Expansions At Ari Dongri Mines And New Solar Power Initiatives Will Strengthen Future Operations

Key Takeaways

• Expanding mining and pellet plant capacities is poised to boost production, potentially increasing revenue and improving margins through reduced material costs.
  
• Strategic investments in solar power and sustainable gas supply aim to cut energy costs and meet ESG goals, enhancing operational efficiencies and margins.
  
• Declining iron ore pellet production, market uncertainties, and project cancellations pose significant challenges to revenue, profitability, and future growth for the company.

Catalysts

Engages in the mining of iron ores in India.

• The approval for mining capacity expansion of Ari Dongri Mines from 2.35 million tonnes to 6 million tonnes is expected by Q1 FY '26, which will significantly increase iron ore availability for production, potentially boosting revenue and improving margins due to lower raw material costs.
  
• The restart of mining operations at Boria Tibu iron ore captive mines with a capacity of 0.7 million tonnes per annum will enhance the supply chain, reduce the need for external purchases, and positively impact revenue and net margins.
  
• The ongoing increase in pellet plant capacity from 2.7 million tonnes to 4.7 million tonnes is expected to be commissioned by Q2 FY '26. This expansion will allow for higher production levels, potentially increasing revenue and leveraging fixed costs to improve margins.
  
• The strategic investment in solar power plants (70MW and 25MW) to meet additional capacity demands will reduce energy costs over time, enhancing net margins through operational efficiencies and cost savings.
  
• The company's agreement with GAIL for the supply of electrified natural gas for the upcoming pellet plant enhances sustainable operations, which can lead to cost efficiencies and improved earnings, especially under carbon-reduction goals and ESG considerations.

Godawari Power & Ispat Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Godawari Power & Ispat's revenue will grow by 13.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.9% today to 23.5% in 3 years time.
• Analysts expect earnings to reach ₹18.7 billion (and earnings per share of ₹29.94) by about April 2028, up from ₹8.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 15.5x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 20.4x.
• Analysts expect the number of shares outstanding to decline by 6.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.18%, as per the Simply Wall St company report.

Godawari Power & Ispat Future Earnings Per Share Growth

Risks

• The company experienced a decline in quarterly revenue, EBITDA, and PAT due to lower production and realizations of iron ore pellets, which indicates challenges in maintaining revenue and profitability.
  
• Market uncertainties driven by global iron ore trade policies and a potential decline in demand from China could negatively impact revenue derived from international operations.
  
• The decision to cancel large-scale projects like a greenfield integrated steel plant and the venture into OPVC pipe manufacturing due to high costs and competitive challenges could limit future growth and diversification, potentially affecting net margins.
  
• Delays in obtaining environmental clearances and cost overruns associated with infrastructure and new capacity expansions pose risks to the planned increase in mining and pellet production, impacting projected earnings.
  
• The increasing domestic competition in the pellet market due to new and upcoming capacities could exert pressure on pellet price realizations, thereby affecting revenue and margins.

Valuation

• The analysts have a consensus price target of ₹235.0 for Godawari Power & Ispat based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹79.3 billion, earnings will come to ₹18.7 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 14.2%.
• Given the current share price of ₹193.69, the analyst price target of ₹235.0 is 17.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.