Gujarat Mineral Development Corporation – mineral resources stock to power your portfolio

Reviewed by Vinit Bolinjkar on August 10, 2012.
Resource mineral stock GMDC to power your portfolio!
So compelling are its fundamentals that we wonder why any one would buy Coal India Ltd, when such a low risk high investment opportunity presents itself!
Rating: Low Risk Buy

GMDC monopoly lignite producer in Gujarat

GMDC powering Gujarat

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In line with the low risk high yielding trading  strategies philosophy of this blog, we introduce a new mineral resource  stock GMDC (Gujarat Mineral Development Corporation Ltd). Although it is not a new story however it has been much ignored by the market. So compelling are its fundamentals that we wonder why any one would buy Coal India Ltd, when such a low risk high investment opportunity presents itself!

Continuously improving lignite volumes, price hikes,  traction in the bauxite business and the turnaround of its loss making power business are triggers for an up move in the stock. We expect GMDC’s revenues and earnings to grow at a CAGR of 27.1% and 23.7% to Rs 2636 crore and Rs 745 crore respectively by FY14. Having a virtual monopoly in the lignite business in India’s fastest growing  and one of the most industrialized states of Gujarat, lends long term revenue visibility on assured off take and pricing power.

We rate this stock a core BUY and initiate coverage with a price target of Rs 255 representing an upside of ~32% over the next 15 to 18 months. At the CMP of Rs 193, the stock is trading at 6x and 5x its EV/EBIDTA estimates for FY13 and FY14

GMDC low risk high yileding investment opportunity for the Indian markets

GMDC’s compelling valuations present a low risk buying opportunity

Commencement of lignite production from new mines to ensure strong volume growth

Over the period of 5  years from 2007 to 2012, GMDC’s lignite segment has witnessed a robust production growth of ~7.3% CAGR. Going forward, we expect this segment to grow at a CAGR of 13.5% from FY12-FY14 aided by the commissioning of the new mine  –  Umarsar and healthy production growth from existing mines of Bhavnagar, Raj pardi, Mata-no-Madh and Tadkeshwar mines. This volume growth story is on despite declining production  at its largest mine Panandhro  from 3.6 MT in FY09  to 2.5 MT in FY12.

GMDC lignite production volumes set to rise

GMDC’s rising lignite production trend is encouraging

Approval for increasing production at Mata-no- Madh to ~ 4.8 MT from current 3.5 MT are expected over the next few months and once this mine starts ramping up it should further fuel the growth. To ensure long term growth and reserve addition, GMDC is all set to commission a new mine at Umarsar (24 mt reserves and mining  life of 24  years) by the end of FY13. In addition, two  new mines named Dhedadi and Akirimoto, are expected to commission over the next three years once government approvals come through

Lignite resource base for GMDC

Adequate reserves and reserve life of lignite mines provide long term revenue visibility for GMDC

GMDC is comfortably insulated from any price correction

Given the rapidly increasing demand for energy and the shortage of coal availability,  lignite prices are expected to trend firmly up over the medium term. GMDC  prices lignite at a discount of 15-20% to Indian coal (of equivalent calorific value of 3,600kcal/kg) and in absence of any coal mines in Gujarat, coal transportation costs over a distance of 750 km from the nearest coal mines based in Nasik provides for sufficient head room  to take further price hike in the near future, thereby ensuring profitability.

GMDC’s loss making power business has already turned around

Issues related with the bellow in the boiler at its 250 MW  (Kutch, Gujarat)  lignite based thermal power plant,  has led to a sharp decline in its PLF (40%) leading to lower revenues. Subsequently the recent replacement is working  properly and the plant has achieved a PLF of ~80% which is a huge turnaround. However not wanting too optimistic (the bellow was replaced 19 times in the previous  year! ), we have factored in a PLF of 55% and 69% for FY13 and FY14 respectively which should ensure that the profitability of the power business would be restored latest by FY14. Accordingly, we expect the  revenues of the power segment to grow at a CAGR of 15.1 % to  `  271.0  crore over the forecast period There is an upside risk to our estimates and would be an icing on the cake if the 80% PLF should continue.

Power business is an upside kicker to our estimates

Loss making power business of GMDC on course to profitability

GMDC realizing that power generation is not its core business plans to outsource O&M activity to third party power generators. The company has invited bids for the same and expects to complete the process in the next 5-6 months. The company hopes that this step would help in permanently improving the PLF of the power plant.

Investments in renewable power to enhance generation portfolio of GMDC

GMDC’s  105.5  MW  renewable  power  portfolio includes  the recently commissioned  5 MW  solar power plant at Kutch. It plans to enhance this by 50 MW  per annum taking the capacity to 200.5 MW by 2014 at an investment of ~ Rs 600 crore. We expect the plants to continue to operate at PLFs of 20-22% and boost revenue and profitability.

Bauxite mining and other business to add further value to GMDC

Apart from lignite GMDC also mines other minerals like bauxite, manganese, limestone, multi metal etc. Ramp up in production for bauxite at its Gadhsisa mines should lead to revenues growing at a CAGR of 57.7% to Rs 193  crore over the forecast period. The  other businesses are at an emerging stage and expected to take considerable time to prosper.

GMDC’s valuations are compelling

At the CMP of Rs 193, GMDC is trading at 5.9x and 4.8x its estimated EV/ EBIDTA for FY13 and FY14, respectively. We initiate coverage on GMDC as a BUY with a Price Objective of ` 255 (6.5x FY14 EV/EBIDTA) over a period of 18 months. Considering
the increasing production, adequate reserves life of its mines and pricing power, we expect GMDC to continue to register robust growth. The bauxite mining business is also witnessing good growth and the JV with Nalco for setting up an alumina plant and
aluminum smelter project, augurs well in terms of long term revenue visibility. However, we have not factored any business revenue from this JV in our earning model.

GMDC revenue growth and profitability projections are at reduced risk and provide high return potential

Healthy revenue and profitability growth augurs well for GMDC

GMDC EV/EBIDTA valuation charts seem to suggest low downside risk

GMDC is trending well above its mean valuation of the last 10 years

This blogpost is a review of the equity research report on GMDC prepared by Ventura Securities Ltd. Incidently I am also head the Equity Research at Ventura. For a detailed description and to aid you in better evaluating GMDC as a low risk high yielding investment proposition, we encourage you to read the indepth report.

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Disclaimer: The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither or myself accepts any liability arising out of the above information/articles.

Vinit Bolinjkar Head of Research, Ventura Securities Ltd
Tel: | Mobile: 0 9730836363

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