GMDC Ltd- Company update- Worst over, smart production uptick ahead, maintain Buy: centrum

Rating: Buy; Target Price: Rs150; CMP: Rs102; Upside:47.3%



Worst over, smart production uptick ahead, maintain Buy



We maintain Buy on GMDC with an increased TP of Rs150. Our recent
visit to the company’s Bhavnagar mine and interaction with management
cemented our view of sharp volume recovery ahead and worst being past.
Current undemanding valuations probably indicate investors’ extreme
scepticism on a near-term volume recovery/price hikes. The dismal
production for YTDFY14 was largely due to heavy monsoons, while
production issues (hard strata, thin seam) have already been tackled.
The land acquisition for overburden dumping that is still pending is
likely to be resolved in the near future, offering additional volume
upside. We have increased our volume estimates for FY14E/15E and
adjusted realizations & costs leading to upward revision in EBITDA
estimates by 2.1%/10.3%.

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$ Production pick up underway across all mines: Production has
remained dismal in the last 4 months due to strong monsoons (South
Gujarat received double the average rainfall this year leading to
flooding of mines). Production is picking up after removal of water
from the mines in the last 40-45 days and there are no other
structural issues marring mining activity. Tadkeshwar mine restarted
on 18 Nov and produced 57kt in last nine days, Bhavnagar is picking up
and Rajpardi is expected to restart from Dec. Management expects ~5 MT
production from Dec-Mar and has guided for 10 MT volumes for FY14E.
Lignite power plant PLF has increased to 62% in Nov and further
investments into wind power are on hold.



$ Bhavnagar mine visit – land acquisition hearings in Dec: Post our
visit to Bhavnagar mines, we understand that excessive rainfall (~125%
higher than average) led to a halt in mining for 4-5 months and
production recovery got delayed due to water logging at mine pits.
Land acquisition of 180 hectares for overburden dumping is progressing
and final hearings are due in Dec post which possession could be
granted in 3-4 months. Management has guided for 1.6MT/3MT production
from Bhavnagar in FY14E/15E but we expect 1.5MT/1.9MT as we have not
factored in land acquisition in our base case.



$ Demand stabilising; price increase possible in Q4: Demand for
lignite has started to stabilise post monsoons and management is
focussed on reducing the landed cost of lignite to consumers by
providing lignite from nearest mines. Company does not expect demand
constraints to affect production volumes. Price hikes will be
considered after stabilising supplies in coming months and could
happen in Q4 finally. We expect lignite production to improve
materially from Dec and raise our volume estimates by 1.7%/3.8% for
FY14E/15E to 9.2MT/10.8MT. We have considered Rs50/t lignite price
hike each for FY15E and FY16E.



$ Valuations attractive - increase target price, maintain Buy: With
volume recovery in sight and incremental volume upsides from a
possible resolution of land acquisition issues not factored in our
base case, we believe that the stock trades at inexpensive valuations
of 3.1x FY15E EV/EBITDA. We increase our TP to Rs150 from Rs125
earlier following an earnings revision. Risks include further
production disappointments, large capex announcements for low return
projects (power) and no price hikes till the end of FY15E.



Thanks & Regards

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