GMDC- Monopoly At Attractive Valuation:: Nirmal Bang

Monopoly At Attractive Valuation
We have assigned a Buy rating to Gujarat Mineral Development Corporation
(GMDC) due to monopolistic nature of its business, steady volume and earnings
growth and attractive valuation. We expect GMDC to post 18%/22%/21% CAGRs
in revenue/EBITDA/PAT, respectively, over FY12-FY15E, driven by 11%/9% rise in
lignite volume/realisation, respectively, in the same period. GMDC trades at P/E
of 9.0x/8.4x/7.3x FY13E/FY14E/FY15E earnings, respectively, while EV/EVITDA
multiples are at 4.8x/4.3x/3.5x, respectively, for the same period. We have set a
target price of Rs265 (6.0x FY14E EV/EBITDA) on GMDC, up 34% from the CMP

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Steady volume growth: We have assumed a 10.7% CAGR in lignite volume over
FY12-FY15E based on commissioning of Umarsar mine and expansion of Bhavnagar
and Mata’s Madh mines. We are also positive on the next phase of volume growth,
beyond FY15, which involves Panandhro North, Lakhpat, Gala and Damlai Padal
mines, all located in Gujarat.
Price hikes likely to remain steady, customers’ acceptability not a concern: We
are assuming 8.7% CAGR in lignite realisation on a blended basis over FY12-FY15E,
but a significant portion of this will be driven by ad-hoc increase in Panandhro mine
realisation, which rose 27% in 2QFY13. Barring Panandhro mine realisation, the
increase is likely to be at 7.6% CAGR over FY12-FY15E. Our interaction with
customers revealed these price hikes would be absorbed easily as other substitutes
like gas face a supply crunch, while imported coal remains significantly expensive.
Monopoly business: GMDC is the only merchant lignite miner in Gujarat and with
lignite’s characteristic of burning within 7-15 days, depending on the temperature, it is
not viable to import from other states. The company sells lignite on ex-mine basis
(where cash is paid in advance) and transportation is arranged by the customer.
Earnings estimates broadly in line with consensus estimates: Our FY13E/FY14E
revenue estimates are just 5%/6% above consensus estimates, respectively, resulting
in higher EBITDA and PAT estimates. Our EBITDA estimates for FY13E/FY14E are
5%/7%, respectively, above street estimates, while our PAT estimates are 7%/4%,
respectively, above street expectations for the same period.
Outsourcing of power plant to result in higher plant load factor (PLF): GMDC has
outsourced power plant operation and maintenance (O&M) activity to Korean Power
Company (KEPCO), which has indicated running the plant at a PLF of 75% versus
past five years’ average of 51% due to technical glitch. Higher PLF would result in
strong earnings for GMDC, as fixed costs recovery is dependent on PLF.
Valuation: GMDC trades at P/E multiple of 9.0x/8.4x/7.3x FY13E/FY14E/FY15E
earnings, respectively, while EV/EBITDA estimates are at 4.8x/4.3x/3.5x for the same
period, respectively. The current P/E multiple is similar versus the past 10 years’
median of 8.9x (1-year forward) while EV/EBITDA is below the past 10 years’ median
of 6.4x (1-year forward). We like to highlight here that average RoE of 26.8% over
FY13E-FY15E is above historical average of 17.5% and hence a re-rating is inevitable