GMDC - Management Meeting Update - Centrum

Management Meeting Update/Estimate Change

GMDC

Rating: Buy

Target Price: Rs182

CMP: Rs133

Upside: 36.7%

Grappling with production issues

We met with GMDC management to gauge reasons for the sharp underperformance in volumes since Q3FY13 and other production issues. We held lengthy discussions with Mr. A.L Thakor, Mr. Pawan Bhootra and Mr. D. Chattopadhyay on the steps taken by GMDC to overcome production issues and improve performance of lignite and power divisions going ahead. We inferred that production issues were mainly at Tadkeshwar and Bhavnagar mines due to the scarcity of land for overburden dumping, increased thickness of stone (at Bhavnagar) and reduced thickness of lignite seam (at Tadkeshwar). While the company has taken various steps to mitigate these issues, progress remains slow and volume growth is expected to be subdued in FY14E. Demand however remains strong for lignite in Gujarat and price hikes (expected to be more than earlier proposed Rs100/t post coal price hike of ~10% by Coal India in May’13) could be taken soon (post board meeting in July’13).  Power division is being overhauled (after handover to KEPCO) and should stabilise from Aug’13. We have cut our volume estimates for FY14E/15E due to production issues and reduced earnings estimates. We cut our target price to Rs182. Maintain Buy on attractive valuations post recent underperformance and higher quantum of price hikes ahead.

�� -->

m  Production affected adversely at Bhavnagar and Tadkeshwar: Production at Bhavnagar and Tadkeshwar was affected due to scarcity of land for dumping of overburden waste. In addition, Bhavnagar has encountered higher thickness stones (5-6 mtrs versus 2-3 mtrs earlier) and at Tadkeshwar, lignite mining seam thickness has reduced to 3.5 mtrs from 7 mtrs earlier. Due to these issues, production has dropped YoY by 37% and 30% at Bhavnagar and Tadkeshwar respectively during Jan-May’13. Various steps (like speeding up land acquisition, appointment of an additional contractor at Bhavnagar and shifting of mining area at Tadkeshwar to thicker seam) have been taken to overcome production issues but progress is slow and production is expected to recover only by the end of Q2FY14E.

m  Price hikes expected to be higher than Rs100/t after next board meeting: With Coal India’s recent price increase of 10%, GMDC is expected to club the long pending price hike of Rs100/t with the added effect of price increase of coal from CIL. The decision of price hike was delayed due to pending board approval but is expected soon at the coming board meetings.

m  Power operations expected to stabilise by Aug’13: 250 MW lignite power plant handover KEPCO is complete and annual overhauling and maintenance under the new contractors is under way. The plant is expected to stabilise from Aug’13 when KEPCO’s performance reaches threshold PLF of 75%. Wind power investments for FY15E/16E (100 MW each announced earlier) are being reconsidered.

m  Outlook and earnings revised downwards on lower volumes – Poor production performance from Bhavnagar and Tadkeshwar mines remains a key concern over volumes growth going forward as volumes from these mines has continued to drop YoY in YTDFY14 despite various measures taken by the company. GMDC is expected to see recovery in volumes by H2FY14E. The start of production from Umarsar has also been delayed. Thermal power plant operations has been handed over to KEPCO in Q4 at a fixed cost payout of Rs320mn p.a till Aug-13 and thereafter payment will be performance based with PLF threshold of 75%. Price hike of ~Rs100/tonne across merchant mines has been delayed for over 6 months but we expect upward momentum in prices especially after 10% price hike by Coal India recently. We see pressure on lignite volumes due to production and quality issues and reduce our volume estimates by 14.7%/13.4% for FY14E/15E. We see momentum in price hikes at merchant mines in the near future and increase our blended realization estimates by 3.6%/2.7% for FY14E/15E.  Our EBITDA estimates are revised downwards by 11.1%/7.2% for FY14E/15E. 

m  Valuations, cut target price, maintain Buy: We are disappointed with production performance and delay in price hikes but see valuations pricing in all the negatives. We value the company at 4.5xFY15E EV/EBITDA and cut our target price to Rs182 from Rs225 earlier. Maintain Buy.

Thanks & Regards,