Multiple disappointments have led the GMDC share price to free fall, we believe
pessimism is overdone and expect some rationality to return once volume shows sign
of stability. We believe volume could regain normalcy at its Tadkeshwar mine as seam
thickness is getting closer to 7m. We believe Tadkeshwar could scale back to 0.6-0.7
mn tonnes run rate from Q3FY14 onwards making total volumes at c.2mn tonnes. We
expect complete normalcy by FY15 to 2.2 mn tonnes. Secondly Volumes at Bhavnagar
mines are continuously getting affected due to teething problems of overburden
dumping. We believe the problem is more genuine and serious as it relates to land
acquisition for overburden dumping of capacity addition which company expected to
increase to 5mtpa. However previous estimates across the street were at 3-3.5MTPA
from Bhavnagar mine, which are now getting rationalized. But we believe company
would be able to maintain 2mtpa volume in FY14.
What is share price factoring? We believe multiple factors led the de-rating
GMDC share price has been witnessing severe pressure since Q3FY13. We underpin
following reasons for such a downfall i) Volume de-growth ii) delay in Lignite price hike
ii) Thermal power sub-performance iv) allocation of cash flows towards low return
wind generation business. However of these reasons cited, we believe weight age to
the volume and price hold the substantial value. We also believe that these factors
are time bound and have the potential to recover going ahead. We continue to believe
the robustness of demand of lignite in Gujarat and monopolistic nature of GMDC. We
also continue to believe that GMDC has the pricing power and would be utilized in
course of time. We never took such price hike in our estimates for FY14, understanding
bureaucratic nature of operations. However at CMP of 78 stock seems to factor in
volume similar to FY10 and a multiple of 4x EV/EBIDTA, which we believe is a perfect
case of irrational exuberance.
Umarsar mine ready with wildlife clearance, State level permissions pending, Make
us believe volume growth underway
GMDC secured wid life clereance of Umarsar mine two months back and has been
waiting for various state level miniscule permissions before it can issue tender for
contract mininng. However drilling work is getting delayed, which was expected to
start by now. Considering cautious scenario we now remove 0.5mn tonne from our
FY14 estimates, however there exist a bright possibility of Umarsar contributing in
FY14. We also cut our estimate from other mines given weak june volumes. We Now
cut our volume assumptiions to 11.6mtpa from 12.2mtpa.
Valuation and Recommendation
We now factor in volume estimate of 11.6 mn tonnes for FY14 against 12.2mn tonnes
earlier due to 0.5 mnt lower volume at Umarsar and other mines due to early monsoon
adjustment. We continue to believe in company’s overall strength and believe these
issues can be overcome in near future given strong execution done in the past. We
value GMDC at 5x of its FY14E EBIDTA and maintain our BUY recommendation with
target price of `153.
��
pessimism is overdone and expect some rationality to return once volume shows sign
of stability. We believe volume could regain normalcy at its Tadkeshwar mine as seam
thickness is getting closer to 7m. We believe Tadkeshwar could scale back to 0.6-0.7
mn tonnes run rate from Q3FY14 onwards making total volumes at c.2mn tonnes. We
expect complete normalcy by FY15 to 2.2 mn tonnes. Secondly Volumes at Bhavnagar
mines are continuously getting affected due to teething problems of overburden
dumping. We believe the problem is more genuine and serious as it relates to land
acquisition for overburden dumping of capacity addition which company expected to
increase to 5mtpa. However previous estimates across the street were at 3-3.5MTPA
from Bhavnagar mine, which are now getting rationalized. But we believe company
would be able to maintain 2mtpa volume in FY14.
What is share price factoring? We believe multiple factors led the de-rating
GMDC share price has been witnessing severe pressure since Q3FY13. We underpin
following reasons for such a downfall i) Volume de-growth ii) delay in Lignite price hike
ii) Thermal power sub-performance iv) allocation of cash flows towards low return
wind generation business. However of these reasons cited, we believe weight age to
the volume and price hold the substantial value. We also believe that these factors
are time bound and have the potential to recover going ahead. We continue to believe
the robustness of demand of lignite in Gujarat and monopolistic nature of GMDC. We
also continue to believe that GMDC has the pricing power and would be utilized in
course of time. We never took such price hike in our estimates for FY14, understanding
bureaucratic nature of operations. However at CMP of 78 stock seems to factor in
volume similar to FY10 and a multiple of 4x EV/EBIDTA, which we believe is a perfect
case of irrational exuberance.
Umarsar mine ready with wildlife clearance, State level permissions pending, Make
us believe volume growth underway
GMDC secured wid life clereance of Umarsar mine two months back and has been
waiting for various state level miniscule permissions before it can issue tender for
contract mininng. However drilling work is getting delayed, which was expected to
start by now. Considering cautious scenario we now remove 0.5mn tonne from our
FY14 estimates, however there exist a bright possibility of Umarsar contributing in
FY14. We also cut our estimate from other mines given weak june volumes. We Now
cut our volume assumptiions to 11.6mtpa from 12.2mtpa.
Valuation and Recommendation
We now factor in volume estimate of 11.6 mn tonnes for FY14 against 12.2mn tonnes
earlier due to 0.5 mnt lower volume at Umarsar and other mines due to early monsoon
adjustment. We continue to believe in company’s overall strength and believe these
issues can be overcome in near future given strong execution done in the past. We
value GMDC at 5x of its FY14E EBIDTA and maintain our BUY recommendation with
target price of `153.
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