GMDC - Volumes disappoint but expected to recover - Centrum

GMDC's volumes at ~2.5MT (down by ~11%) disappointed, but management's clarification on low demand from local brick makers due to lack of approvals (which has now been resolved and back on track) has provided visibility on recovery from Q4FY13E. Power division reported EBIT loss on account of low PLF in wind power. We have cut our volume and realization estimates for FY13E/14E due to Q3 volume drop and delay in hike in merchant prices. We cut our target price to Rs225. Maintain Buy.

Volumes disappoint and fall by ~11% YoY: Lignite volumes stood at 2.48 MT, down by ~11% YoY. The volume trajectory was down from all the merchant mines and demand was affected due to delay in clearances for brick and ceramics makers. Bhavnagar mine met with a rough production patch which led to volume loss.

Negative EBIT from power operations: Thermal power plant operated at ~52% PLF and generated 284mn units whereas wind power PLF was at a low 10%. EBIT loss from power division stood at ~Rs22mn, but thermal power plant had a positive EBIT of Rs10mn and has now been outsourced to KEPCO for operations.

EBITDA margin fall more than expected: EBITDA margin fell to 49.8% during the quarter and EBITDA stood at ~Rs1.76bn. Lower volumes at the lignite division and lower PLF from wind power were mainly responsible for the EBITDA underperformance.

Conference call highlights: Demand from brick makers will return to normal as issue of clearances have been resolved with MoEF. GMDC received all clearances for its 1 mtpa Umarasar mine and 1 ltpa Mewasa bauxite mine and is expected to start mining from Apr-13. Thermal power plant operations has been handed over to KEPCO from Feb-13 and fixed cost payout of Rs280mn p.a will be paid to them till Aug-13 post which performance based payout would be followed with PLF threshold of 75%. Volume growth is expected to remain strong with FY14E volume target of 14.2MT and price hike of ~Rs100/tonne across merchant mines is expected to be taken from Mar-13. Increase in bulk diesel prices is expected to result in cost of production increase of ~Rs90/tonne for Rs10/ltr hike. We see pressure on lignite volumes due to demand and quality issues and reduce our volume estimates by 7.9%/2.9% for FY13E/14E. Due to delay in price hikes at merchant mines we also reduce our blended realization estimates by 6.6%/4.4% for FY13E/14E. Coupled with increase in cost of mining on account of diesel price hike, our EBITDA estimates are revised downwards by 10.5%/7.7% for FY13E/14E. Increase in wind power capacity set up is to continue with 50MW/100MW addition in FY14E/15E.

Valuations: target price cut, maintain Buy: We remain positive on the volume growth story in the company but are disappointed with the delay in price hikes and additional wind power investment. We value the company at 6x FY14E EV/EBITDA and cut down our target price to Rs225 from Rs244 earlier. Maintain Buy.

Source : Equity Bulls

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