Management Interaction Update/Estimates Revision GMDC Buy Target Price: Rs236 :Centrum

Management Interaction Update/Estimates Revision

GMDC

Buy

Target Price: Rs236

CMP: Rs190

Upside: 24%

Pricing and volumes to stay robust, reiterate buy

We interacted with the management of GMDC to get better clarity on recent developments. We remain positive on the stock on account of i) recent approval of pending price increase in regulated Panandharo mine, ii) strong possibility of price increase in merchant mines in H2FY13E (our exp: 4% hike), iii) strong volume growth of 12%/10.2% in FY13E/14E, iv) turnaround in power plant operations and its consequent outsourcing and v) successful implementation of lignite beneficiation project in FY14E. Factoring in higher prices, we revise our EBITDA estimates for FY13E/14E upwards by 6.6%/6%. We believe valuations are at an unwarranted discount to coal peers. Maintain buy with a target price of Rs236.

m  Price increase at Panandharo approved, hikes in merchant prices expected in H2FY13E: Management has guided for price increase in merchant mines soon after monsoons. We expect price hike of ~4% for merchant mines of GMDC in H2FY13E and have factored in overall merchant price increase of 2%/4% for FY13E/14E. GMDC also recently obtained the pending approval for increase in price (from Rs532/tonne to Rs635/tonne applicable from FY12 onwards with a 4% YoY increase hereafter) at its regulated mine (Panandharo) and also received Rs300mn payment from SEBs. As a result, we expect lignite blended realizations to increase by 8.9%/5.2% in FY13E/14E. We observe 18-20% lower landed cost of lignite as compared to CIL coal in Gujarat which strengthens the argument of price increase.
m  Strong volume traction in lignite continues: We expect strong traction in lignite sales volumes to continue and maintain our lignite volumes estimates at 12.7/14 MT (growth of 12%/10.2%) for FY13E/14E. Higher industrialization led growth in Gujarat and diversified customer base of GMDC provide strong volume visibility.  Approvals for increase in EC limits of merchant mines are still awaited and Panandharo (north block) is expected to replace existing Panandharo as the regulated price lignite mine in 3-4 years time.
m  Lignite beneficiation could be a potential game changer: We see setting up of beneficiation plant of 1.5 mtpa at Bhavnagar (scalable if model is successful) as a potential game changer for the company. MoEF approval has been obtained and the project is expected to start operations within 6 months after obtaining pollution control board approval. We see net per tonne value addition of ~Rs200/tonne on account of beneficiated lignite sales and expect 1 MT of beneficiated volumes in FY14E resulting in net value addition of ~Rs200mn. 
m  Lignite power plant shows operational improvement, outsourcing remains the key: 250 MW lignite power plant at Nani Chher has shown operational improvements with average PLF of ~65% in Q2FY13E till date and is expected to reduce its EBIT losses significantly. GMDC is looking to outsource the operations to a third party vendor which remains the key to its sustainable and profitable operations in our view.
m  Bauxite and other divisions remain largely subdued: Company expects bauxite volumes of ~1 MT in FY13E notwithstanding the upcoming closure of VAL’s refinery and subdued domestic demand. Other divisions of fluorspar and manganese ore also remain largely subdued as of now. We see less than 5% revenue contribution of bauxite and other divisions combined for GMDC in FY13E/14E.
m  Valuations – Attractive: We continue to find the valuations highly attractive with the stock trading at 4.7x FY14E EV/EBITDA, which implies a steep unwarranted discount to both global coal miners’ average as well as CIL’s current valuation of 6.4x. The current valuations also remain well below GMDC’s 3 year and 5 year average historic multiples on both P/E and EV/EBITDA basis. We value the stock at 6x FY14E EV/EBITDA to arrive at a target price of Rs236. Maintain buy.

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