Gujarat NRE Coke -- Ugly duck or golden swan? ::Macquarie Research

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Gujarat NRE Coke
Ugly duck or golden swan?
Event
 Strong Q1FY12 earnings beats expectation by 78%: GNC started the year
with a bang and has already achieved almost 50% of our full-year stand-alone
estimate in Q1. We think there is too much pessimism built around the stock,
while business fundamentals have remained very strong. We advise
investors to cut through the noise and focus on operational performance.
Maintain Outperform.
Impact
 Q1 stand-alone results – strong operationally: Net sales were at Rs4.4bn,
with coke sales at 164kt and realisations at US$480/t. EBITDA at Rs1,109mn
is up 70% QoQ and 40% YoY, as costs were helped by consumption of
coking coal inventory. Net profit at Rs389mn is up 94%YoY.
 Volume and reducing inventory to prop Q2 results too: GNC has
successfully reduced coking coal inventory by 50kt during the quarter and we
expect that this will be further reduced in the next quarter to a more normal
level of 360-400kt. Coke volumes should also improve above the current
164kt level, as the company targets 1mnt sales this year.
 Reducing production from mines: We have reduced our production
estimate from mines to 2mnt from 2.2mnt, erring on the conservative side,
though management is still targeting 2.5mnt. This has impacted our
consolidated earnings estimates by 7-8%.
 Provided for warrants conversion: We were already building in a discount
to NPV for the equity dilution. Our EPS numbers are now fully diluted, but no
change to our target price, as we do away with the discount.
Earnings and target price revision
 Reduction in earnings by 7-8% for FY12E and FY13E on lower mine
production estimate and further building in dilution of warrants. No change in
target price as discount to NPV reduced.
Price catalyst
 12-month price target: Rs95.00 based on a Sum of Parts methodology.
 Catalyst: Continued performance of the Australian subsidiary
Action and recommendation
 Maintain Outperform: GNC has underperformed the market in the past few
months on concerns about profitability. However, we believe that these results
should put some concerns to rest. Mining subsidiary profits will be second half
heavy, but timely commissioning of longwall should be a key catalyst.
 The company is currently trading at 6.7x PER on FY2012E, compared to
global coking coal companies at 11-12x. We believe that the current
correction presents a good entry point.