Radhika Kamath

While the captive power plant is likely to result in cost savings, operational and financial risks are likely to act as a dampener to profitability.

An investment in the public offer of Godawari Power and Ispat (GPI) can be avoided. Though the company's performance has been reasonable on key parameters, the risks associated with operation and financing make the offer less attractive.The price band for the offer is Rs 70-81.

The price-to-earnings multiple works out to seven times the likely FY-08 earnings at the upper end of the price band on an expanded equity base. We believe this to be stiffly priced compared to the industry average.

Expanding capacity

GPI is in the business of making sponge iron, steel billets and power for captive consumption. It proposes to expand the existing capacities to cater to the group's requirements of steel billets. A part of the issue proceeds will be used to acquire a majority stake in two of its group companies — Jagadamba Power and Ferro Alloys, and Sagar Energy and Steels — to make them its subsidiaries. These companies are undertaking projects for setting up pig iron and power plants.

While the offer document states that these investments are strategic in nature, the possibility of GPI taking them over in future cannot be ruled out. While such a merger may result in operational synergies , the likelihood of a swap ratio going against the GPI shareholders remains high. The company is yet to get mining leases for coal and iron ore; any delay in allocation is likely to affect operations.

The benefits of capacity expansion in the form of cost-reductions will be reflected fully in earnings only from FY-08. The higher component of debt is likely to increase the financial risks; the impact will be more pronounced in the event of a downturn in the steel cycle.

Offer details: On offer are 86,95,000 shares, lead managed by IL&FS Investsmart. The offer opens on March 28 and closes on April 4.

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