactured are proposed to be marketed through the existing network of its agents.

The company supplies about 80 per cent of its current production to group companies. It does not plan to merge group companies as it is currently enjoying sales tax exemption, which will be lost in case of a merger.

The wire and wire rods industry is highly fragmented with a large number of unorganised players. B L Agarwal said, "We would like to consolidate the fragmented industry and remain in the mild wire manufacturing business to avoid competition from large players."

The company's present capacity utilisation is around 65-70 per cent, which is at par with the industry standard, he added. However, according to analysts, this is lower than the industry standards. The capacity utilisation for sponge iron is over 90 per cent, and for steel it is 87.8 per cent.

In the mild wire business, Godawari Power has a market share of around 15 per cent. Dinesh Agarwal, director of the company, said, "The major risk to the company is the availability of raw material till the expansion is over and a downturn in the industry. However, downswing of 4-5 per cent will not have much impact on the company."

The company has signed a memorandum of understanding with the Chhattisgarh government to set up facilities for manufacturing almost everything related to steel right from sponge iron to iron ore and coal with a total investment of Rs 493 crore.

It is also benefiting from sales tax exemption, which expires in 2012, and income tax exemption under Section 80IA on profits of the power division. The company is also eligible for carbon credit under the Kyoto protocol scheme.

The economic growth is surely a key driver for the steel industry's growth. As such, the increased spending on infrastructure is set to drive the sector, going forward.

However, considering that the company has a utilisation rate of only 65 per cent, it seems like an opportunistic move by the management to capitalise on the buoyant markets.

The valuations in the markets are not cheap. Moreover, the performance of the recent IPOs on the bourses has not been heartening. So, investors can give this issue a pass.