Stock Fundamentals

GMDC: BUY

Meera Siva | Updated on October 12, 2014 Published on October 12, 2014

The expected increase in output should boost the company’s earnings



Investors who want to profit from the expected revival in the mining sector, can consider buying shares of Gujarat Mineral Development Corporation (GMDC).

The company is a good bet in the mining space, given its exclusive rights to mine lignite, bauxite and manganese in Gujarat, good margins and expansion plans in mining and power.

The company’s shares were under pressure in the past, falling sharply from the peak of ₹217 in October 2012 to ₹76 in August 2013, due to dwindling reserves hurting output.

However, improved output prospects and improvement in economic fundamentals, that are aiding demand outlook, fuelled a rally last year.

But even after the run-up, the stock is not expensive. At ₹147, it trades at 8.5 times the company’s expected earnings for 2014-15. This is cheaper that its five-year historical average valuation of 11 times and on par with its peer Neyveli Lignite Corporation.

Revenue to grow

GMDC derives nearly 80 per cent of its revenue from mining operations. It also has a presence in the power sector through its thermal and wind power plants. In the mining segment, over 90 per cent of the revenue comes from the sale of lignite, a type of brown coal used mainly in power plants. The company has reasonable pricing power. Even after the recent fall in international coal prices, lignite is nearly 15-20 per cent cheaper than coal supplied by Coal India or imported coal for its customers — primarily small and medium industries.

The fall in coal prices may dampen the prospects of a price hike. That said, the company has not raised lignite prices since February 2013 and any price increase, as demand rises, could boost revenues.

Revenue is expected to increase more likely from volume growth. Unlike other States, increasing mineral output is less onerous in Gujarat for GMDC.

This is because the mining policy of the State Government, which owns 74 per cent of the company, gives GMDC exclusive mining rights for extracting lignite, bauxite and manganese.

GMDC’s lignite output declined to 8.4 million tonnes per annum (mtpa) in 2013-14 from 11.3 mtpa a year ago due to heavy monsoon and falling reserves. But with operations likely to start within the next two-three quarters in its new mine in Umarsar (capacity of one mtpta) and existing mines increasing production, output could increase to 10 mtpa in 2014-15.

Additional volume growth is likely in the next two years, once clearances are obtained for five mtpa total capacity in its mines at Lakhpat, Ghala and Damalai Padal.

In addition to lignite, GMDC also mines around 0.8 mtpa of bauxite and other minerals such as limestone and manganese. The company plans to create value-added products with new joint ventures — an alumina refinery with Nalco and a cement plant with a private company are in the works.

Besides mines, GMDC operates a 250-MW thermal power plant with lignite supplied from its mines. The company has been working with other public sector units in joint venture to set up a 500-MW power plant in Bhavnagar.

Though the operation has faced delays, it could start in the next few months. GMDC also owns a 150-MW wind power plant and a 5-MW solar power plant; plans for an additional 50-MW wind power plant are being worked on.

Robust margins

GMDC’s businesses are highly profitable, with operating margin of about 45 per cent.

In the recent June quarter, the company’s revenue increased 15 per cent year-on-year to ₹424 crore while net profit rose 10 per cent y-o-y to ₹130 crore.

Margins dipped in the recent quarter due to an increase in employee-related expenses associated with a voluntary retirement scheme. Also, overburden removal charges in its open pit mines were higher.

Employee expenses are likely to normalise but higher expenses for land acquisition and increase in extraction costs could dent profit margins.

In 2013-14, GMDC’s revenue and profit dropped 27 per cent and 23 per cent y-o-y due to lower output.

However, with expected ramp up in output, revenue and profits should increase about 25 per cent in 2014-15.

The company is debt-free. GMDC is also a regular dividend payer and its current dividend yield is around 2 per cent.

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