GMDC - Q2FY13 Result Update - Centrum

Q2FY13 Result Update

GMDC

Buy

Target Price: Rs244

CMP: Rs206

Upside: 18.3%

Strong operational performance, maintain buy

GMDC reported better than expected EBITDA margin of 56.9% (higher by 1390bps YoY) as lignite volumes improved by ~20% YoY to 1.96 MT. Net sales grew by 56.6% YoY and EBITDA by 107% YoY as costs were lower on operational improvements. Power division reported higher EBIT as the lignite power plant reported positive EBIT of Rs20mn. We see hikes in merchant pricing ahead due to favourable demand supply situation in Gujarat market and also higher landed cost of Coal India’s similar calorific value coal. We maintain our volume estimates and marginally revise our power plant PLF estimates. Reiterate buy with an upward revised target price of Rs244.

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m  Volumes grow by 20% YoY for Q2FY13 and 14% YoY for H1FY13: Lignite volumes stood at 1.96 MT, up by ~20% YoY. The volume trajectory remained strong and H1FY13 volume growth stood at ~14%, indicating strong overall growth for FY13.  EBIT from mining division went up by 118% YoY.

m  Higher EBIT from power backed by turnaround in lignite power plant: EBIT from power division doubled sequentially and stood at ~Rs307mn as the lignite power plant showed a turnaround with improved PLF and positive EBIT of Rs20mn.

m  EBITDA margin improvement more than expected: EBITDA margin improved smartly during the quarter and EBITDA stood at ~Rs2.2bn (margin at ~57%) vs our expectation of 53.4% as costs were lower on operational efficiencies.
m  Outlook – Merchant price hikes likely soon: GMDC has shown strong growth in lignite volumes and remains on track to achieve its volume guidance of 12.7-13 MT in FY13E. We expect price hikes in merchant mines in Q3FY13E as current prices remain at a discount of ~20% to landed cost of similar calorific value coal of Coal India in Gujarat. The lignite power plant has shown a turnaround with higher PLF of ~75% and we expect positive EBIT going forward. We retain our volume and realization estimates for the lignite division but marginally revise our lignite power plant PLF assumptions.  As a result, our PAT estimates are revised upwards by 2%/3.9% for FY13E/14E. For FY13, the company remains well on track to beat our estimates based on strong H1FY13 performance and positive outlook ahead. We continue to factor in negative impact of mining bill in estimates for FY14E, due to which our EPS estimate for FY14E stands at Rs21.2, lower than Rs21.9 for FY13E
m  Maintain Buy on attractive valuations: We remain positive on the company as we see continuation of strong volume growth and better pricing going ahead. We find the stock trading at attractive valuations with FY14E P/E of 9.5x and FY14E EV/EBITDA of 4.9x. We value the company at 6.5x FY14E EV/EBITDA to arrive at a target price of Rs244. Maintain Buy.

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