GMDC - Asit C. Mehta Investment

Monopoly in Lignite Business: GMDC is the only merchant lignite miner allowed to operate in Gujarat. Hence, the lignite market has essentially become a seller's market in Gujarat. Lignite demand is likely to remain very strong as lignite is used as a substitute for costlier imported coal or gas. GMDC has shown volume growth of ~7.3% over the past five years (FY07-FY12) on the back of commissioning new mines. Moving ahead, we expect steady growth in lignite volume over FY12-FY15E on account of commissioning of the new Umarsar mine and brownfield expansion expected at the Bhavnagar and Matano-Madh mines. Additionally, on the back of being the sole player in the state and the absence of coalmines in the surrounding region, GMDC enjoys significant pricing power. This can be reiterated from the fact that the company has been able to increase lignite prices at a CAGR of 14.5% since FY07-FY12, enabling it to easily offset cost pressures.

New Mines to Drive Volume Growth: GMDC is working on several new mines including Lakhpat, Gala, Dalmai Padal, which are likely to provide volume growth. These are Greenfield mining projects at the approval stage and are likely to be operational by FY16. GMDC's oldest mine, Panandhro, is expected to exhaust its reserves in the next four years. The company is likely to start mining in Panandhro North, which is expected to replace Panandhro's current volume.

Outsourcing of Power Plant Operation: GMDC has a 250 MW lignite based thermal power plant at Kutch, Gujarat. The company is facing issues with the bellow in the boiler and has seen a decline in its Plant Load Factor (PLF) to 39% in FY12, leading to revenue loss. GMDC has outsourced power plant operation and maintenance (O&M) activity to Korean Power Company (KEPCO), w.e.f. 1st February 2013 for an annual fixed charge of Rs.330 mn (Incl. taxes) vs. current ~Rs. 480 mn being spent as fixed O&M charges. KEPCO has indicated running the plant at a PLF of 75%. Higher PLF would result in stronger earnings, as fixed costs recovery is dependent on the PLF.

Investment in Renewable Power to Enhance Portfolio: GMDC has been investing in wind power since the past five years and currently has a capacity of 100.5 MW, which would be expanded to 150.5 MW by the end of FY13E. The company has guided for capex of Rs. 5,550 mn for setting up another 50 MW wind farm in FY14, taking its total wind power generation capacity to 200 MW. GMDC is a cash surplus company and its investment in wind power segment gives ROE of 10-11% (post tax), which is better than the pre-tax ROE of 9% generated on the cash surplus.

Mining Other Minerals to Enhance Value: GMDC also engages in mining of other minerals like bauxite, manganese ore, fluorspar, silica, and limestone. At present, their respective contribution to the total revenue of the company is miniscule (compared to lignite and power). However, the immense growth opportunity prevalent in the other minerals and the company's continuous effort to monetize the same is a lucrative proposition from a long-term perspective.

Valuation: Considering the increase in lignite production, adequate reserves life of its mines and pricing power, we expect GMDC to continue registering robust growth. We also believe that the outsourcing of the power plant O&M will improve the earnings in the power segment. At the CMP of Rs. 163, the stock is trading at 8.50x its TTM consensus EPS of Rs. 19.19. We assign a multiple of 9x to the FY13E EPS of Rs. 20.25 to arrive at a target price of Rs. 184. Therefore, we assign a 'BUY' rating to the stock at the current levels.

Source : Equity Bulls

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