Macquarie: Buy Gujarat NRE Coke -Coke inventory to add to party

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Gujarat NRE Coke
Coke inventory to add to party
Event
􀂃 GNC best play in coking coal: GNC is well poised to benefit from rising
coking coal prices. Its mines are not affected by rains and it is also sitting on
300kt (30% of its annual production) of coke inventory, which can now be sold
at lucrative prices. We reviewed our forecasts in consideration of its modified
mine plan, made minor changes while keeping our target price unchanged at
Rs103.

Impact
􀂃 Modified mine plan – focus on development: GNC's mining subsidiary has
filed a revised mine plan and has reduced near-term production to focus on
long-term mine development. It has now forecast 1.7mt and 2.5mt production
against 2.1mt and 3.0mt for FY11 and FY12, respectively. However the rampup
to 6mt remains on track. It has also announced increase in reserves and
resources to 652mt, up by 14%. Also, its mines remain unaffected by rains in
Australia.
􀂃 Inventory – will come in handy: GNC is sitting on 300kt of coke inventory
and coking coal inventory in excess of half a million ton. GNC plans to sell
these over the next two quarters. Already 80kt of coke has been exported in
the Dec quarter. It has also booked two shipments of raw coal directly from its
mine to China.
􀂃 Detailed review of our model: We have not changed our earnings estimate
for FY11 but have raised it by 7% for FY12. We have incorporated: a) lower
near-term production; b) stronger AUD forecasts; c) the impact of larger
inventory of coking coal on next year’s costs; d) tax rates.
􀂃 Earnings risk remain on higher side: Coking coal prices are already
touching US$270/t in the spot market against our forecast of US$229/t for
FY12. Coke prices have also started moving closer to US$500/t as compared
to our forecast of US$473/t for FY12. We estimate that every US$10/t
increase in coke and coking coal prices would increase earnings by 4–5%.
Earnings and target price revision
􀂃 FY11E EPS unchanged at Rs6.10; FY11E up 7% to Rs11.57.
Price catalyst
􀂃 12-month price target: Rs103.00 based on a Sum of Parts methodology.
􀂃 Catalyst: Continued strength in coking coal and coke prices.
Action and recommendation
􀂃 GNC – cheapest coal stock: GNC remains on track to increase its
production six-fold and become one of the top-ten coking coal exporters in the
world. Also, it is trading at a very attractive valuation of 6x PER on FY12E,
which is a 50% discount to its peers. Maintain Outperform.