Mining And Pellet Plant Expansions Will Increase Production Capacity By FY '26

Key Takeaways

• Strategic expansions in mining and pellet plant capacities are set to significantly boost production and earnings potential by the middle of the next fiscal year.
  
• Initiatives in solar power and stable gas supply agreements are expected to enhance operational efficiency and improve cost management for higher net margins.
  
• Strategic missteps and market challenges threaten revenue growth, as escalating costs and competition impact financial stability, with global and domestic pressures affecting sales and operational expansion.

Catalysts

Engages in the mining of iron ores in India.

• The approval for mining capacity expansion at Ari Dongri's mines from 2.35 million to 6 million tonnes is expected by Q1 FY '26. This expansion is likely to increase revenue from higher production capabilities.
  
• The company is increasing its pellet plant capacity from 2.7 million to 4.7 million tonnes, with commissioning expected by Q2 FY '26. This scale-up is anticipated to enhance earnings through increased product volumes.
  
• GPL is setting up a solar power plant to support additional capacity requirements, providing cost savings and operational efficiency that may boost net margins.
  
• Godawari's strategic agreement with GAIL for the supply of electrified natural gas for its upcoming pellet plant for seven years could ensure cost stability and potentially improve net margin.
  
• The potential for increased domestic steel demand by 8% to 9% in 2025, driven by infrastructure and housing sectors, could elevate revenue as the company is well-positioned in domestic markets with strategic expansion plans.

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 February 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 9.9x on those 2028 earnings, down from 13.7x today. This future PE is lower than the current PE for the IN Metals and Mining industry at 19.9x.
• 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 14.45%, as per the Simply Wall St company report.

Godawari Power & Ispat Future Earnings Per Share Growth

Risks

• The company dropped its plan to set up a 2 million tonne greenfield integrated steel plant due to incorrect initial CapEx estimations and escalating costs, now projected at ₹8,000 crores, which could strain financial resources and capital allocation, thereby impacting future earnings.
  
• Increased competition from new and existing pellet plants, both domestically and internationally, could exert pressure on pellet prices and affect revenue growth margins as Godawari Power & Ispat expands its own pellet capacity.
  
• Global market uncertainties, including tariffs and economic shifts affecting the iron ore market, may indirectly impact the company's export potential and competitive positioning, thereby affecting sales and revenue projections.
  
• Domestic steel market challenges, such as increased imports and evolving global trade policies, could also impose risks to stable demand and pricing, potentially impacting Godawari Power & Ispat's revenue from steel-related operations.
  
• The decision to postpone the setup of an OPVC pipe manufacturing plant due to rapid advancements in competing Chinese technologies highlights a reactive strategic posture, which could impact the diversification of revenue streams and overall business growth prospects.

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 9.9x, assuming you use a discount rate of 14.5%.
  
• Given the current share price of ₹171.71, the analyst price target of ₹235.0 is 26.9% 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.