GMDC - Q1FY14 Result Update - Centrum

Lignite production issues continue
GMDC lignite production issues kept volumes subdued at ~2.43MT (down by
~28% YoY) and resulted in a sharp drop in revenues/EBITDA by ~26%/36%
YoY. EBITDA at Rs1.7bn was marginally lower (vs. est. Rs1.76bn) and margin
stood at 46.3%, lower by 430bps QoQ due to lower lignite volumes and
mining revenue. We have cut our volume and realization estimates for
FY14E/15E due to production issues at Tadkeshwar and Bhavnagar mines
and delay in merchant price hike. We cut our valuation multiple to 4x FY15E
EV/EBITDA and reduce the target price to Rs138. Maintain Buy.
Lignite volumes remain dismal and fall by ~28% YoY: Lignite volumes stood
at 2.43 MT, down by ~28% YoY. The volume trajectory was down across all the
mines but sharp drop was again seen mainly from Bhavnagar and Tadkeshwar
(both down 41% YoY) on account of issues related to production at mining sites
and scarcity of land for dumping overburden. Bauxite volumes were dismal at
60kt, down from 200kt YoY.
Negative EBIT from power operations reduces due to higher wind power
generation: The thermal power plant operated at ~22% PLF (as 1 unit of 125MW
was shut for overhauling) and generated only 122mn units whereas wind power
PLF was high at ~30% resulting in ~80mn units. EBIT loss from power division
reduced to ~Rs2mn due to higher wind power generation. Thermal power
operations at Akrimota saw low PLF again due to the transfer of operations to
KEPCO and shutdowns for overhauling.
EBITDA margin drops further: EBITDA margin stood at 46.3%, lower by 430bps
QoQ due to sharp drop in profitability from both mining and power businesses.

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Outlook and earnings revision : Poor production performance from Bhavnagar
and Tadkeshwar mines remains a key concern over volumes going forward and
volumes from these mines have continued to see sharp YoY drop in YTDFY14.
The start of production from Umarsar mines has also been delayed and we now
expect production only in FY15E. Thermal power plant operations was handed
over to KEPCO in Q4FY13 (after which overhauling of both units are being carried
out) and from Aug’13 performance based payout to KEPCO by GMDC will be
followed with PLF threshold of 75%. Price hike across merchant mines has been
delayed much beyond expectations with no clear visibility from the company, but
we expect upward momentum in prices to return considering the hike in prices
by Coal India recently. We expect lignite production to improve sharply from
H2FY14E but with poor performance in H1, we reduce our volume estimates
further by 15.5%/9.3% for FY14E/15E to 9.8MT/11.7MT. Coupled with lower
realizations than expected earlier and increase in cost of mining on account of
diesel price hike, our EBITDA estimates are revised downwards by 17%/16.9% for
FY14E/15E.
Valuations - cut target price, maintain Buy: We are disappointed with lignite
production performance and delay in price hikes but see valuations pricing in
these negatives. We expect volumes to recover sharply in H2FY14E from current
dismal levels. We cut our target multiple to 4xFY15E EV/EBITDA and cut down our
target price to Rs138 from Rs182 earlier. Maintain Buy.